The Elements of Standing When Asserting a False Advertising Claim under the Trademark Act

March 28, 2014 – Blog Post

On March 25, 2014, in Lexmark International, Inc. v. Static Control Components, Inc., Case No. 12-873 (S.Ct., March 25, 2014), the Supreme Court defined and described the test under which a non-competitor may bring a claim for false advertising under Trademark Act Section 43(a), 15 U.S.C. § 1125(a). Lexmark is a manufacturer and seller of laser printers, including toner cartridges for those printers. Lexmark designs its printers to work only with its own proprietary cartridges. However, remanufacturers acquire used Lexmark toner cartridges, refurbish them, and sell them in competition with new and refurbished cartridges sold by Lexmark.

Lexmark prefers that its customers return their empty toner cartridges to it for refurbishment and resale, so that it reaps the profits from those aftermarket resales rather than the remanufacturers. Lexmark thus introduced a “Prebate Program” enabling its customers to purchase new toner cartridges at a discount if they agree to return the cartridge to Lexmark once it is empty. The terms of the Prebate Program are communicated to customers through notices printed on the toner cartridge boxes, by use of a shrink-wrap license. To enforce the Prebate Terms, Lexmark includes a microchip in each Prebate Cartridge that disables the cartridge after it runs out of toner. For the cartridge to be re-used, the microchip must be replaced by Lexmark.

Static Control manufactures and sells components necessary to remanufacture Lexmark cartridges. Static Control supplies the remanufacturers with toner, replacement parts, and a microchip that mimics Lexmark’s microchip for its Prebate Cartridges.

In 2002, Lexmark sued Static Control for copyright infringement and violations of the Digital Millennium Copyright Act, 17 U.S.C. §101 et seq. and 1201 et seq. Static Control counterclaimed alleging, inter alia, false advertising under Trademark Act Section 43(a).

Static Control alleged that two Lexmark practices amounted to false or misleading conduct: 1) through its Prebate Program Lexmark led end-users to believe that they were legally bound by the Prebate Terms, and thus were required to return the Prebate-labeled cartridges to Lexmark after a single use; and 2) upon introducing the Prebate Program, Lexmark sent letters to toner cartridge remanufacturers falsely advising them that it was illegal to sell refurbished Prebate Cartridges, and that it was illegal to use Static Control’s products to refurbish those cartridges.

The District Court dismissed Static Control’s false advertising counterclaim against Lexmark for lack of “prudential standing.” That is, there were more direct plaintiffs who had a greater interest in stopping Lexmark’s practices through litigation, the toner cartridge remanufacturers. The District Court further stated that Static Control’s injury was remote because it was a byproduct of the supposed manipulation of consumers’ relationships with the toner cartridge remanufacturers. The Sixth Circuit Court of Appeals reversed the District Court’s dismissal of Static Control’s false advertising counterclaim.

The Supreme Court granted certiorari to decide the appropriate analytical framework for determining a party’s standing to sue for false advertising under the Lanham Act; and, more particularly, whether Static Control fell within the class of plaintiffs whom Congress had authorized to sue under Trademark Act Section 43(a).

In the course of its opinion, the Supreme Court rejected all of the tests offered by the parties and their amici with respect to whether a party had standing to sue under the Trademark Act. Under the Antitrust Standing Theory, the Court conducts a multifactor balancing test attributed to the Supreme Court’s opinion inAssociated Gen. Contractors of Cal, Inc. v. Carpenters, 459 U.S. 519 (1983). Under the Categorical Test, Trademark Act suits only are permitted by actual competitors. Finally, under the Reasonable Interest Approach, a Trademark Act plaintiff has standing if the claimant 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 of these approaches.

Rather, the Supreme Court outlined two inquiries to determine whether a plaintiff has standing to sue for false advertising under Trademark Act Section 43(a). The Plaintiff must satisfy both of these tests. Under the Zone-of-Interest Test, the Court presumes that a statutory cause of action exists as to plaintiffs whose interests fall within the zone of interest protected by the Act. This test forecloses suit only when the plaintiff’s interests are so marginally related to or inconsistent with the purposes implicit in the statute that it cannot reasonably be assumed that Congress authorized that plaintiff to sue. This test clearly precludes a defrauded consumer from maintaining a cause of action under Trademark Action Section 43(a). On the other hand, a plaintiff does come within the zone of interest protected by Trademark Act Section 43(a) if the injury is to its commercial interest in reputation or lost sales.

Under the Proximate Cause Test, the Court presumes that a statutory cause of action is limited to plaintiffs whose injuries are proximately caused by a violation of the statute. The proximate cause requirement generally bars suit for alleged harm that is too remote from the defendant’s unlawful conduct. Under the Proximate Cause Test, a plaintiff suing under Trademark Act Section 43(a) must show economic or reputational injury flowing directly from the deception wrought by the defendant’s false advertising; and that occurs when deception of consumers causes them to withhold trade from the plaintiff.

Concluding, the Supreme Court held that a direct application of the Zone-of-Interest and Proximate Cause requirements supply the relevant limits of who may maintain a cause of action under Trademark Act Section 43(a). This is true even when the plaintiff cannot quantify losses with sufficient certainty to recover damages; although it still may be entitled to injunctive relief.

The Supreme Court concluded that Static Control came within the class of plaintiffs whom Congress authorized to sue under Trademark Act Section 43(a). Although Static Control and Lexmark are not direct competitors, Static Control claimed a reputational injury from Lexmark’s conduct. This is true even if Lexmark’s aim was to harm its immediate competitors (the remanufacturers), and Static Control merely suffered collateral damage. The Supreme Court also stated that while the causal chain linking Static Control’s injuries to consumer confusion (caused by Lexmark’s activities) is not direct, it includes the intervening link of injury to the remanufacturers. Concluding, the Supreme Court stated that a plaintiff must plead (and ultimately prove) an injury to a commercial interest in sales or business reputation proximately caused by defendant’s misrepresentations. Static Control adequately pled both elements.

The Supreme Court’s opinion clarified and unified the test for a non-competitor to sue for false advertising under Trademark Act Section 43(a). It remains to seen whether the lower courts will require, as matters of pleading and proof, even direct competitors to plead and prove the elements of the Zone-of-Interest and Proximate Cause tests with respect to garden variety trademark infringement claims