The U.S. Supreme Court’s unanimous decision in Lexmark International v. Static Control Components, 134 S. Ct. 1377 (March 25, 2014), is noteworthy for resolving a split among the circuit courts. In doing so, the court’s decision effectively broadens the class of plaintiffs that can bring claims for false advertising under the Lanham Act.
Beyond this, the decision is also a substantial step in the court’s ongoing adjustment of standing doctrine. In short, the Lexmark decision begins to dismantle the judge-made doctrine of prudential standing in favor of more straightforward statutory interpretation. Nevertheless, the opinion relies heavily on judge-made common law for its interpretation of the Lanham Act’s scope. Ultimately, the central role of the judiciary under the act cannot be abandoned.
Under the Lanham Act, it is unlawful to use “any false designation of origin, false or misleading description of fact, or false or misleading representation of fact [that,] in commercial advertising or promotion, misrepresents the nature, characteristics, qualities or geographic origin” of the advertiser or another’s “goods, services or commercial activities.”
While this prohibition frames a subject area—false advertising—it leaves many questions unanswered. As a result, the application of the Lanham Act in general and Section 1125 in particular has evolved in the courts based upon common law concepts of unfair competition.
Since the passage of the act more than 60 years ago, the courts have applied it to trademark infringement and unfair competition generally in accord with prior and evolving common law principles. Thus, Congress left it to the courts to define the precise scope of the Lanham Act’s prohibitions.
In Lexmark, the Supreme Court addressed the various efforts of the circuit courts to resolve the question of who can sue for false advertising under the Lanham Act.
Three divided approaches had developed in the circuit courts: (1) a categorical test that allows claims only by direct competitors of the advertiser; (2) a reasonable interest test allowing claims by those who can show an interest that must be protected; and (3) a balancing test that relies on various factors developed in the antitrust setting.
Noteworthy here, this third test had been adopted by the U.S. Court of Appeals for the Third Circuit, as articulated in decisions authored by Justice Samuel A. Alito Jr., such as Conte Bros. Automotive v. Quaker State-Slick 50, 165 F.3d 221 (3rd Cir. 1998). Despite Alito’s prior involvement with the issue, the Supreme Court unanimously rejected all three of the circuits’ tests.
Generally, the circuits had framed the issue raised in Lexmark as one of “prudential standing.” But, writing for the court, Justice Antonin Scalia expressly refutes this characterization. “Constitutional standing” under Article III requires that the claimant suffered a concrete and particularized injury fairly traceable to the challenged conduct that is redressable through a favorable judicial outcome. Beyond this, Scalia observes that in “recent decades” the concept of “prudential standing” has developed in the courts to bar claimants from raising another person’s legal rights, generalized grievances or issues beyond the “zone of interest” protected by the law sued upon.
Scalia has long been concerned for the role of standing in the separation of powers and has not been pleased with the role of the courts in tinkering with the fundamental definition of their authority. Before his appointment to the Supreme Court, he addressed the distinction between the constitutional and prudential standing doctrines developed by the court in cases such as Association of Data Processing Service Organizations v. Camp, 397 U.S. 150 (1970), and Warth v. Seldin, 422 U.S. 490 (1975), and noted in a Suffolk University Law Review article:
“Personally, I find this bifurcation unsatisfying—not the least because it leaves unexplained the court’s source of authority for simply granting or denying standing as its prudence might dictate. As I would prefer to view the matter, the court must always hear the case of a litigant who asserts the violation of a legal right. … When the legislature explicitly says that a private right exists, this so-called ‘prudential’ inquiry is displaced.”
As a result, in assessing the zone of interests test, Scalia has previously noted in Bennett v. Spear, 520 U.S. 154, 163 (1997), that “Congress legislates against the background of our prudential standing doctrine,” and in Steel v. Citizens for a Better Environment, 523 U.S. 83, 97 at n.2 (1998), that having “statutory standing” and a cause of action on the merits are “connected” and often “overlap.”
While the parties—and the circuits’ prior decisions—framed the issue in Lexmark as one of prudential standing, the court’s decision begins to dismantle the doctrine. First, the court notes that the proposed balancing test is a question of statutory interpretation not prudential standing. Then, the court notes:
“Although we admittedly have placed [the zone of interests] test under the ‘prudential’ rubric in the past, it does not belong there any more than [the balancing test] does. 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 court further notes that the prudential concept of generalized grievances is, in fact, more properly characterized as an issue of constitutional standing and then remarks that dismantling the prudential limitation on third-party standing can “await another day.”
In essence, the Lexmark decision begins to strip the prudential factors from standing inquiries and refers us to the constitution and the relevant statute for guidance.
Having cleansed the issue before it of prudential standing considerations, if not dispensing with the law of the prudential standing altogether, the court turned to the Lanham Act to decide the case on more straightforward terms.
The question is simple: Does the act provide a remedy for a plaintiff like Static Control? In short, Static Control is not a competitor of Lexmark, but was allegedly harmed when Lexmark falsely claimed to Static Control’s customers that Static Control’s business of supplying parts to those who did compete with Lexmark was unlawful.
In resolving whether such a noncompetitor can sue under the Lanham Act, Scalia reviewed the statutory text and found that the act clearly states that its purpose is to “protect persons engaged in such commerce against unfair competition,” which at common law included protection of business reputation and present and future sales. Beyond this, the court noted that statutory causes of action are limited to those in which “injuries are proximately caused by violations of the statute.”
As a result, a plaintiff can bring a claim under the Lanham Act by alleging that the accused conduct caused injury to its business reputation or sales that was proximately caused by the statutory violation. This is a broad formulation of the statute’s scope—particularly in light of some of the circuits’ constrained view that the cause of action is limited to claims between competitors.
Moreover, while Scalia noted that the zone of interest inquiry is one of statutory interpretation, not the courts’ application of their own prudential standing notions, the source of the statute’s scope in this very case was judge-made common law.
In relying on the Lanham Act’s limited reference to “unfair competition,” Scalia chooses to accept this “plastic concept” of common law. Indeed, the court’s ultimate test—injury to a commercial interest in reputation or sales—emerges from 75-year-old judge-made law.
Thus, the Lexmark decision appears to elevate the statute’s role at the expense of the prudential standing doctrine. The Lanham Act, however, is a set of broad provisions that were built upon and continue to rely on common law and judicial usage for their meaning. While the decision takes issue with judge-made prudential concepts of standing, Scalia replaces them with his favored approach—statutory construction. When the statute at issue is the Lanham Act, however, construction can occur only by reference to the Lanham Act’s common law roots and growth. Any further effort by the court to eliminate judges’ assessment of prudential standing will be more telling when considered in connection with a statute that relies less heavily on the common law. But for that decision, we must wait.
J. Alexander Hershey is a member in the litigation practice group of Clark Hill. His practice is focused in the areas of unfair competition, antitrust issues and intellectual property protection; business torts, trade secret issues and employment law; insurance and managed care law; and related commercial and contractual disputes.