United States: Non-Competitors May Now Bring False Advertising Claims Under The Lanham Act

Last Updated: April 11 2014

Article by Laura Goldbard George, Matthew Siegal and Madelon Witte, a law school graduate awaiting admission.

Supreme Court Rules in Lexmark Int'l, Inc. v. Static Control Components, Inc.

On March 25, 2014, the Supreme Court made it easier for a non-competitor to state a claim for false advertising under the Lanham Act. The Court resolved a long-standing split among the Circuits by explaining that a company may sue a non-competitor for false advertising under Section 43(a) of the Lanham Act, as long as it alleges "an injury to a commercial interest in reputation or sales" that was proximately caused by the allegedly false or misleading advertisements.1 Lexmark Int'l, Inc. v. Static Control Components, Inc., No. 12-873, 572 U.S. ___ (2014) (slip op.) ("Lexmark"). In doing so, the Court overruled numerous potentially more complex tests that had been applied by the Circuit Courts for determining the circumstances under which non-competitors could assert such an action. Specifically, the Court found that Static Control could sue Lexmark under the Lanham Act for statements Lexmark made to Static Control's customers regarding Static Control's alleged violation of Lexmark's intellectual property, even though Lexmark was not Static Control's direct competitor, on the grounds that Lexmark's public statements were the proximate cause of the requisite injury to Static Control.2

The Circuits had been divided on the circumstances under which an entity, believing itself to be falsely accused of intellectual property violations or indirectly harmed by other types of false advertising, could sue its accuser under the false advertising provisions of the Lanham Act, 15 U.S.C. § 1125(a)(1)(B). Faced with a conflicting mélange of standards by which to determine when a plaintiff could bring such a suit, the Supreme Court rejected them all. Instead, the Court determined that in order to bring a suit under § 43(a), a company must show that its interests fall within "the zone of interests" covered by the Lanham Act, such as interests in sales or business reputation, and that the injury suffered was "proximately caused" by the defendant's activity and therefore, not too remotely related.3

Background

Lexmark sells printers and toner cartridges for use in its printers. The empty cartridges fuel a robust aftermarket. Third party remanufacturers acquire, refill, refurbish and offer the refurbished cartridges for sale in competition with cartridges sold by Lexmark itself. In order to combat these aftermarket sales, Lexmark initiated a "Prebate" program in an effort to contractually restrict the rights cartridge purchasers have to directly or indirectly refill used cartridges. New cartridges bear a "shrinkwrap" license stipulating that once empty, the cartridges will be returned to Lexmark.4

Lexmark embeds each Prebate cartridge with a microchip, which is programmed to deactivate the cartridge once empty. Upon return of the cartridge, Lexmark replaces the microchip, refills and refurbishes the cartridge, then resells the refurbished cartridge. Static Control sells toner and other supplies to cartridge remanufacturers but does not sell cartridges to consumers in competition with Lexmark.5 Rather, Static Control developed a substitute microchip and sells that chip to remanufacturers for inclusion in refurbished Lexmark cartridges.6

Lexmark sued Static Control, alleging that the substitute chips violated its copyright and other intellectual property in the chips. Lexmark also sent letters to Static Control's customers, alleging that it was illegal to use Static Control's microchip to override Lexmark's deactivation technology. Static Control denied infringement and also counterclaimed under § 43(a) of the Lanham Act for false advertising. Static Control alleged that Lexmark's letters, pronouncing Static Control's merchandise illegal, had fraudulently diverted sales from Static Control to Lexmark, even though Lexmark and Static Control were not direct competitors.7

Circuit Split

The district court dismissed Static Control's counterclaim, holding that under a balancing test articulated by an earlier Supreme Court case, Associated Gen. Contractors of Cal., Inc. v. Carpenters, 459 U.S. 519 (1983), Static Control was not the proper party to bring the false advertising claim. The district court held that because the remanufacturers were more directly injured by Lexmark's accusations of illegality, the remanufacturers were the appropriate plaintiffs, and that Static Control's injury was too remote for it to state a claim. The court found that Lexmark's "alleged intent [was] to dry up spent cartridge supplies at the remanufacturing level, rather than at [Static Control's chip] supply level, making remanufacturers Lexmark's alleged intended target."8

The Sixth Circuit reversed by applying a "reasonable interest" test, developed by the Second Circuit,9 to assess whether Static Control had enough of a direct interest to bring the claim. The Sixth Circuit held that Static Control was an appropriate Lanham Act plaintiff, because it "alleged a cognizable interest in its business reputation and sales to remanufacturers and sufficiently alleged that th[o]se interests were harmed by Lexmark's statements to the remanufacturers that Static Control was engaging in illegal conduct."10

Under such circumstances, different circuits have applied different tests that have led to different outcomes. The Third, Fifth, Eighth, and Eleventh Circuits analyzed Lanham Act false advertising claims under an "antitrust standing" test, which employed the same multifactor balancing test engaged in by the district court when it held that Static Control had not stated a cause of action under the Lanham Act. On the other hand, the Seventh, Ninth, and Tenth Circuits analyzed these claims under a bright-line categorical test, allowing suits to move forward only when brought by an actual competitor. The Second Circuit and, in this instance, the Sixth Circuit, applied a "reasonable interest" test.11

The Decision

The Supreme Court declined to adopt any of these tests and instead articulated a new two-prong test. First, the plaintiff's interest must exist within the "zone of interests" intended to be protected by the Lanham Act. Second, the injury for which the plaintiff seeks redress must be "proximately tied" to the defendant's alleged violation.12

The Court explained that the "zone of interests" or "sphere of intended protection" is explicitly spelled out by Section 45 of the Act:

The intent of this chapter is to regulate commerce within the control of Congress by making actionable the deceptive and misleading use of marks in such commerce; to protect registered marks used in such commerce from interference by State, or territorial legislation; to protect persons engaged in such commerce against unfair competition; to prevent fraud and deception in such commerce by the use of reproductions, copies, counterfeits, or colorable imitations of registered marks; and to provide rights and remedies stipulated by treaties and conventions respecting trademarks, trade names, and unfair competition entered into between the United States and foreign nations.13

Interpreting this statement of intent, the Supreme Court held that "to come within the zone of interests in a suit for false advertising under § 1125(a), a plaintiff must allege an injury to a commercial interest in reputation or sales." It is crucial that the injury alleged be related to a commercial interest – "a business misled by a supplier into purchasing an inferior product is, like consumers generally, not under the Act's aegis."14

The second prong of the standard requires that the plaintiff's injury be proximately caused by violation of the Lanham Act's proscription on false or misleading advertising. Although proximate cause can be a nebulous concept, according to the Court, the crux of the inquiry is "whether the harm alleged has a sufficiently close connection to the conduct the statute prohibits."15 In other words, the harm may not be so remote from the Lanham Act violation that the plaintiff cannot show "economic or reputational injury flowing directly from the deception wrought by the defendant's advertising."16 Such an injury occurs "when deception of consumers causes them to withhold trade from the plaintiff."17 As an example, the Court explained that "while a competitor who is forced out of business by a defendant's false advertising generally will be able to sue for its losses, the same is not true of the competitor's landlord, its electric company, and other commercial parties who suffer merely as a result of the competitor's 'inability to meet [its] financial obligations.'"18

Conclusion

Prior to this decision, an indirect competitor such as Static Control would have had more difficulty stating a claim under Section 43(a) in circuits adhering to the bright-line "actual competitor" test and those adhering to the balancing test followed by the district court. Now, an indirect competitor harmed by false or misleading advertising need only allege an injury to its commercial interest in reputation or sales, proximately caused by the defendant's alleged Lanham Act violation. This change opens the door to § 43(a) suits previously foreclosed by circuits adhering to the aforementioned bright-line and balancing standards.

Based on Lexmark, potential liability stemming from allegedly misleading, disparaging, or false advertising which harms business reputation is greater today than it was prior to this decision. Although "diversion of sales to a direct competitor may be the paradigmatic direct injury from false advertising, it is not the only type of injury cognizable under §1125(a)."19 Static Control's allegations that Lexmark harmed its reputation by impugning the legality of its products was found to be an injury intended for protection by the Lanham Act, and was found to be proximately caused by the Act's alleged breach. Even though Static Control and Lexmark are not direct competitors, "competition is not required for proximate cause."20

For More Information

Laura Goldbard George
212.806.6675
lgoldbard@stroock.com

Matthew Siegal
212.806.6444
msiegal@stroock.com

Footnotes

1. Slip Op. at 13.

2. Slip Op. at 10.

3. Id.

4. Slip Op. at 2.

5. Id.

6. Id.

7. Slip Op. at 4.

8. App. to Pet. for Cert. 83.

9. The reasonable interest test: whether an entity could show that it had a "reasonable interest to be protected against the alleged false advertising," and a "reasonable basis for believing that the interest is likely to be damaged by the false advertising." Slip Op. at 5

10. 697 F.3d at 411

11. Slip Op. at 5.

12. Slip Op. at 13.

13. 15 U.S.C. § 1127

14. Slip Op. at 13.

15. Slip Op. at 14.

16. Slip Op. at 15.

17. Id.

18. Id. (citing Anza, 547 U.S. at 458).

19. Slip Op. at 19.

20. Slip Op. at 20.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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