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January 26, 2015
Non-Direct Competitors May Sue Under the Lanham Act, Doctrine of Prudential Standing Eliminated
The Supreme Court of the United States swept away the different standards for Lanham Act prudential standing previously applied by the courts of appeals, and expressly discarded the amorphous concept of prudential standing in all federal statutory cases.
In Lexmark International, Inc. v. Static Control Components, Inc., decided on March 25, 2014, the Supreme Court of the United States held that the right to bring false advertising claims under the Lanham Act is not limited to direct competitors. Justice Scalia, writing for a unanimous court, applied “traditional principles of statutory interpretation” to determine that Static Control—a manufacturer of parts used by Lexmark’s competitors to refurbish and sell toner cartridges—fell within “the class of plaintiffs whom Congress has authorized to sue” under the false advertising provision of the Lanham Act, 15 U.S.C. § 1125(a).
Lexmark is a laser printer company that manufactures the only new toner cartridges that work with its printers, though it competes with other manufacturers in refurbishing used cartridges. To exclude this competition, Lexmark equipped its cartridges with a microchip that causes the cartridges to shut down once they run out of toner. When customers return the spent cartridges to Lexmark, Lexmark replaces the microchips and re-sells the cartridges. Static Control reverse-engineered the microchips and sells them to the third parties that compete with Lexmark for sales of replacement toner cartridges.
In 2002, Lexmark sued Static Control for copyright infringement—a claim that the U.S. Court of Appeals for the Sixth Circuit rejected. Lexmark Int’l, Inc. v. Static Control Components, Inc., 387 F.3d 522 (6th Cir. 2004). Static Control counterclaimed for false advertising under the Lanham Act, 15 U.S.C. § 1125(a), alleging that (1) notices included on the packaging of Lexmark’s cartridges falsely represented to customers that they were legally bound to return the spent cartridges to Lexmark only, and (2) Lexmark sent letters to its competitors that refurbish cartridges (i.e., Static Control’s customers) falsely stating that it was illegal to use Static Control’s microchips to refurbish Lexmark cartridges. The district court dismissed Static Control’s false advertising claims for lack of “prudential standing,” holding that there were “more direct plaintiffs in the form of remanufacturers of Lexmark’s cartridges” who could bring these claims, but the Sixth Circuit reversed. Lexmark petitioned the Supreme Court for cert.
In affirming the Sixth Circuit’s decision, the Supreme Court swept away the three different standards for Lanham Act prudential standing previously applied by the courts of appeals, and expressly discarded the amorphous concept of prudential standing in all federal statutory cases. Rather than ask whether Congress should have authorized a plaintiff’s suit, a federal court is required to ask “whether in fact Congress did so,” because a court may not “limit a cause of action that Congress has created merely because ‘prudence’ dictates.” In other words, applying ordinary principles of statutory construction, the appropriate inquiry is whether the plaintiff “has a cause of action under the statute.”
The Supreme Court set forth a two-part test to determine whether a putative plaintiff enjoys a statutory cause of action. First, the plaintiff’s allegations must demonstrate that the plaintiff is in the statute’s “zone of interests.” Second, the plaintiff’s complaint must allege injuries “proximately caused by violations of the statute.” Applying its new two-part test to the Lanham Act, the Supreme Court held that Static Control could sue under the statute.
Under the “zone-of-interests” inquiry as applied to a Lanham Act false advertising claim, the Supreme Court held “a plaintiff must allege an injury to a commercial interest in reputation or sales.” As Static Control “alleged injuries—lost sales and damage to its business reputation—[that] are injuries to precisely the sorts of commercial interests the [Lanham] Act protects,” Static Control came within the Lanham Act’s zone of interests, even though Static Control was not a direct competitor of Lexmark in the market for replacement cartridges sales.
Under the “proximate-cause” inquiry, Static Control’s complaint also sufficiently alleged proximate causation in two distinct respects.
First, Static Control alleged that Lexmark expressly disparaged Static Control’s products, and that these false statements had a negative effect on the number of microchips that Static Control was able to sell.
In addition, Static Control alleged that it designed, manufactured and sold microchips that were necessary for, and had no other use than, refurbishing Lexmark toner cartridges. Lexmark’s “false advertising that reduced the manufacturers’ business necessarily injured Static Control as well.” Taking Static Control’s allegations at face value, “there is likely to be something very close to a 1:1 relationship between the number of refurbished [ ] cartridges sold (or not sold) by the manufacturers and the number of [ ] microchips sold (or not sold) by Static Control.” In these circumstances, the remanufacturers were not “more immediate victims” for purposes of proximate cause.
The Supreme Court’s decision in Lexmark eliminates widespread confusion concerning the right to bring false advertising claims under the Lanham Act, and for that reason is important for Lanham Act practitioners. More broadly, Lexmark is a landmark decision of interest to all practitioners litigating federal statutory claims, because it replaces the nebulous doctrine of “prudential standing” with a clear two-part test.