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Article: October 2014 Trademark Litigation Update

Business Litigation Reports

Supreme Court Opens the Door to More False Advertising Claims. In a unanimous decision, Lexmark International Inc. v. Static Control Components, Inc., 134 S. Ct. 1377 (2014), the Supreme Court held that a plaintiff does not need to be a direct competitor in order to pursue a false advertising claim under the Lanham Act. Id. at 1394.

The Lanham Act is the primary federal trademark statute, and it prohibits misrepresenting the “nature, characteristics, qualities, or geographic origin of his or her or another person’s goods, services, or commercial activities” in commercial advertising or promotions. 15 U.S.C. §1125(a)(1)(B). Circuit courts, however, have been split on how to determine who has standing to bring a claim of false advertising under the Lanham Act. See Lexmark, 134 S. Ct. at 1385. Some circuits, for example, explicitly required a plaintiff to be an “actual competitor” of the defendant to have standing, while other circuits applied a lower standard, such as that a plaintiff merely have a “reasonable interest” to protect. Id.

In Lexmark, Static Control brought a claim against Lexmark under §1125(a)(1)(B) of the Lanham Act. See id. at 1384. Lexmark produced laser printers and toner cartridges for their printers. Id. at 1383. Static Control did not sell cartridges—and thus was not a direct competitor of Lexmark—but rather created components that “remanufacturers” needed to refurbish Lexmark cartridges, which the remanufacturers could then sell in direct competition with Lexmark. Id. at 1384. In its lawsuit, Static Control alleged that Lexmark violated §1125(a)(1)(B) of the Lanham Act by: (1) misleading Lexmark customers into thinking that they must return their used cartridges to Lexmark; and (2) falsely advising remanufacturers that it was illegal to use Static Control’s products to refurbish Lexmark cartridges. Id. Static Control alleged that these actions would divert sales from Static Control to Lexmark, harming Static Control’s business reputation in the process. See id. The Supreme Court granted certiorari to decide the appropriate analytical framework for determining a party’s standing to bring a Lanham Act false advertising claim.

The Supreme Court held that the cause of action could only extend to Static Control if: (1) its interests fell within the “zone of interests” of the statute; and (2) its injuries were proximately caused by violations of the statute. See id. at 1388, 1390.

The Lanham Act’s “zone of interests” are defined by a detailed statement of purpose within the Act. See id. at 1389. The Court determined that plaintiffs who can allege “an injury to a commercial interest in reputation or sales” are within the zone, while consumers and companies who are simply misled into buying “a disappointing product” do not fall within the zone. Id. at 1390. If a plaintiff falls within the zone, then the analysis turns to proximate causation. See id. Under §1125(a), a plaintiff must generally show “economic or reputational injury flowing directly from the deception wrought by the defendant’s advertising; and that that occurs when deception of consumers causes them to withhold trade from the plaintiff.” Id. at 1391. If the deception only harms another commercial actor that in turn affects the plaintiff, proximate cause will not be found. Id.

The Court held that Static Control satisfied both prongs. Id. at 1393. The “zone of interests” prong was relatively clear, with the Court holding that there was “no doubt” that the company was “within the zone” of the Lanham Act. Id. The proximate cause prong was less clear, as Static Control’s injuries were not directly linked to customers, but rather “include[d] the intervening link of injury to the remanufacturers.” Id. at 1394. However, the Court found that Static Control’s allegations satisfied the proximate cause prong for at least two reasons. First, Static Control alleged that Lexmark disparaged its business by calling it illegal; “[w]hen 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.” Id. at 1393. Second, false advertising that reduced the remanufacturers’ business necessarily injured Static Control, because it designed, manufactured, and sold microchips that were necessary for refurbishing Lexmark toner cartridges and had no other use. Id. at 1394. Given the “relatively unique circumstances” of the case, where there was “very close to a 1:1 relationship” between Static Control’s and the remanufacturers’ sales, the Court determined that Static Control sufficiently pled proximate causation. Id.

The Court explicitly rejected the idea that plaintiffs suing under §1125(a) need to be in direct competition with defendants in order to show proximate cause. Id. at 1394. Even if a defendant only meant to harm its immediate competitors and a plaintiff “merely suffered collateral damage” from the defendant’s actions, a plaintiff could still pursue a claim under §1125(a). Id. The plaintiff’s harm need only be “directly” caused by the defendant’s actions, such that the targeted competing companies and the plaintiff are equally “immediate victim[s].” Id.

Lexmark
may open the door to more litigation. While the Court underscored the “relatively unique” factual pattern of the case, id. at 1394, future plaintiffs may test the boundaries of the Court’s decision to see how far the Court’s proximate cause analysis can be extended to give more companies standing under the Lanham Act.