U.S. Supreme Court Creates Uniform Test for Standing in False Advertising Cases
In a unanimous opinion in Lexmark Int'l v. Static Control issued on March 25, 2014, the U.S. Supreme Court created a new, simpler rule for determining standing in false advertising claims brought under 15 U.S.C. § 1125(a), section 43(a) of the Lanham Act. In doing so, the Supreme Court both created a uniform rule and expanded the scope of parties permitted to bring false advertising suits—potentially increasing the liability from false advertising suits for entities doing business within the United States.
The Supreme Court held that to have standing to bring an action for false advertising, a plaintiff must plead "an injury to a commercial interest in sales or business reputation proximately caused by the defendant's misrepresentations." The Supreme Court's ruling broadens the scope of potential plaintiffs by enabling indirect competitors to bring suit.
Going forward, businesses must be cautious to avoid exposure to unnecessary liability for false advertising when making statements about a commercial entity's products or services—even if that entity is not a direct competitor. Such statements, particularly those claiming that a product or service is illegal or unfit for use, must be avoided or reviewed carefully to ensure they are not false or misrepresentative. Even a misleading statement may be actionable as false advertising if it deceives or has a tendency to deceive.
If a third-party advertising agency is used, an indemnity agreement may reduce the risk for statements made without the business's approval. However, businesses must still make a good-faith effort to substantiate claims and review all advertising material prior to publication. Deliberate ignorance or failure to exercise ordinary care in reviewing advertising materials may expose the business to liability for any false statements made on the business's behalf.
If successful in a claim for false advertising under § 1125(a), a plaintiff may be entitled to injunctive relief, damages, corrective advertising, attorneys' fees or other equitable remedies at the discretion of the court. It is therefore imperative that businesses are vigilant to avoid exposing themselves to unnecessary risks associated with false advertising claims.
Prior to the Supreme Court's decision, three different competing tests were used in different circuit courts to determine if a plaintiff had standing to sue for false advertising. The Third, Fifth, Eighth, and Eleventh Circuits all used a multifactor balancing approach or "antitrust standing" based on the factors set forth in Associated General Contractors.1 The Seventh, Ninth and Tenth Circuits categorically required that suits for false advertising must be brought by actual competitors. The Second Circuit used a "reasonable interest" test, requiring plaintiffs to demonstrate they had both a reasonable interest to be protected against alleged false advertising and a reasonable basis for believing their interest was likely to be damaged.
In rejecting these rules, the Supreme Court began by analyzing the text of § 1125(a), using traditional principles of statutory interpretation to determine the type of actions authorized by Congress. Section 1125(a) provides, in relevant part, the following:
Any person who, on or in connection with any goods or services, or any container for goods, uses in commerce any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which[,]…in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person's goods, services, or commercial activities, shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act.
Static Control alleged that Lexmark violated § 1125(a) by asserting that Static Control's business infringed Lexmark's patents and was thus illegal. Under the new rule for standing, these allegations, coupled with allegations regarding the requisite intent by Lexmark and harm caused to Static Control, were sufficient to establish a cause of action for false advertising.
Significantly, the district court had emphasized that Lexmark and Static Control were not direct competitors. Lexmark manufactures and sells toner cartridges for laser printers. In doing so, Lexmark competes with "remanufacturers" that refurbish and resell used toner cartridges. Static Control manufactures and sells components necessary to remanufacture Lexmark cartridges, including microchips and toner used by remanufacturers to refurbish Lexmark cartridges. Accordingly, the remanufacturers, not Static Control, would be the direct victims of Lexmark's statements. Static Control's harm was indirect because as consumers refrained from purchasing the remanufacturers’ toner cartridges, Static Control would similarly suffer through reduced sales to the remanufacturers.
However, the Supreme Court found that a plaintiff does not need to be a direct competitor of the defendant to have standing to bring a false advertising suit. As stated by the Court, "[W]hen a party claims reputational injury from disparagement, competition is not required for proximate cause; and that is true even if the defendant's aim was to harm its immediate competitors, and the plaintiff merely suffered collateral damage."
Although the Supreme Court's rule is broader than those previously used by several of the circuit courts, it does maintain two significant restrictions on potential plaintiffs. First, individual consumers, who lack the requisite commercial interest, remain barred from bringing an action for false advertising under § 1125(a). The Supreme Court noted this type of injury falls outside the zone of interests that Congress intended to protect by the Lanham Act, thereby preventing it from serving as the basis for a cause of action under the statute.
Second, the Supreme Court held that a potential plaintiff "under § 1125(a) ordinarily must 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." The causal chain linking the plaintiff's harm to the defendant's actions may contain intervening steps, so long as there is not a "discontinuity" present. In other words, where there is a close relationship (such as a one-to-one ratio) in the harm suffered by an indirect victim and the harm suffered by the direct victim, both independently have standing to bring suit for false advertising. As noted by the Court, "When 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," thereby bringing the plaintiff's harm within the zone of interests protected by the statute regardless of whether the plaintiff and defendant are immediate competitors.
The relationship between the plaintiff's harm and the defendant's actions would be too remote where the plaintiff was harmed merely because its fellow commercial actor was unable to meet its financial obligations as a result of false or misleading statements by the defendant. For example, if a first car manufacturer falsely claimed that its rival's cars were poorly designed and thus unsafe, the rival's suppliers would not have standing to bring a cause of action under § 1125(a) for false advertising. However, if the first car manufacturer instead falsely claimed that the rival's cars were unsafe because they used poor-quality airbags, the rival and the rival's air bag supplier would have standing to bring a cause of action under § 1125(a).
To view the decision in its entirety, please download opinion here.
1Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519 (1983).