()

The Lanham Act has long served as a vehicle for businesses to bring civil actions for false advertising claims, but the tests to determine who may sue and under what circumstances have varied significantly among the circuits. Three different tests for standing had been applied by the federal courts. The U.S. Supreme Court resolved the conflict on March 25, 2014, in Lexmark Int’l v. Static Control Components,1 by setting forth a uniform test to determine the circumstances under which a party may bring false advertising claims under Section 43(a) of the Lanham Act.2 Because the court adopted a relatively lenient test to establish standing, the opinion paves the way for an expanded universe of potential false advertising plaintiffs throughout most of the country.

Three circuits (the Seventh, Ninth and Tenth) had used a categorical test that limited claims to actual competitors; four circuits (the Third, Fifth, Eighth and Eleventh) applied a five-factor balancing test sometimes referred to as “antitrust standing”; and the Second Circuit had been following the “reasonable interest” approach, under which a Lanham Act plaintiff has standing if it can demonstrate: (1) a reasonable interest to be protected against the alleged false advertising; and (2) a reasonable basis for believing that the interest is likely to be damaged by the alleged false advertising.

The Supreme Court rejected all three and instead held that application of the “zone-of-interests” test and the traditional proximate-cause requirement “supplies the relevant limits on who may sue.”

Background

The underlying action involved Lexmark, a manufacturer of laser printers and toner cartridges for its printers, and Static Control, a manufacturer of components sold to companies that refurbish and resell Lexmark toner cartridges in competition with Lexmark. Each Lexmark cartridge contains a microchip that disables the cartridge after its toner is depleted, necessitating a replacement chip, as well as toner, for the cartridge to be used again. Static Control had developed a microchip that mimics Lexmark’s, thus enabling its customers (the refurbishing companies) to sell cartridges that functioned in Lexmark printers.

Lexmark sued Static Control for copyright violations related to the microchip. Static Control counterclaimed for, inter alia, false advertising under the Lanham Act in connection with two types of allegedly false or misleading conduct: (1) Lexmark, through “shrinkwrap license” language on the packaging of its printer cartridges, purposefully misleads end-users to believe they are legally bound to return the cartridges to Lexmark after their ink is depleted; and (2) Lexmark sent letters to most of the cartridge refurbishing companies stating that it was illegal to sell refurbished Lexmark cartridges, and in particular, that it was illegal to use Static Control’s products to refurbish those cartridges.

Static Control asserted that the two foregoing activities constituted material misrepresentations of the nature, characteristics and qualities of both parties’ products, in violation of Section 43(a) of the Lanham Act. Static Control also claimed that Lexmark’s misrepresentations were the proximate cause of injury, including diversion of sales and injury to business reputation.

The district court granted Lexmark’s motion to dismiss the counterclaim, holding that Static Control lacked “prudential standing.” The court had conducted a multi-factor balancing test and concluded, among other things, that Static Control’s injury was remote because it was a mere “by-product of the supposed manipulation of consumers’ relationships with manufacturers” by Lexmark. The district court emphasized that there were more direct plaintiffs in the form of remanufacturers of Lexmark’s cartridges, as opposed to a component supplier like Static Control.

The U.S. Court of Appeals for the Sixth Circuit reversed. It applied the Second Circuit’s “reasonable interest” test and concluded that Static Control had standing because it alleged a “cognizable interest in its business reputation and its sales to manufacturers, and sufficiently alleged that those interests were harmed by Lexmark’s statements to the manufacturers that Static Control was engaging in illegal conduct.”3 The Supreme Court granted certiorari to decide “the appropriate analytical framework for determining a party’s standing to maintain an action for false advertising under the Lanham Act.”

The court, in an opinion by Justice Antonin Scalia, first dispensed with both parties’ arguments that the issue before the court involved “prudential standing,” a concept that the court had previously applied to limit standing generally, based on various broad principles. Instead, the court framed the question presented as one of simple statutory interpretation—whether Static Control falls within the class of plaintiffs that Congress authorized to sue under §1125(a). In negating the applicability of the concept of “prudential standing,” the court observed that a federal court’s obligation to hear and decide cases within its jurisdiction is “virtually unflagging,” and therefore a court cannot limit a cause of action that Congress had created “merely because ‘prudence’ dictates.”

Three Tests

With regard to the three existing tests, the court commented that none was “wholly without merit,” but it concluded that each had faults. The balancing test, first articulated by the U.S. Court of Appeals for the Third Circuit,4 involved five considerations:

(1) The nature of the plaintiff’s alleged injury: Is the injury of a type that Congress sought to redress in providing a private remedy for violations of the [Lanham Act]?; (2) The directness or indirectness of the asserted injury; (3) The proximity or remoteness of the party to the alleged injurious conduct; (4) The speculativeness of the damages claim; and (5) The risk of duplicative damages or complexity in apportioning damages.

There were two issues with this test. With respect to the first two factors, which essentially translate to “zone-of-interests” and proximate cause respectively, these are outright requirements in every case and not merely factors to be weighed in a balance. With regard to the fourth and fifth factors, the potential difficulty in assessing or apportioning damages is not an independent basis for denying standing. Indeed, a Lanham Act plaintiff may be entitled to injunctive relief without seeking monetary damages.

In contrast, the direct-competitor test5 provides a bright-line rule, but it is too restrictive. In particular, the Lanham Act is not limited to actions between direct competitors, and therefore such a restriction does not comport with the statutory language. Finally, the Second Circuit’s “reasonable interest” test6 is off the mark because the relevant question is not whether the plaintiff’s interest is “reasonable,” but whether it is one that 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 proximate to the defendant’s conduct.

Plaintiffs Authorized to Sue

Having rejected the three existing tests, and the parties’ prudential standing arguments, the court focused on the question presented: whether Static Control falls within the class of plaintiffs that Congress has authorized to sue under §1125(a), or more simply, does Static Control have a cause of action under the statute? At the outset of its analysis, the court recognized that the broad language of the statute must have an outer boundary. A literal reading might suggest that anyone who meets the minimum requirements of Article III may sue for false advertising, but it is unlikely that Congress intended all factually injured plaintiffs to have a cause of action. Instead, the court concluded that the proper limits are set in view of the concepts of zone-of-interests, and proximate causation.

With regard to the zone-of-interests, the court explained that the concept applies to all statutorily created causes of action and that Congress is presumed to legislate against the background of the zone-of-interest limitation. Nevertheless, judicial analysis of “certain statutes” shows that they protect a “more-than-usually expan[sive] range of interests,” according to the court. Significantly, at least with respect to prior Supreme Court application of the concept, the court noted that the test is “not especially demanding” and that “the benefit of any doubt goes to the plaintiff.”

Turning to the interests protected by the Lanham Act, the court found that the expressed purposes of the Lanham Act set forth in the statute7 are relevant to false advertising claims. The court held that to come within the zone of interests in a suit for false advertising under the Lanham Act, a plaintiff must only allege an injury to a commercial interest in reputation or sales.

As regards proximate cause, it has, for centuries, been a well-established principle of the common law, that in all cases, the claimed loss must be attributed to the proximate cause, and not to any remote cause. Similarly, for a statutory cause of action, it is presumed that claims are limited to injuries proximately caused by violations of the statute. The court held that a plaintiff suing under §1125(a) “ordinarily must show economic or reputational injury flowing directly from the deception brought about by the defendant’s advertising.”

Applying these two principles, the court concluded that Static Control comes within the class of plaintiffs whom Congress authorized to sue under §1125(a), and further that Static Control sufficiently alleged that its injuries were proximately caused by Lexmark’s alleged misrepresentations. The court acknowledged that Static Control, as a supplier to Lexmark’s competitors, could not make out the more traditional false advertising claim in which one competitor directly injures another by making statements about his or the competitor’s goods, thus inducing consumers to switch. However, it nonetheless satisfies the proximate causation requirement because “when a defendant harms a plaintiff’s reputation by casting aspersions on its business, the plaintiff’s injury flows directly from the audience’s belief in the disparaging statements.”

In rejecting the three existing tests for standing to bring false advertising claims under the Lanham Act in favor of the zone-of-interests/proximate cause test, the Supreme Court has effectively broadened the boundaries of who may bring such claims. Previously, under the five-factor balancing test, a plaintiff could be denied standing merely because its damages claim was considered too speculative. Under the direct competitor test, a party such as Static Control could be foreclosed from bringing a claim solely because it is found not to directly compete with the defendant. And, although the reasonable interest test was generally viewed as a broad one, there is inherent ambiguity in what is “reasonable,” which posed a risk of inconsistent and possibly arbitrary standing determinations.

In contrast, the Supreme Court has adopted a straightforward and expansive approach to determining standing for false advertising claims. The unified standing test brings more certainty and ensures that most aggrieved parties with commercial interests will not be denied an opportunity to bring claims for false advertising under the Lanham Act, based on lack of standing.

Darren W. Saunders is a partner in the litigation division of Manatt, Phelps & Phillips in New York.

Endnotes:

1. 572 U.S. ___ (2014).

2. 15 U.S.C. §1125(a).

3. 697 F.3d 387, 411.

4. Conte Bros. Automotive, Inc. v. Quaker State-Slick 50, 165 F.3d 221 (3d Cir. 1998).

5. See, L.S. Heath & Son v. AT&T Information Systems, 9 F.3d 561 (7th Cir. 1993).

6. Famous Horse v. 5th Avenue Photo, 624 F.3d 106.

7. See 15 U.S.C. §1127.