False Advertising Standing Argued at Supreme Court

False Advertising Standing Argued at Supreme Court

 WASHINGTON, D.C. — (Mealey’s) The proper analytical framework for assessing standing in Lanham Act false advertising cases is the same for assessing standing in an antitrust action, counsel for Lexmark International Inc. told the U.S. Supreme Court Dec. 3 (Lexmark International Inc. v. Static Control Components Inc., No. 12-873, U.S. Sup.; See 11/18/13, Page 43).

Accordingly, attorney Steven B. Loy argued, standing does not exist where the parties in question are not competitors.

“The plain text of the Lanham Act at Section 45 states that the intent of that Act is to protect commercial actors against unfair competition. Competition generally is the focus of both antitrust statutes and the Lanham Act, and any test that this Court adopts should be tied to that statutory intent section,” Loy said.

‘Prebate’ Program

Lexmark makes and sells laser printers and replacement toner cartridges for its printers. Respondent Static Control Components Inc. 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 are illegal, which diverted sales from Static Control to Lexmark and caused substantial injury to Static Control’s business reputation.

Partial Reversal

Lexmark moved to dismiss Static Control’s state and federal antitrust and false advertising counterclaims for lack of prudential standing. In deciding Lexmark’s motion, the District Court first concluded that Static Control lacked antitrust standing under state and federal law after applying the U.S. Supreme Court’s five-factor test established in Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 537-45 (1983) (AGC) [an enhanced version of this opinion is available to lexis.com subscribers]. The District Court further found that Static Control lacked standing under the Lanham Act and the North Carolina Unfair and Deceptive Trade Practices Act (NCUDTPA) for the same reasons that it lacked standing to pursue the antitrust claims.

Both parties appealed to the Sixth Circuit U.S. Court of Appeals, which on Aug. 29, 2012, affirmed the District Court’s dismissal of Static Control’s federal antitrust claims but reversed dismissal of the Lanham Act and NCUDTPA claims and state law antitrust claims (Static Control Components, Inc. v. Lexmark International, Inc., Nos. 09-6287, 09-6288, 09-6449, 6th Cir.; 2012 U.S. App. LEXIS 18316; See 10/1/12, Page 15) [enhanced version]. The Sixth Circuit held 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) [enhanced version].

Response Requested

Lexmark filed a petition for writ of certiorari with the U.S. 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), 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 on March 1, 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?”

On June 3, the Supreme Court granted certiorari.

Absence Of Competition

Loy told the Supreme Court at oral arguments today that the absence of any competition between the parties proves fatal for Static Control’s false advertising claim. Justice Sonia Sotomayor expressed skepticism, however, noting, “[Y]ou’re disparaging the goods of a person. . . . [Y]ou’re saying that it’s illegal to use that person’s products.” 

“It seems to me that’s the essence of the Lanham Act as it’s now written,” she remarked.

Similarly, Justice Ruth Bader Ginsberg cited the text of the Lanham Act, which states that “the false advertiser shall be liable to any person who believes he or she is likely to be damaged by such an act.”  The legislation “seems to envision a very broad standing, certainly enough to encompass the person whose product is being disparaged,” she added.

‘Any Person’ Language

Although conceding that the Lanham Act uses “any person” language, Loy responded that the Sherman Act and the Racketeer Influenced and Corrupt Organizations Act do also.

“We think the Lanham Act is a limited, focused statutory remedy. It’s not a federal tort of misrepresentation. It’s not a federal tort of deceit. The purpose of the statute is to protect commercial actors against unfair competition, not against unfair trade practices. And so to — to use the — or take advantage of the federal courts in the Lanham Act, which has potential for treble damages and attorney’s fees, we think it’s a narrow class of plaintiffs. Particularly, unlike the antitrust context, there’s no intent requirement under the Lanham Act,” Loy added.

Finally, Loy cautioned that a finding of standing in the instant dispute “could lead to overenforcement, which has its own set of harms.” 

“We don’t think you want to deter companies from putting even truthful information into the marketplace for fear of facing lawsuits by remote parts suppliers,” Loy said.

Zone Of Interest

Jameson R. Jones, representing Static Control, argued that “if any party has standing under Section 43(a) of the Lanham Act, it’s a party whose goods are misrepresented in false advertising.”  Noting that Congress amended the statute in 1988 to “ensure a cause of action when a false advertiser misrepresents the goods or commercial services of ‘another person,’” Jones told the Supreme Court that its “zone of interest” analysis in other cases demonstrates that “parties whose goods are disparaged, either expressly or by necessary implication, must have standing to sue.”

Justice Antonin Scalia then asked Jones to “square” his position with the statutory provision that the purpose of the law is to prevent unfair competition, and not unfair trade practices.

“Where Section 45 says that it is designed to protect those engaged in such commerce from unfair competition, it's referring to what is defined in the operative text as unfair trade practices. Unfair competition involves specific measures, the use of falsities, that can injure parties who are not necessarily in competition with one another. The courts as a whole all agree that a competition requirement cannot be inferred into the false association cause of action that is also unfair competition that's part of Section 43(a). Section 43(a) goes to commercial activity. There is unfair competition in the sense that all of the activity under it is commercial and competitive in that sense. But some narrow form of competition between a plaintiff and a defendant for the purposes of standing is inconsistent with the structure of Section 43(a) and the text of the operative paragraph,” Jones replied.

Lexmark is represented by 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 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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