The Supreme Court just last week issued a decision that will allow more businesses to sue under the federal Lanham Act. And while that is good news for lawyers, it raises some interesting questions about just how far the decision will stretch.
The Lanham Act is a federal statute that prohibits false or misleading advertising. In that respect, it’s easy to see how a direct competitor would have a claim. Imagine a commercial for a print cartridge made by Company A that implies to customers that only Company A can refill that cartridge. Assuming that’s false, Company B – a direct competitor – clearly has a Lanham Act claim.
But what about Company C, which makes technology for actually executing the refill for Company B? Does Company C have a claim? It’s not a direct competitor, but isn’t it affected just as much by Company A’s misleading advertising?
That was nearly the precise question for the Supreme Court. The plaintiff in the case was a company called Static Control. The defendant was a company called Lexmark. According to the Court, Lexmark sells the only style of toner cartridges that work with Lexmark laser printers. But given American ingenuity, some after-market players were able to acquire and refurbish used Lexmark cartridges to sell in competition with Lexmark’s own new and refurbished ones.
Using its own ingenuity, Lexmark developed a “Prebate” program. Under that program, Lexmark customers got a discount on new cartridges if they agreed to return empty cartridges to Lexmark. Lexmark inserted a microchip in each Prebate cartridge that disabled the empty cartridge unless Lexmark replaced the chip.
Static Control, developed a microchip that mimicked the Lexmark chip (this is starting to sound like the arms race) which would allow the after-market sellers back in the game. When Lexmark sued Static for copyright infringement, Static countersued on a Lanham Act claim, alleging that Lexmark deceived its Prebate customers by making them believe they were legally bound to allow only Lexmark to refill the cartridges. The trial court dismissed Static’s Lanham Act claim, on the grounds that it was not a direct competitor and therefore couldn’t bring a Lanham Act claim. The Sixth Circuit Court of Appeals, however, reversed. The Supreme Court accepted the appeal because the various federal appellate courts were split on the issue.
In a decision authored by Justice Scalia, the Supreme Court ruled that the “direct competitor” analysis was too confining. In its view, any entity able to allege damage to reputation or sales resulting from the Lanham Act violation can bring a claim. In the Lexmark case, there was no mention of Static in any of the Lexmark advertising. So it’s not like Lexmark disparaged Static, or made a false comparison. But that ultimately didn’t matter. Lexmark allegedly made false representations that reduced Static’s sales. And that’s apparently enough.
The Lexmark decision certainly means more Lanham Act plaintiffs (and conversely more Lanham Act defendants – I told you this would make lawyers happy) but it’s hard to say exactly how far this plays out. It seems to me that the affected supplier has to be somewhat captive. That is, if Walmart makes a misleading claim about Kroger, that means that less people will go to Kroger’s and buy Coke. And so, in that respect, Coke a Kroger supplier is harmed. But presumably, those people who stop shopping “Krogering” (it’s from an old commercial) will still buy Coke. So, no harm there. But if some supplier only supplies to Kroger that might be a different story.
The point here is I think that if you’re thinking about getting aggressive with your advertising, just know that there may be more plaintiffs besides direct competitors lurking out there.