On March 25, 2014, the Supreme Court articulated a new test for determining who has standing to bring a false advertising claim under the Lanham Act. The Lanham Act permits claims by “any person” likely to be damaged by a defendant’s false advertising but implies that a plaintiff must have suffered some sort of competitive injury. See 15 U.S.C. §§ 1125(a) and 1127. The Court’s unanimous decision in Lexmark International, Inc. v. Static Control Components, Inc., No. 12-873 (March 25, 2014), resolves a split among the Circuits — and changes the law in all of them — over the proper way to determine who has standing to assert a claim for competitive injury under the Lanham Act.
The underlying case involves a long-running dispute between Lexmark International, Inc. (“Lexmark”), a manufacturer and seller of laser printers and toner cartridges for those printers, and Static Control Components, Inc. (“Static Control”) “the market leader [in] making and selling the components necessary to remanufacture Lexmark cartridges.” Lexmark Intern, Inc., No. 12-873, slip op. at 2. Businesses known as “remanufacturers” refurbish Lexmark cartridges using Static Control parts, and then sell those cartridges in competition with new and refurbished cartridges sold by Lexmark. Id. at 1-2. To limit the market for these competing cartridges, Lexmark introduced a Prebate program whereby customers would receive a 20 percent discount on new toner cartridges if they agreed to return the Prebate cartridge to Lexmark once it was empty. Id. at 1-2. “Those terms were communicated to consumers through notices printed on the toner-cartridge boxes, which advised the consumer that opening the box would indicate assent to the terms — a practice commonly known as ‘shrinkwrap licensing.’” Id. at 2. The new Prebate cartridge contained a microchip that disabled the cartridge when it ran out of toner. Id. The empty cartridge would not work unless and until Lexmark replaced the microchip. Id. at 3. Static Control developed a microchip that could mimic Lexmark’s microchip enabling remanufacturers who purchased Static Control’s microchip to refurbish and resell used Lexmark Prebate cartridges. Id.
Lexmark sued Static Control for copyright infringement. Static Control counterclaimed, and alleged claims for violation of §43(a) of the Lanham Act, codified as 15 U.S.C. § 1125(a). Specifically, Static Control claimed that Lexmark violated 15 U.S.C. the Lanham Act’s prohibition on false advertising by (1) misleading customers into believing they were required to return the empty Prebate cartridges to Lexmark after the cartridge ran out of toner (the shrinkwrap license) and (2) sending letters to toner cartridge remanufacturers “falsely advising those companies that it was illegal to sell refurbished Prebate cartridges and, in particular, that it was illegal to use Static Control’s products to refurbish those cartridges.”Lexmark Intern, Inc., No. 12-873, slip op. at 3 (internal citations omitted). Static Control further alleged that Lexmark’s actions had proximately caused injury to Static Control by diverting sales from Static Control to Lexmark, and had substantially injured Static Control’s business reputation. Id. at 3-4.
Although the Lanham Act authorizes suit “by any person who believes that he or she is or is likely to be damaged by” a defendant’s false advertising, the district court in Kentucky dismissed Static Control’s claim for lack of standing. Lexmark Intern, Inc., No. 12-873, slip op. at 4 (emphasis added). In reaching that decision, the district court used a multi-factor balancing test borrowed from federal antitrust laws, and used by the Third, Fifth, Eighth, and Eleventh Circuits in Lanham Act false advertising cases. Id. at 4-5, 16. The Sixth Circuit reversed, applying the Second Circuit’s “reasonable interest” test. Id. at 4-5. Under that test, a commercial plaintiff need only demonstrate “(1) a reasonable interest to be protected against the alleged false advertising and (2) a reasonable basis for believing that the interest is likely to be damaged by the alleged false advertising.” Id. at 18 (internal citations omitted). The Supreme Court “granted certiorari to decide ‘the appropriate analytical framework for determining a party’s standing to maintain an action for false advertising under the Lanham Act.’”Id. at 5-6 (internal citation omitted).
In the opinion authored by Justice Scalia, the Court declined to adopt the “reasonable interest” test, favored by several amici, or the multifactor balancing test, or a third test — the direct competitor test — utilized in the Seventh, Ninth and Tenth Circuits. Lexmark Intern, Inc., No. 12-873, slip op. at 15-18. Instead, the Court articulated a new standard, holding that “[t]o invoke the Lanham Act’s cause of action for false advertising, a plaintiff must plead (and ultimately prove) an injury to a commercial interest in sales or business reputation proximately caused by the defendant’s misrepresentations.” Id. at 22. Such injury is “proximately caused” by those misrepresentations “when deception of consumers causes them to withhold trade from the plaintiff.” Id. at 15. Justice Scalia noted that although this type of derivative harm is generally too remote to satisfy the proximate cause requirement, “[i]n a sense all commercial injuries from false advertising are derivative of those suffered by consumers who are deceived by the advertising” and “since the Lanham Act authorizes suit only for commercial injuries, the intervening step of consumer deception is not fatal to the showing of proximate causation required by the statute.” Id. at 14.
Applying this new framework, the Court found that Static Control had standing to assert a Lanham Act false advertising claim. Lexmark Intern, Inc., No. 12-873, slip op. at 18. Static Control’s alleged injuries — lost sales and damages to its business reputation — are injuries to its commercial interests protected by the Lanham Act. Id. at 19. Static Control’s allegation that Lexmark disparaged its business and products by asserting that Static Control’s business was illegal was also sufficient to establish proximate cause. Id. at 19-20. “When a defendant harms a plaintiff’s reputation by casting aspersions on its business, the plaintiff’s injury flows directly from the audience’s belief in the disparaging statements...even if the defendant’s aim was to harm its immediate competitors, and the plaintiff merely suffered collateral damage.” Id. Additionally, because Static Control’s microchips were allegedly necessary for and had no other use than refurbishing Lexmark toner cartridges, “any false advertising that reduced the remanufacturers’ business necessarily injured Static Control as well.” Id. at 21-22.
The impact of the Lexmark holding varies depending on jurisdiction. In the Seventh, Ninth, and Tenth Circuits, which had required plaintiffs to be a “direct competitor” of the alleged defendant, the new standing test is arguably looser and thus may lead to an increase in Lanham Act claims by indirect competitor plaintiffs, such as Static Control. In contrast, plaintiffs in the Second and Sixth Circuits may find it more difficult to maintain Lanham Act false advertising claims. However, it is important to keep in mind that the Lexmark ruling only applies to Lanham Act false advertising claims and that other false advertising laws, including state laws, are not affected. Even if a plaintiff is now precluded from bringing a false advertising claim under the Lanham Act, relief may still be available through other statutes.