United States: A Yarn Spun, But Advertising Not Tailored To A Lanham Act Claim

In a recent application of the Supreme Court's 2014 Lexmark decision on standing, the Court of Appeals for the Third Circuit held last month that a yarn retailer who alleged it was misled by its supplier into purchasing mislabeled yarn lacked standing to bring a Lanham Act false advertising claim. Knit With v. Knitting Fever, Inc., No. 12-3219, 2015 WL 5147749 (3d Cir. Sept. 2, 2015). While the Third Circuit followed what at first glance appears to be a straightforward pronouncement in Lexmark that "even a business misled by a supplier into purchasing an inferior product" does not have Lanham Act standing, the facts of this case make it worth considering whether there are any contexts in which the Supreme Court's pronouncement should not apply.

Appellant, The Knit With ("TKW"), is a small business engaged in retail sales to consumers of specialty yarns. Appellee, Knitting Fever Inc. ("KFI"), is a supplier and distributor of yarn. From the mid-1980s through late 2005, TKW purchased yarn from KFI, including yarn purportedly spun with cashmere content – the Debbie Bliss Cashmerino line. The Cashmerino products were identified by KFI as being spun of fiber content consisting of 55% merino wool, 33% microfiber and 12% cashmere. TKW purchased over 2,000 balls of the Cashmerino yarns.

In 2004, scandal erupted in the "designer" yarn world when testing by a competitor attempting to knock-off the Cashmerino products revealed that the Cashmerino yarns did not contain any cashmere. After a series of tests and an alleged cover-up by KFI, TKW announced a recall of the Cashmerino yarns. TKW then filed a federal lawsuit alleging that KFI's false labeling harmed its commercial interests. The Complaint asserted many causes of action including breach of express and implied warranties of merchantability, RICO claims, perfidious trade practices and, relevant here, false advertising under the Lanham Act.

The district court dismissed TKW's Lanham Act claim for lack of standing, relying on the then-applicable multi-factor balancing test for Lanham Act standing articulated in Conde Bros. Auto v. Quaker-Slick 50, 165 F.3d 221 (3d Cir. 1998). Subsequently however, Lexmark International v. Static Control, 134 S. Ct. 1377 (2014) abrogated Conde, and the appeal on the issue of standing therefore was governed by the Lexmark standard. As it turned out, the result was the same and the Third Circuit panel affirmed the dismissal.

Under Lexmark, "a plaintiff must allege injury to a commercial interest in reputation or sales" to come within the "zone of interests" protected under Section 1125(a) of the Lanham Act, and must also allege that this injury was proximately caused by the defendant's false advertising. While in certain circumstances a plaintiff not need be a competitor of the advertiser to have standing under Lexmark, consumers misled by the advertiser's false claims do not fall within the zone of interests protected by the Lanham Act, even if suffering injury cognizable under Article III of the Constitution. The Third Circuit relied on the statement in Lexmark that "[e]ven a business misled by a supplier into purchasing an inferior product is, like consumers generally, not under the Act's aegis." Accordingly, the court held that TKW's allegations that it was misled by KFI into purchasing mislabeled yarn were not enough to confer standing for purposes of its false advertising claim.

While the Third Circuit accurately quoted from the Lexmark decision, it is not clear that the Supreme Court intended that statement to apply under the particular facts of Knit With. Knit With was a retailer that sold yarns and knitting products to consumers. If, relying on its supplier's advertising, it in turn falsely advertised to its customers that its yarn contained cashmere, it is plausible that its reputation among those customers would be harmed, as would its sales. It is also reasonable to assert that such injury would be proximately caused by the supplier's intentionally false claims about the cashmere content of the yarn. In that circumstance, it is arguable that the harm to the retailer falls within the zone of interest protected by the Lanham Act that Lexmark recognized – harm to reputation and loss of sales. Contrast that instance to the one the Lexmark decision more likely envisioned, in which a business is misled into purchasing inferior goods from a supplier but where the goods were not destined for resale in reliance on the supplier's false advertising claims. And, while the retailer and supplier in Knit With were not competitors, Lexmark was clear, and indeed exemplified, that the false advertising provision of the Lanham Act can protect others than just direct competitors.

It appears (from the district court's opinion) that the plaintiff in Knit With failed to allege harm to its reputation or sales due to its supplier's false advertising. So, for now, the Third Circuit's decision demonstrates the limits to Lanham Act standing in commercial disputes and that businesses misled by advertising claims need to be careful not to pull the string too quickly on a false advertising claim.

A Yarn Spun, But Advertising Not Tailored To A Lanham Act Claim

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