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SCOTUS Relaxes Standing Requirements For Lanham Act Section 43 False Advertising Claims In Lexmark Ruling

BACKGROUND

On March 25, 2014, the United States Supreme Court delivered a unanimous opinion in Lexmark International, Inc. v. Static Control Components, Inc.  The decision liberalized standing requirements for false advertising claims under the Lanham Act by getting rid of three separate tests utilized by three different groups of circuit courts of appeal to determine standing.  The three standing tests were: (1) the antitrust standing requirement; (2) direct competitor requirement; and (3) the reasonable interest requirement.  District courts in the Ninth Circuit (including California) followed the direct competitor standing requirement, which limited Lanham Act claims only as between competitors.  The new test espoused by the Supreme Court is a two part test, which inquires whether the claimant can demonstrate an injury that “fall[s] within the zone of interests” of the Lanham Act, and whether such injuries were proximately caused by the false advertising.  In sum, the new test will mean more false advertising claims between businesses will survive the pleading stage, regardless of whether they are competitors or not.  However, claimants will still need to gather evidence to overcome summary judgment/adjudication motions.

FACTS

Lexmark sells the only style of toner cartridges compatible with the company’s laser printers.  Remanufacturers acquire and refurbish used Lexmark cartridges to sell in competition with Lexmark’s own new and refurbished ones.  Lexmark did not want to keep losing market share for its printer cartridges to remanufacturers so it developed a microchip that disabled the spent cartridges unless Lexmark replaced the chip.  Static Control developed a microchip that mimics Lexmark’s, thus allowing remanufacturers to continue to refill and sell Lexmark’s old cartridges.  Not to be denied, Lexmark sued Static Control for infringing the copyright to its chip.  Not giving up without a fight, Static Control counterclaimed, alleging Lexmark engaged in false or misleading advertising under the Lanham Act, 15 U.S. Code Section 1125(a).  Lexmark allegedly engaged in “shrink wrap licensing” by misleading end users that they are legally bound to return to the Lexmark cartridge only to Lexmark.  Lexmark also allegedly advertised to remanufacturers that use of Static Control’s products was illegal.  The District Court determined that Static Control lacked standing to bring its false advertising counterclaim.  The Sixth Circuit reversed by applying the “reasonable interest” test for standing.

ANALYSIS

The Supreme Court determined the starting point of its analysis to be the statutory interpretation of Section 1125(a).  The Court determined the three tests used by the various circuit courts were either too stringent, as in the case of the Ninth Circuit’s direct competitor test, or too imprecise in the case of the other two.  Instead, the Supreme Court noted that Congress set forth what interests were sought to be protected by the Lanham Act.  The interests were codified in 15 U.S.C. §1127 and could be best summed up as, injuries to business reputation and present and future sales.  Thus, the Court announced a new two pronged test.  First, a claimant must fall within the zone of interests to establish standing.  The zone of interests test element is met if a claimant can show an injury to a commercial interest in reputation or sales, and economic or reputational injury.  The second part of the test requires proximate causation, ie., claimant must show that its economic or reputational injury flows directly from the deceptive advertising when customers withhold trade from the claimant.  Based on this analysis, the Supreme Court affirmed the Sixth Circuit Court of Appeals finding that Static Control adequately pleaded standing for a Lanham Act false advertising counterclaim.

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