United States: Supreme Court Clarifies Who Can Assert A Federal Claim For False Advertising

The Bottom Line

The Supreme Court's ruling in Lexmark should have a significant impact on Lanham Act false advertising cases. The decision adopts a simpler standard for determining Lanham Act false advertising standing that will more likely be uniformly applied by the courts. At the same time, the new standard allows for plaintiffs who are not direct competitors of the defendants to assert claims, so the decision could result in an increase in false advertising suits, especially in those Circuits that previously required plaintiffs to be direct competitors of the defendants.

In a recent decision, the United States Supreme Court resolved a three-way split among the federal Circuit Courts of Appeal by rejecting all three approaches in favor of a simpler test to determine who has standing to assert a claim for false advertising under the Lanham Act.

The false advertising prong of the Lanham Act allows "any person that believes that he or she is or is likely to be damaged by" a defendant's false advertising to bring a claim in federal court. While the federal courts have all agreed that Congress did not intend the Lanham Act as a means for consumers to sue based on misleading advertising, they have long taken varying approaches to what kind of plaintiff can sue for false advertising under the Act.

Some have held that the parties must be direct competitors of each other; others have held that a variety of factors need to be weighed in assessing the plaintiff's standing to sue; and others have taken a more objective approach. The United States Supreme Court has finally resolved this split of authority – rejecting all three approaches in favor of something simpler.

Under its decision in Lexmark International Inc. v. Static Control Components Inc., the Supreme Court held that any plaintiff who is in the "zone of interests" Congress intended to protect under the Lanham Act, and who can show an injury to their business reputation or sales that was proximately caused by the defendant's advertising, can sue for false advertising.

Background

Lexmark, the well-known laser printer manufacturer, and Static Control Components (SCC), a manufacturer of printer component parts, have been litigating for over a decade, with each asserting claims against the other. One claim SCC brought against Lexmark accused Lexmark of falsely advertising to SCC's customers that SCC was infringing Lexmark's patents.

In September 2006, the United States District Court for the Northern District of Ohio held that SCC lacked standing to bring its Lanham Act false advertising claim, because Lexmark failed to satisfy a multi-factor balancing test used by many courts to determine false advertising standing. In August 2012, however, the Sixth Circuit Court of Appeals reinstated SCC's false advertising claim, holding that the multi-factor approach was not the proper test for standing, and instead adopting a "reasonable interest" test that was previously articulated by the Second Circuit. Finding that SCC had properly alleged "a cognizable interest in its business reputation and sales to remanufacturers" and "that these interests were harmed by Lexmark's statements to the remanufacturers," the Court of Appeals held that SCC had standing to sue Lexmark for false advertising.

In January 2013, Lexmark petitioned the Supreme Court to take up the case, which it later did in June. A previous Davis & Gilbert alert discusses the Supreme Court's decision to hear Lexmark's appeal (see previous alert here).

Decision

In late March 2014, the Supreme Court affirmed the Court of Appeals' decision, allowing SCC to move forward to try and prove its case. In doing so, however, the Supreme Court rejected the Sixth Circuit's approach – as well as the other approaches taken by the Circuit Courts. The Supreme Court instead adopted a two-part test to determine whether a party has standing to bring a Lanham Act false advertising claim. Under the new test, the plaintiff must first establish that it comes within the "zone of interests" for a suit for false advertising under the Lanham Act. To do this, the plaintiff must allege that it suffered an injury to a commercial interest in its business reputation or sales. The plaintiff must then claim that the alleged false advertising proximately caused its injuries. The alleged harm cannot be "too remote" from the alleged false advertising, but consumer deception is sufficient to establish harm as long as the plaintiff alleges that the deception caused the plaintiff's customers to withhold trade from the plaintiff.

This new standard replaces three tests previously applied by the various Courts of Appeal – a Direct Competitor test, a Multifactor Balancing Test, and a "Reasonable Interest" test.

Under the Direct Competitor Test used by the Seventh, Ninth and Tenth Circuits, the plaintiff needed to establish it was the defendant's direct competitor. The Supreme Court has now made it clear that companies that are not direct competitors of the defendant, such as SCC, can sue under proper circumstances.

The Multifactor Balancing Test used by the Third, Fifth, Eighth and Eleventh Circuits weighed several factors, including some similar to the "zone of interest" and "proximate cause" elements. The test only included these factors in a balance with others, however. The Supreme Court's new standard eliminates any of this balancing, which, it noted, led to inconsistent application.

Finally, the Reasonable Interest Test used by the Second and Sixth Circuits was the least restrictive and most objective standard. This test required a plaintiff only to allege a reasonable interest to be protected against the alleged false advertising and a reasonable basis for believing the interest is likely to be damaged. In adopting its zone of interest/proximate cause analysis, the Supreme Court noted the vague nature of this Reasonable Interest Test, which was prone to divergent application. The new standard brings more predictability to the determination of whether a plaintiff has standing to bring a Lanham Act false advertising claim.

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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