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Supreme Court: Non-Competitors May Have Standing for False Advertising Claim

Wednesday, March 26, 2014

By Anandashankar Mazumdar  

March 25 --A maker of parts to be used to make replacement toner cartridges for a laser printer has standing to bring a false advertising claim against the printer manufacturer even though the parties do not compete directly in the same market for goods, the U.S. Supreme Court ruled unanimously on March 25.

The court rejected the plaintiff's argument that the appropriate test was a multi-factor test for “prudential standing” as set forth by Associated General Contractors of California Inc. v. California State Council of Carpenters, 459 U.S. 519 (1983), which has been adopted by the Third, Fifth, Eighth and Eleventh Circuits.

Rather, in an opinion authored by Justice Antonin G. Scalia, the court focused on the scope for plaintiffs set by the specific statute in this case, Section 43(a) of the Lanham Act, 15 U.S.C. §1125(a).

The opinion looked to the Lanham Act's own “detailed statement of its purposes” in concluding that the statute authorizes a party to assert a claim when its interests are within the “zone of interests” protected by the statute, and, specifically, that it has alleged “an injury to a commercial interest in reputation or sales.”

However, the court also noted that there was also a limitation on claims set by traditional jurisprudence regarding proximate cause. Applying the zone of interest and proximate cause limitations, the court found that the replacement parts manufacturer was a legitimate plaintiff with a cause of action.

Eric Goldman, a law professor at Santa Clara University and director of the High Tech Law Institute, told Bloomberg BNA that the Supreme Court's ruling would clarify the standards for standing under Section 43(a).


“[T]he opinion should eliminate the Circuit-by-Circuit variations in the standing tests.”
--Eric Goldman, Santa Clara University

“First, the opinion should eliminate the Circuit-by-Circuit variations in the standing tests,” he said. “Second, the opinion categorically excludes standing for consumers, businesses buying for their own account, and service providers to injured businesses (such as landlords).”

Goldman said that he expected that there might be a “small uptick in false advertising litigation by the businesses that now have standing but didn't previously,” but that “the number of new plaintiffs is still relatively small, and many of them would have already had potential claims pursuant to other legal doctrines.”

Lexmark and Static Control's History

Lexmark International Inc. of Lexington, Ky., is a maker of laser printers for use with computer systems. For certain high-cost printers, Lexmark instituted a discount program called a “prebate.”

Those customers that purchased toner cartridges at the lowered prebate price were required to return used ink cartridges to Lexmark for refilling. Those who purchased the cartridges at the regular price were not subject to this restriction.

In order to enforce the prebate restriction, Lexmark installed two computer programs that managed access to the printer cartridge by the printer.

One program, the Toner Loading Program, a very short piece of code, was designed to measure the amount of toner remaining in the cartridge. This program was located on a chip on the cartridge.

The Printer Engine Program, a longer program installed on the printer itself, controlled a number of printer functions.

Static Control Components Inc. of Sanford, N.C., sells parts and supplies for reusing used printer toner cartridges. Static Control made a chip, the Smartek chip, for sale to makers of third-party replacement toner cartridges. Many such third parties take used toner cartridges and refurbish them for reuse.

Thus, the chip, if used in a refurbished cartridge, would mimic the effect of the chip on the Lexmark cartridges, allowing customers to obtain and use cartridges from sources other than Lexmark. The Smartek chip contained an identical copy of the Toner Loading Program.

This argument represented the latest skirmish between two companies in the laser printer business in a dispute that has now lasted more than a decade and has touched on most of the intellectual property regimes covered by federal law.

Initial Patent and Copyright Decisions

In 2002, Lexmark sued Static Control, alleging that Static Control's mimicking of the Toner Loading Program infringed Lexmark's copyright interests.

In February 2003, Judge Karl S. Forester of the U.S. District Court for the Eastern District of Kentucky ruled that Static Control's activity was likely to violate the anticircumvention provisions of the Digital Millennium Copyright Act, 17 U.S.C. §1201, et seq., and imposed a preliminary injunction.

In February 2004, Static Control filed an action seeking a declaration that its new line of re-engineered toner chips did not infringe Lexmark's copyrights or violate the anticircumvention provisions of the DMCA.

In that declaratory judgment action, Lexmark filed several counterclaims, including claims of patent infringement. Lexmark also joined as defendants some of Static Control's customers, which used the chip to remanufacture used printer cartridges.

In September 2004, the federal district court ruled that Lexmark could pursue its counterclaims against Static Control in this proceeding.

In October 2004, the Sixth Circuit vacated the preliminary injunction, ruling that Lexmark's claim might fail because the control measure at issue merely prevented use of the printer without controlling access to the content of the Toner Loading Program. 

The Sixth Circuit called into question whether the Toner Loading Program was protected under copyright law. It concluded that Lexmark had failed to demonstrate a likelihood of success on the merits of its infringement and DMCA claims and remanded the matter back to the district court. In February 2005, the Sixth Circuit rejected Lexmark's request for en banc review.

In August 2005, the district court consolidated Lexmark's infringement action with Static Control's declaratory judgment action.

On remand, Static Control moved for partial summary judgment on the copyright infringement claim and the district court found that the Toner Loading Program was not sufficiently original to be afforded copyright protection.

Nine mechanical patents held by Lexmark were found valid, and the court granted summary judgment of direct patent infringement against some of the third-party cartridge remanufacturers. However, by this time, they had already settled with Lexmark.

The district court also found valid Lexmark's single-use prebate license, which meant that the sale of a toner cartridge to a user did not exhaust Lexmark's patent rights.

The district court also granted Lexmark's motion for dismissal of Static Control's antitrust, Lanham Act and state law counterclaims. Thus, when the case went to trial, the jury was presented only with the issues of patent inducement and patent misuse.

The jury handed down a verdict in Static Control's favor on the question of inducement of patent infringement and advised the court that Lexmark had misused its patents.

Lexmark then renewed a motion for judgment as a matter of law and moved for a retrial, arguing that the evidence had been sufficient to establish direct infringement by the cartridge remanufacturers and that evidence of inducement had been erroneously excluded at trial.

False Advertising Issue

Judge Gregory F. Van Tatenhove of the U.S. District Court for the Eastern District of Kentucky, reversing the prior decision that Lexmark had not exhausted its patent rights, denied the motions.

Both parties appealed and the Sixth Circuit determined that Static Control had sufficiently alleged a claim of false advertising under Section 43(a) of the Lanham Trademark Act of 1946, 15 U.S.C. §1125(a)(1), based on Lexmark's statements to its customers that Static Control's products were infringing.

The appeals court rejected Lexmark's argument that standing in this case should only be granted to direct competitors. Lexmark argued that Static Control was not a direct competitor because it only made parts for refurbishing printer cartridges. Static Control--unlike its customers--did not actually sell goods that directly competed with Lexmark's goods.

According to Sixth Circuit precedent, standing for a false advertising claim could be based on a showing of a “reasonable interest.” The appeals court also restored Static Control's counterclaims of unfair competition and false advertising under North Carolina state law.

The Supreme Court granted Lexmark's petition for a writ of certiorari and heard oral arguments on Dec. 3.

Statutory, Not 'Prudential' Basis for Analysis

Scalia's opinion first noted that Lexmark did not argue that there was no case or controversy at hand, as required under Article III of the U.S. Constitution and, indeed, the court found no lack of standing on that basis. However, Lexmark did argue that even given a constitutional case or controversy, that considerations of “prudential standing” as set forth by Associated General Contractors should bar Static Control's claim.

However, the court rejected this characterization of Associated General Contractors. The court said:

[W]e did not describe our analysis in that case in those terms. Rather, we sought to “ascertain,” as a matter of statutory interpretation, the “scope of the private remedy created by” Congress in §4 of the Clayton Act, and the “class of persons who [could] maintain a private damages action under” that legislatively conferred cause of action.  

 

According to the court, the key to the decision in that case was the finding that the plaintiff had asserted injuries that had been proximately caused by the defendant's violations of federal antitrust law. This and later Supreme Court decisions confirmed that standing was determined on the basis of “statutory, not 'prudential' considerations.”


“We do not ask whether in our judgment Congress should have authorized Satic Control's suit, but whether Congress in fact did so.”
--Justice Antonin G. Scalia

The concept of a “zone of interests,” thus, was not a “prudential” question, but rather “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.”

Summing up the issue to be determined, the court said:

[W]e ask whether Static Control has a cause of action under the statute. That question requires us to determine the meaning of the congressionally enacted provision creating a cause of action. In doing so, we apply traditional principles of statutory interpretation. We do not ask whether in our judgment Congress should have authorized Static Control's suit, but whether Congress in fact did so. Just as a court cannot apply its independent policy judgment to recognize a cause of action that Congress has denied, … it cannot limit a cause of action that Congress has created merely because “prudence” dictates.  

 

Thus the court turned to the question of interpreting standing as set forth by the statute, which allows claims by “any person who believes that he or she is likely to be damaged” by false advertising.

This question was broken down into two considerations. First, was the question of whether Static Control's interests “fell within the zone of interests protected by the law invoked,” as set forth by Association of Data Processing Service Organizations, Inc. v. Camp, 397 U.S. 150 (1970). Second was the traditional common law question of proximate cause.

Commercial Injury to Reputation Required

In determining that Static Control's interests were within the “zone of interests” contemplated by Section 43(a), the court held that “a plaintiff must allege an injury to a commercial interest in reputation or sales.”

This standard included a plaintiff like Static Control, the court said. But it would exclude, for example, a consumer or business “hoodwinked into purchasing a disappointing product” or “misled by a supplier into purchasing an inferior product.”


“[W]hile a competitor who is forced out of business by a defendant's false advertising generally will be able to sue for its losses, the same is not true of the competitor's landlord, its electric company, and other commercial parties who suffer merely as a result of the competitor's 'inability to meet [its] financial obligations.' ”
--Justice Antonin G. Scalia

This test was derived from the Lanham Act's own “ 'unusual, and extraordinarily helpful,' detailed statement of the statute's purposes,” set forth in Section 45, 15 U.S.C. §1127. The court interpreted the statement to apply to those parties who alleged “injuries to business reputation and present and future sales.”

Proximate Cause Standard Set

Similarly, the court used the statute to craft a standard for showing proximate cause as required by common law:

[A] plaintiff suing under §1125(a) ordinarily must show economic or reputational injury flowing directly from the deception wrought by the defendant's advertising; and that occurs when deception of consumers causes them to withhold trade from the plaintiff. That showing is generally not made when the deception produces injuries to a fellow commercial actor that in turn affect the plaintiff. For example, while a competitor who is forced out of business by a defendant's false advertising generally will be able to sue for its losses, the same is not true of the competitor's landlord, its electric company, and other commercial parties who suffer merely as a result of the competitor's “inability to meet [its] financial obligations.”  

 

The court rejected Lexmark's advocacy of a balancing test for standing under Section 43(a) derived from Associated General Contractors and set forth in several different circuits, particularly taking form as a five-factor test in Conte Bros. Automotive, Inc. v. Quaker State-Slick 50, Inc..

The court said that “This approach reflects a commendable effort to give content to an otherwise nebulous inquiry, but we think it slightly off the mark.” In particular, the court said that the Conte Bros. test was too unpredictable. On the other hand, the court said, the direct-competitor test was too restrictive and failing to Section 43(a) its full intended scope.

The “reasonable interest” test used by the Sixth Circuit below in the instant proceeding also led to “widely divergent application.” Furthermore, the court said, “the relevant question is not whether the plaintiff's interest is 'reasonable,' but whether it is one the Lanham Act protects.”

Thus, the court rejected all these approaches in favor of the “economic reputational injury flowing directly from the deception” test it adopted.

Applying these standards for zone of interest and proximate causation, the court found that Lexmark did have standing to bring its claim under Section 43(a). The court concluded:

Static Control's allegations suggest that if the remanufacturers sold 10,000 fewer refurbished cartridges because of Lexmark's false advertising, then it would follow more or less automatically that Static Control sold 10,000 fewer microchips for the same reason, without the need for any “speculative … proceedings” or “intricate, uncertain inquiries.”  

 

Thus, the court affirmed the Sixth Circuit's ruling.

 

To contact the reporter on this story: Anandashankar Mazumdar in Washington at amazumdar@bna.com

To contact the editor responsible for this story: Naresh Sritharan at nsritharan@bna.com


Text is available at http://pub.bna.com/ptcj/12873SupCt2014Mar25.pdf.

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