In a unanimous decision announced today, the United States Supreme Court upheld an expansive interpretation of the false advertising prong of the Lanham Act (15 U.S.C. s. 1125(a)), which decision will allow a broader range of commercial interests to bring false advertising claims. As we reported earlier in this blog, the question asked of the Supreme Court was whether companies that were not in direct competition (i.e., did not sell competing goods or services directly to the same class of consumer) nonetheless had standing to sue for false advertising under the Lanham Act. The Supreme Court answered with a resounding “Yes!”
Lexmark manufacturers toner cartridges, but “remanufacturers” were acquiring, refurbishing and refilling those cartridges to resell in competition with Lexmark’s original cartridges. Hence, Lexmark came up with a “Prebate” program that gave customers a discount on new cartridges so long as they agreed to return empty cartridges to the company. The terms of that program were printed on the cartridge packaging, and Lexmark advised consumers that by opening the box, they consented to those terms. Lexmark tried to enforce that program by inserting a microchip into the cartridge that would disable the cartridge once it was empty unless Lexmark replaced the chip. The defendant Static Control developed replacement microchips that were used by the “remanufacturers” to replace Lexmark’s microchips so that the cartridges could be used again. As Lexmark did not sell the chips to anyone, but only installed them as a component part of the end product sold by Lexmark to end-users, Lexmark and Static Control were not technically in competition.
Lexmark sued Static Control for copyright infringement and for violation of the Digital Millennium Copyright Act, and Static Control counterclaimed for false advertising. Static Control contended that Lexmark purposefully misled end-users into believing that they were legally required to return the cartridges after a single use. Static Control also contended that Lexmark sent letters to most of the companies in the toner remanufacturing business falsely advising that it was illegal to sell refurbished cartridges and illegal to use Static Control’s products (e.g., its competing microchip) to refurbish those cartridges.
Lexmark moved to dismiss the counterclaims, and the trial court granted the motion, holding that Static Control lacked prudential standing to bring false advertising claims as Static Control was not a direct competitor of Lexmark. The Sixth Circuit reversed that dismissal, holding that Static Control had alleged a cognizable interest in its business reputation that was being harmed by Lexmark’s allegations of illegal conduct. However, the Sixth Circuit noted that there were three different tests being applied by courts in different areas of the country to determine standing to bring false advertising claims.
The Supreme Court has now clarified the test, and adopted a test that is slightly different (and arguably broader) than the tests adopted by various circuits throughout the country. The Supreme Court has now extended standing to those whose claims fall within the zone of interests protected by the false advertising prong of the Lanham Act and whose injury was proximately caused by the alleged violation of that Act. The Lanham Act’s purpose is to protect against “unfair competition,” and that was understood at the common law to be concerned with injuries to business reputation and present and future sales. Thus, the plaintiff must allege (and ultimately prove) injury to its commercial interest in its reputation or sales. Further, the plaintiff must show that its injury flows directly from the deception wrought by the defendant’s allegedly false advertising, which will normally be proven by showing that consumers are withholding trade from the plaintiff because of the deception. Here, Static Control’s alleged injuries – lost sales and damage to its reputation – were within the zone of interests protected by the Lanham Act, and Static Control had sufficiently alleged that its injuries were proximately caused by that false advertising.
This is not the end of this long-running dispute between these two companies, which has been going on for at least a decade. In 2004, the Sixth Circuit Court of Appeals ruled that use of Static Control’s replacement microchips to circumvent Lexmark’s ink cartridge authentication did not violate the Digital Millenium Copyright Act. Later, in another part of the Sixth Circuit’s 2012 decision (which part was not appealed to the Supreme Court), the Sixth Circuit affirmed dismissal of Static Control’s antitrust claims, affirmed the trial court’s decision finding infringement of certain of Lexmark’s patents, and affirmed that Lexmark’s single-use license for the Prebate cartridges was valid, which prevented exhaustion of those patents following the initial sale (though that latter conclusion was later modified in light of the Supreme Court’s decision on exhaustion in Quanta v. LG Electronics. In short, though Static Controls kept its false advertising claim alive, there will undoubtedly be further challenges (and further appellate decisions).