Supreme Court Affirms: False Advertising Counterclaimant Has Standing

Supreme Court Affirms: False Advertising Counterclaimant Has Standing

 WASHINGTON, D.C. — (Mealey’s) In a unanimous decision, the U.S. Supreme Court today ruled that “to come within the zone of interests in a suit for false advertising under” Section 1125(a) of the Lanham Act, “a plaintiff must allege an injury to a commercial interest in reputation or sales” (Lexmark International Inc. v. Static Control Components Inc., No. 12-873, U.S. Sup.; See 12/16/13, Page 15) ( subscribers may access Supreme Court briefs and the opinion for this case).

Additionally, “a plaintiff suing under §1125(a) ordinarily must show economic or reputational injury flowing directly from the deception wrought by the defendant’s advertising; and that that occurs when deception of consumers causes them to withhold trade from the plaintiff,” Justice Antonin Scalia wrote for the court.

Because respondent Static Control Components Inc. satisfies both the zone-of-interest test and the proximate-cause requirement, Static Control “comes within the class of plaintiffs whom Congress authorized to sue under §1125(a),” according to the Supreme Court.

Diverted Sales

Petitioner Lexmark International Inc. makes and sells laser printers and replacement toner cartridges for its printers while Static Control is the world’s leading maker and seller of replacement parts for printer cartridges, including parts designed for Lexmark-compatible toner cartridges. Static Control sells the parts, including microchips and specialized mechanical parts, to remanufacturers, which recycle and sell used toner cartridges by replacing any worn internal parts and replenishing the toner. Lexmark sued Static Control in 2002 in the U.S. District Court for the Eastern District of Kentucky, alleging copyright and patent infringement claims related to Static Control’s manufacture and sale of microchips used by remanufacturers of toner cartridges for Lexmark's laser printers.

Static Control asserted counterclaims under federal and state antitrust laws, as well as a false advertising claim under the Lanham Act, on grounds that Lexmark falsely advertised that it sold its toner cartridges subject to a single-use patent license — known as the “Prebate” program — and that remanufacturing Lexmark cartridges would therefore constitute infringement. Static Control also asserted that Lexmark falsely advertised that the use of Static Control’s products would cause remanufacturers to infringe Lexmark’s patent-based restrictions on Prebate cartridges. According to Static Control, the advertisements were false because Lexmark lacked patent rights to impose on the cartridges’ post-sale use. Static Control asserted that Lexmark’s false advertising harmed Static Control’s business by causing consumers and people in the printer trade to believe that Static Control’s products were illegal, which diverted sales from Static Control to Lexmark and caused substantial injury to Static Control’s business reputation.

Partial Reversal

Relevant to the Supreme Court ruling, the District Court found that Static Control lacked standing to sue under the Lanham Act. Both parties appealed to the Sixth Circuit U.S. Court of Appeals, which in 2012 reversed after finding that Static Control pleaded sufficient facts to establish standing under the reasonable interest test set forth in Frisch’s Restaurants, Inc. v. Elby's Big Boy, 670 F.2d 642, 649-50 (6th Cir. 1982) [an enhanced version of this opinion is available to subscribers]. Lexmark filed a petition for writ of certiorari with the Supreme Court, presenting the following question: “Whether the appropriate analytic framework for determining a party’s standing to maintain an action for false advertising under the Lanham Act is (1) the factors set forth in Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 537-45 (1983) [enhanced version], as adopted by the Third, Fifth, Eighth, and Eleventh Circuits; (2) the categorical test, permitting suits only by an actual competitor, employed by the Seventh, Ninth, and Tenth Circuits; or (3) a version of the more expansive ‘reasonable interest’ test, either as applied by the Sixth Circuit in this case or as applied by the Second Circuit in prior cases.”

Static Control waived its right to respond, but in March 2013, the Supreme Court requested a response. In its response brief, Static Control said that the question presented is:  “Does a plaintiff have prudential standing, at the pleading stage, under Section 43(a) of the Lanham Act where the plaintiff alleges that the defendant directly targeted the plaintiff with false advertising statements about plaintiff's products that had the effects of diverting sales from plaintiff to defendant and tarnishing plaintiff's goodwill?”  In June, the Supreme Court granted certiorari, and oral arguments were held in December.

Traditional Principles

The Supreme Court as an initial matter characterized as “misleading” both parties’ contention that the instant dispute is one of prudential standing. Although “whether a plaintiff comes within the ‘zone of interests’ is an issue that requires us to determine, using traditional tools of statutory interpretation, whether a legislatively conferred cause of action encompasses a particular plaintiff’s claim,” the District of Columbia U.S. Circuit Court of Appeals recently observed in Association of Battery Recyclers Inc. v. EPA, 716 F.3d 667, 675-676 (D.C. Cir. 2013) [enhanced version] that “prudential standing is a misnomer as applied to the zone-of-interest analysis, which asks whether ‘this particular class of persons ha[s] a right to use under this substantive statute,’” according to the court.

“In sum, the question this case presents is whether Static Control falls within the class of plaintiffs whom Congress has authorized to sue under §1125(a). In other words, we ask whether Static Control has a cause of action under the statute. That question requires us to determine the meaning of the congressionally enacted provision creating a cause of action. In doing so, we apply traditional principles of statutory interpretation. We do not ask whether in our judgment Congress should have authorized Static Control’s suit, but whether Congress in fact did so. Just as a court cannot apply its independent policy judgment to recognize a cause of action that Congress has denied . . . it cannot limit a cause of action that Congress has created merely because ‘prudence’ dictates,” the Supreme Court held.

Trade Withheld

Turning to the zone-of-interests test, the court noted that “identifying the interests protected by the Lanham Act . . . requires no guesswork” because the statute includes an “unusual and extraordinarily helpful, detailed statement” of its purposes. Accordingly, to satisfy the zone-of-interests test, a Section 1125(a) claim must allege an injury to a commercial interest in reputation or sales, the court found. Consumers who are “hoodwinked” into purchasing a “disappointing product” may sustain an injury cognizable under Article III of the U.S. Constitution, but they are not entitled to protection under the Lanham Act, the Supreme Court ruled. Furthermore, “even a business misled by a supplier into purchasing an inferior product is, like consumers generally, not under the Act’s aegis,” it said.

With regard to proximate cause in a Section 1125(a) case, the court found that a plaintiff must demonstrate economic or reputational injury that occurred as a result of a defendant’s advertising, often in the form of consumers who consequently withhold trade from the plaintiff.

“That showing is generally not made when the deception produces injuries to a fellow commercial actor that in turn affect the plaintiff. For example, 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,’” the court clarified, citing Anza v. Ideal Steel Supply Corp., 547 U.S. 456 (2006) [enhanced version].

Clearer, More Accurate

In fashioning a test for Section 1125(a) standing that combines the zone-of-interests test with a proximate causation requirement, the court deemed the Third Circuit U.S. Court of Appeals’ “balancing” test in Conte Bros. Automotive Inc. v. Quaker State-Slick 50 Inc., 165 F. 3d 221, 233-234 (3rd Cir. 1998) [enhanced version] “slightly off the mark” and the Sixth Circuit’s Frisch’s Restaurants “reasonable interest” test “vague.”  With regard to its newly established standard, the Supreme Court opined that “the relevant question is not whether the plaintiff’s interest is ‘reasonable,’ but whether it is one the Lanham Act protects; and not whether there is a ‘reasonable basis’ for the plaintiff’s claim of harm, but whether the harm alleged is proximately tied to the defendant’s conduct.” 

“In short, we think the principles set forth above will provide clearer and more accurate guidance. . . . Although we conclude that Static Control has alleged an adequate basis to proceed under §1125(a), it cannot obtain relief without evidence of injury proximately caused by Lexmark’s alleged misrepresentations. We hold only that Static Control is entitled to a chance to prove its case. . . . The judgment of the Court of Appeals is affirmed,” the court concluded.


Lexmark is represented by Steven B. Loy, Anthony J. Phelps, Monica H. Braun and Christopher L. Thacker of Stoll Keenon Ogden in Lexington, Ky.; Robert J. Patton of Lexmark in Lexington; Neal Katyal and Dominic F. Perella of Hogan Lovells in Washington and Timothy C. Meece of Banner & Witcoff in Chicago.

Seth D. Greenstein of Constantine Cannon in Washington; Joseph C. Smith Jr. and Jameson R. Jones of Bartlit Beck Herman Palenchar & Scott in Denver; M. Miller Baker and Stefan M. Meisner of McDermott Will & Emery in Washington; and William L. London III of Static Control in Sanford, N.C., represent Static Control.

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