March 28, 2014
On March 25, 2014, in Lexmark International, Inc. v. Static Control Components, Inc., the U.S. Supreme Court addressed the standing requirements for plaintiffs bringing a cause of action for false advertising under the Lanham Act. Resolving the differing standards applied by the circuit courts, the Court held that the correct inquiry in determining whether a plaintiff possesses adequate standing is whether the plaintiff has alleged “an injury to a commercial interest in reputation or sales” that is proximately caused by the actions of the defendant. Lexmark is a landmark decision under the Lanham Act. Going forward, the decision will govern standing issues in Lanham Act cases between parties who are not direct competitors with one another.
Lexmark manufactures toner cartridges for laser printers and sells them directly to consumers. These toner cartridges ordinarily may be refilled with toner after the consumer has exhausted the original toner supply. Lexmark created a program called the “Prebate Program,” under which the consumer received a discount on the cartridge purchase price if it agreed to return the cartridges to Lexmark rather than having the cartridge refilled by a third party. To control the return of those cartridges, Lexmark fitted each cartridge with a microchip that disabled the cartridge once the toner was exhausted. The microchip prevented the consumer from reusing the cartridge if the consumer attempted to refill it.
Static Control Components is a manufacturer and seller of replacement toner cartridge components. It does not itself sell toner cartridges that compete with those sold by Lexmark. Static Control developed and sold a microchip that Lexmark’s competing cartridge remanufacturers could use to replace the Lexmark microchip, thereby allowing the remanufacturers to refill the Prebate toner cartridges for subsequent reuse. In response to this activity, Lexmark brought suit against Static Control alleging several causes of action. This lawsuit begat several related lawsuits and counterclaims.
One counterclaim brought by Static Control was for false advertising under the Lanham Act. Specifically, Static Control alleged that Lexmark had misled consumers by leading them to believe that the consumers were legally obligated to return cartridges to Lexmark for refilling, and by sending letters to other toner cartridge remanufacturing businesses alleging the illegality of selling refurbished Prebate Program cartridges. On this second issue, Static Control asserted that Lexmark had specifically told other remanufacturers that it was illegal to use Static Control’s microchip to refurbish those toner cartridges.
Lexmark moved to dismiss the counterclaim for lack of standing. The district court analyzed Lexmark’s motion under the doctrine of “prudential standing.” Following an earlier Supreme Court case, Associated Gen. Contractors of Cal., Inc. v. Carpenters, the district court weighed a number of factors, including the facts that there existed “more direct plaintiffs” than Static Control (specifically, Static Control’s remanufacturing customers). Based on this multifactor analysis, but focusing especially on the existence of “more direct plaintiffs,” the court concluded that Static Control lacked standing to bring a Lanham Act claim against Lexmark.
Static Control then appealed to the Sixth Circuit. That court reversed, and held that Static Control did have standing under the Lanham Act to maintain the counterclaim. In its analysis, the court observed a split of authority on the Lanham Act standing issue. The court noted that some circuits followed the multifactor test of Associated Gen. Contractors, while other circuits permitted suit only by a direct competitor. One circuit applied a third test, which it termed the “reasonable interest” test. The Sixth Circuit decided to follow this “reasonable interest” test and concluded that Static Control had standing under this approach.
Lexmark sought a writ of certiorari. The Supreme Court granted the writ for the sole purpose of resolving the standing issue.
The Court began its analysis with a discussion of “prudential standing.” The Court acknowledged that earlier Supreme Court decisions had referenced the standing question in terms of “prudential” standing and, in fact, both parties had presented arguments based on this rubric. Nonetheless, the Court held that “prudential standing” presented the wrong analytical framework. The Court indicated that the correct question was “whether Static Control falls within the class of plaintiffs whom Congress has authorized to sue under [the Lanham Act].” The Court reasoned that “[j]ust 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 Court then turned to the language of the Lanham Act. The statute provides relief for “any person who believes that he or she is likely to be damaged” by a defendant’s false advertising. The Court observed that this standard arguably would provide a claim for any injury, up to the Article III “case or controversy” limits of federal jurisprudence. Neither party had argued for such a broad construction of the statute, however, and the Court likewise found it unlikely that Congress had intended such a statutory scope.
Rather, following another earlier Supreme Court case, Association of Data Processing Service Organizations, Inc. v. Camp, the Court determined that it must determine whether Static Control fell within the “zone of interests protected by the law invoked.” In applying this “zone of interest” test to false advertising claims under the Lanham Act, the Court looked to the express purposes of the false advertising provisions of the Act, namely, “to protect persons engaged in [interstate] commerce against unfair competition.” This statutory purpose is expressly indicated in the Lanham Act itself. From this principle, the Court concluded that “a plaintiff must allege an injury to a commercial interest in reputation or sales” to maintain a Lanham Act claim for false advertising.
The Court next stated its presumption that standing requires proximate cause; i.e., “a statutory cause of action is also presumed to be limited to plaintiffs whose injuries are proximately caused by violations of the statute.” Under the proximate cause inquiry, the Court reasoned, one must examine whether or not the alleged harm has a sufficiently close connection to the activity that the statute prohibits. Put another way, the statute may not be applied where the alleged harm is too remote to the conduct of the defendant. The Court held that “a plaintiff suing under [the false advertising provisions of the Act] ordinarily must show economic or reputational injury flows directly from the deception wrought by the defendant’s advertising; and that occurs when deception of consumers causes them to withhold trade from the plaintiff.” The Court further observed that this standard requires a rather direct connection between the plaintiff and the actions of the defendant; the Court remarked that the proximate cause showing “is generally not made when the deception produces injuries to a fellow commercial actor that in turn affect the plaintiff.”
The Court expressly rejected Lexmark’s arguments for adoption of the multifactor balancing test applied by the district court, and likewise expressly rejected a proposed “direct competitor” standard. It reasoned that, “when a party claims reputational injury from disparagement, competition is not required for proximate cause.” “[T]hat is true,” the Court held, “even if the defendant’s aim was to harm its immediate competitors, and the plaintiff merely suffered collateral damage.”
Based on this analysis, the Court held that Static Control had standing to bring the Lanham Act claim. First, as to the “zone of interest” analysis, the Court found “no doubt” that Static Control met this standard, holding “Static Control’s alleged injuries—lost sales and damage to its business reputation—are injuries to precisely the sorts of commercial interests the Act protects.” Second, as to proximate cause, the Court found it significant that “there is likely to be something very close to a 1:1 relationship between the number of refurbished Prebate cartridges sold (or not sold) by the remanufacturers and the number of Prebate microchips sold (or not sold) by Static Control.” Put another way, taking Static Controls allegations as true, Static Control was harmed as equally as Lexmark’s direct competitors (at least in terms of number of units sold). The remanufacturers were not “more immediate victims” than Static Control.
Finally, the Court emphasized that its holding was limited to the standing issue as assessed by the sufficiency of Static Control’s counterclaim. The Court expressed no opinion on whether Static Control would be able to prove its case at trial.
The Lexmark decision resolves a circuit split on an important aspect of Lanham Act standing. The decision will provide guidance in future cases where the allegedly injured party and the defendant are not direct competitors with one another. Also, the Lexmark decision casts doubt generally on the viability of the “prudential standing” doctrine.
For further information on this ruling, please contact Fitch Even partner Joseph T. Nabor, author of this alert.
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A Fitch Even attorney represented Lexmark before the district court in this action, but no longer represents Lexmark. This alert does not purport to represent any position of Lexmark or of Static Control. Fitch Even likewise expresses no opinion as to the merits of Static Control’s claim or of any of Lexmark’s defenses.