False Advertising and Indirect Competitors

A lawsuit between two parties involved in printer cartridge manufacturing has trudged on with little notice for more than a decade. But the most recent ruling in the case — Lexmark Int’l, Inc. v. Static Control Components, Inc., No. 12-873, March 25, 2014 (Supreme Court) — has gotten quite a bit of attention. That’s because it was made by the U.S. Supreme Court, which resolved a split among the federal courts of appeals over which parties can bring claims for false advertising.

Setting the tone

Lexmark sells the only style of toner cartridges that work with its laser printers. Remanufacturers acquire and refurbish used Lexmark cartridges to sell in competition with the company. To combat this, Lexmark offers a “Prebate” program that gives customers a discount on new cartridges if they agree to return empty cartridges.

In 2002, Lexmark sued Static Control, a maker and seller of components for the remanufacture of Lexmark cartridges, for copyright infringement. Static Control counterclaimed, alleging that Lexmark engaged in false advertising in violation of the federal Lanham Act and that its misrepresentations had caused Static Control lost sales and damaged business reputation. It asserted that Lexmark had:

  • Purposefully misled end-users to believe they were legally bound by the Prebate terms to return cartridges to Lexmark, and
  • Falsely advised remanufacturers that it was illegal to sell refurbished Prebate cartridges and to use Static Control’s products to refurbish those cartridges.

The district court held that Static Control lacked the necessary standing to bring a Lanham Act claim. The U.S. Court of Appeals for the Sixth Circuit reversed this ruling.

Devising a test

On review, the Supreme Court noted that three competing approaches have developed for determining whether a plaintiff has standing to sue under the Lanham Act:

  1. Antitrust standing or the Associated General Contractors multifactor balancing test,
  2. The categorical test, allowing suits only by an actual competitor, and
  3. The reasonable interest approach.

The Court, however, adopted an entirely new two-part test. It held that Lanham Act lawsuits can be brought only by plaintiffs: 1) who fall within the zone of interests protected by the law, and 2) whose injury was proximately caused by a violation of the law.

To come within the zone of interests in a false advertising suit, the Court explained, a plaintiff must allege an injury to a commercial interest in reputation and sales. As far as proximately caused injury, a plaintiff must show that its economic or reputational injury flows directly from the deception wrought by the defendant’s advertising. The Supreme Court said this occurs when deception of consumers causes them to withhold trade from the plaintiff.

Turning to the case at hand, the Court concluded that Static Control could sue for false advertising. Its alleged injuries (lost sales and damaged reputation) fell within the zone of interests protected by the law, and Static Control sufficiently alleged that its injuries were proximately caused by Lexmark’s misrepresentations.

Emboldening competition

The Supreme Court’s ruling could embolden more indirect competitors to pursue false advertising claims. At the very least, it should reduce forum-shopping for more favorable courts in false advertising cases, as all federal courts must now apply the two-part test for standing.