Supreme Court establishes uniform test for false advertising claims

By: Brian Lefort Friday March 28, 2014 0 comments

By Brian Lefort

On March 25, the Supreme Court unanimously decided the case of Lexmark Int'l v. Static Control and in doing so, held that direct competitors are not the only types of plaintiffs that may allege a claim of false advertising under the Lanham Act.

Rather, any plaintiff that can "plead (and ultimately prove) an injury to a commercial interest in sales or business reputation proximately caused by the defendant's misrepresentations" will have standing to assert a false advertising claim under this federal statute.

Lexmark manufactures and sells laser printers, as well as toner cartridges for its printers. Lexmark also designs its printers to work only with its toner cartridges by including a microchip in the cartridges.  Remanufacturers acquire used Lexmark toner cartridges, refurbish them, and sell them, thereby directly competing with the Lexmark cartridges.

Static Control is not a manufacturer or remanufacturer of toner cartridges. Rather, Static Control developed a microchip that mimics the microchip in Lexmark's cartridges, and Static Control sells its microchip to remanufacturers that refurbish and resell used Lexmark cartridges.

In response to this activity, Lexmark sent letters to companies in the toner cartridge remanufacturing business advising those companies that it was illegal to sell refurbished Lexmark cartridges and that it was illegal to use Static Control's products to refurbish those cartridges.

Static Control, in turn, brought a claim of false advertising against Lexmark. Lexmark was initially successful in having the false advertising claim dismissed for lack of standing when the district court held that Static Control's alleged injury was "'remot[e]' because it was a mere 'byproduct of the supposed manipulation of consumers' relationships with remanufacturers.'"

In other words, the district court held that remanufacturers of the Lexmark's cartridges, which are direct competitors of Lexmark, were the more appropriate plaintiffs for asserting a false advertising claim in comparison to Static Control, whose losses were not closely enough related to Lexmark's advertising activities.

Static Control appealed the district court decision to the Court of Appeals for the Sixth Circuit, and the Sixth Circuit reversed the district court decision. The Supreme Court reviewed this case and recognized that there was a split among the various Courts of Appeals--the appellate courts were applying three different tests for determining whether a plaintiff has standing to assert a false advertising claim under the Lanham Act.

The Supreme Court affirmed the Sixth Circuit's holding, but did not adopt the Sixth Circuit's reasoning or any of the three tests applied by the other appellate courts. Rather, the Supreme Court established its own test, which requires a business to establish the following criteria when asserting a false advertising claim:

  1. An injury to a commercial interest in reputation or sales;

  2. That the injury flows directly from the defendant's allegedly deceptive advertising; and

  3. That the allegedly deceptive advertising activity causes consumers to withhold trade from the plaintiff.

The Supreme Court held that Static Control satisfied the necessary prongs of this test because Static Control alleged that Lexmark disparaged its business and products by asserting that Static Control's business was illegal.

The Supreme Court also stated that "there is likely to be something very close to a 1:1 relationship between the number of refurbished [Lexmark] cartridges sold (or not sold) by the remanufacturers and the number of [Lexmark] microchips sold (or not sold) by Static Control."

The Supreme Court explicitly rejected the direct-competitor test proposed by Lexmark, at least in part, because the Lanham Act literally states that "any person who believes that he or she is likely to be damaged" by a defendant's false advertising activity may file such a claim.

Although the Supreme Court recognized that a plaintiff who does not compete with the defendant will often have a harder time satisfying this test, the Supreme Court reasoned that it would be "a mistake to infer that because the Lanham Act treats false advertising as a form of unfair competition, it can protect only the false-advertiser's direct competitors."

The Lanham Act is a very useful legal tool for curbing anticompetitive behavior, and the recent Lexmark decision may possibly increase the number of companies that are able to bring suit against defendants engaging in deceptive business activities, as long as these companies are able to satisfy the new Supreme Court test.

And because the Lanham Act is a federal statute, a company of any size may file a false advertising law suit in federal district court.  
Brian Lefort

About the Author: Brian Lefort

Brian Lefort is a Boulder-based intellectual property attorney who specializes in helping innovative startup and emerging businesses identify and protect their valuable technology assets. Brian has more than 15 years of legal experience building and enforcing strategic patent and trademark portfolios for innovative products in the medical device, telecommunications, software and other high technology industries. He can be reached at [email protected] or 303-447-7723.