Lexmark International, Inc. v. Static Control Components, Inc.

Issues 

What is the appropriate framework to determine standing in a false advertising action under the Lanham Act?

Oral argument: 
December 3, 2013

Petitioner Lexmark International, Inc., a major producer of laser printers, developed a microchip for its toner cartridges to restrict third-party businesses from replacing Lexmark cartridges. Respondent Static Control Components, Inc. replicated that microchip, thereby allowing third parties to refill and resell used Lexmark cartridges. Lexmark responded by telling businesses that the use of Static’s replicated microchips would infringe Lexmark’s patent. In a 2004 lawsuit, Static brought false advertisement claims against Lexmark under the Lanham Act. The district court dismissed those charges, concluding that Static lacked standing. The Sixth Circuit reversed that dismissal, reasoning that Static had a cognizable business interest that was harmed by Lexmark’s remarks; therefore, Static had standing and qualified for protection under the Lanham Act. The Supreme Court’s ruling in this case will resolve a circuit split over the proper framework for determining prudential standing in false advertising claims under the Lanham Act. Accordingly, this case will determine who can assert false advertising claims under the Lanham Act.

Questions as Framed for the Court by the Parties 

Whether the appropriate framework for determining a party’s appropriate standing for a cause of action for false advertising under the Lanham Act is (1) the test established in Associated General Contractors of California, Inc. v. California State Council of Carpenters as used by the Third, Fifth, Eighth, and Eleventh Circuits; (2) the categorical test, allowing suits only by an actual competitor, used by the Seventh, Ninth, and Tenth Circuits; or (3) a more expansive “reasonable interest” test, applied by both the Sixth Circuit lower decision below, and also the Second Circuit?

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Facts

Petitioner Lexmark International, Inc. (“Lexmark”) is a major manufacturer of laser printers and toner cartridges. See Static Control Components, Inc. v. Lexmark Intl., Inc., 697 F.3d 387, 394–395 (6th Cir. 2012). Typically, manufacturers like Lexmark dominate the aftermarket of toner cartridge sales, because manufacturers tend to produce printers compatible solely with their cartridges. See id. at 395. However, other companies, known as remanufacturers, acquire used cartridges, refill them, and sell them at a lower cost on the aftermarket. See id.  

Lexmark developed and installed microchips for its printers and cartridges to ensure that its printers function only with cartridges that contain a matching microchip. See id.Additionally, Lexmark launched a “Prebate” program that offers customers a discount in exchange for accepting a single-use license and a restriction that cartridges be returned to Lexmark, as opposed to remanufacturers. See id. at 396. The microchips in Prebate cartridges enforce the Prebate terms by disabling the cartridges for future use until the microchips are replaced. See id.

Respondent Static Control Components, Inc. (“Static”) is a leading supplier of parts for cartridge remanufacturers. See Brief for Respondent, Static Control at 7. Static replicated Lexmark’s Prebate microchip and sold the microchips to remanufacturers, thereby bypassing Lexmark’s Prebate restrictions. See Static Control v. Lexmark, 697 F.3d at 396. Along with these microchips, Static sent its customers a letter called an “Anti-Prebate kit,” alleging that Lexmark’s Prebate terms are not valid under contract law. See id.On the other hand, Lexmark advertised to remanufacturers that Prebate cartridges are subject to a single-use license and that recycling them would make a remanufacturer liable for patent infringement. See Brief for Respondent at 8.

In 2002, Lexmark sued Static Control for copyright infringement over the duplicated microchips, and the district court granted Lexmark a preliminary injunction against Static. See Static Control v. Lexmark, 697 F.3d at 395. Static counterclaimed for antitrust violations and false advertising. See id. Specifically, Static alleged that Lexmark’s advertisements to remanufacturers falsely represented the legal status of Static’s products, damaging their reputation and business. See Brief for Respondent at 9. Static sought relief under Section 43(a) of the Lanham Act, which provides a cause of action for false advertisement. See id. at 3.

While the case was pending, Static redesigned the microchip and sought declaratory relief from future copyright charges. See Static Control v. Lexmark, 697 F.3d at 395. Lexmark counterclaimed for both copyright and patent violations. See id. These disputes were combined in a 2004 action. See id. 

Reviewing the preliminary injunction, the Sixth Circuit Court of Appeals rejected Lexmark’s copyright claims. See id. However, on remand, the district court dismissed Static’s counterclaims. See id. The district court reasoned that the test for Lanham Act standing is the same as for antitrust standing; accordingly, because Static lacked antitrust standing, it did not have Lanham Act standing. See id. at 409.

At trial, the only issues presented to the jury were (1) whether Static induced patent infringement and (2) whether Lexmark misused its patents. See id. at 395. The jury found that Static was not liable for inducing patent infringement and advised that Lexmark misused its patents. See id.

On appeal, the Sixth Circuit affirmed the district court’s dismissal of Static’s antitrust claims but reversed the dismissal of the false advertisement claims, holding that Static had standing under the Lanham Act. See id. at 411. Noting a circuit split regarding the appropriate test for standing, the Court of Appeals reasoned that Sixth Circuit precedent distinguished between Lanham Act standing and antitrust standing. See id. The court relied on a “reasonable interest” test to conclude that Static had standing because it alleged a cognizable business interest harmed by Lexmark’s statements. See id. at 410–11.

The Supreme Court granted certiorari to determine the appropriate test for standing in a false advertising suit under the Lanham Act. See Brief for Petitioner, Lexmark at 11.

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Discussion

This case will resolve a circuit split over the standing requirements for false advertising claims under the Lanham Act. The Courts of Appeals have applied three different standards. The Third, Fifth, Eighth, and Eleventh Circuits follow the standard enunciated in Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519 (1983) (“AGC”), which relies on a multi-factor assessment. See Brief of Amicus Curiae DRI—The Voice of the Defense Bar, in Support of Petitioner at 4. The Seventh, Ninth, and Tenth Circuits follow a categorical test that limits standing to actual competitors. See Brief for Petitioner, Lexmark at 4. The First, Second, and Sixth Circuits use an expansive “reasonable interest” test that gives standing to anyone with a reasonable basis to believe their interest is likely to be damaged by a statement. See id.

Lexmark argues that the AGC test comports best with the text, history, and purpose of the Lanham Act. See id. at 20. Alternatively, Lexmark argues that the categorical test has the virtues of simplicity and predictability. See id. at 12. According to Lexmark, either of these two tests limits an otherwise overbroad pool of potential plaintiffs. See id. at 29–30.

Static counters that the Court need not formulate a prudential standing test specific to the Lanham Act’s false advertising cause of action. See Brief for Respondent, Static Control at 14–15. However, Static maintains that if the Court does fashion such a test, the reasonable interest test is the most appropriate. See id. at 15. In Static’s view, Congress enacted the Lanham Act to increase protections against false advertising. See id.

EFFICIENCY AND PREDICTABILITY IN THE COURTS

Among the three tests for determining standing, Lexmark argues that the AGC multi-factor test would avoid overburdening federal courts, because it would close the courthouse doors to remote plaintiffs and duplicative lawsuits. See Brief for Petitioner at 25–26. Similarly, Lexmark claims that the categorical test, which limits standing to actual competitors, would constrain the Lanham Act from overextending liability. See id. at 30. DRI—The Voice of the Defense Bar (“DRI”) agrees, noting that the categorical test provides a straightforward rule with predictable results. See Brief of Amicus Curiae DRI at 6. According to DRI, such a strict test would reduce the time, quantity, and cost of litigation, because it would deter frivolous lawsuits. See id. By contrast, DRI claims that the reasonable interest test provides courts with too little guidance, thus leading to unpredictable results. See id. at 14–15.

In support of Static, the American Antitrust Institute (“AAI”) counters that there is no evidence that the reasonable interest test has overburdened the courts applying it. See Brief of Amicus Curiae American Antitrust Institute, in Support of Respondent at 18. According to the AAI, the reasonable interest test already requires plaintiffs’ interests to be commercial in nature and causally connected to the alleged falsehood. See id. Because of these requirements, AAI contends, the reasonable interest test is an adequate safeguard against excessive litigation. See id. at 17–18.

Supporting neither side, a group of law professors supports either a flexible competition-based test or the reasonable interest test, insisting that the AGC multi-factor test is unnecessarily complicated. See Brief of Amicus Curiae Law Professors, in Support of Neither Side at 23. In their eyes, a multi-factor test is internally redundant because it asks essentially the same question in different ways—whether a plaintiff’s ability to compete has been harmed. See id. at 24, 31. Thus, they argue, the AGC test would be “a time-consuming, error-inviting diversion.” See id. at 32.

OVER- AND UNDERINCLUSIVE STANDING RULES 

Static argues that Congress enacted the Lanham Act to give plaintiffs broad protection from false advertising. See Brief for Respondent at 15–16. According to Static, overly stringent standing rules would lead to under-enforcement and under-deterrence of false advertising. See id. at 48. AAI argues that a strict standard is particularly inappropriate here because Lexmark targeted and harmed Static in its statements about Static’s products. See Brief of Amicus Curiae AAI at 22. Thus, in AAI’s view, a restrictive standing test would allow anticompetitive deception to go unpunished. See id.

DRI warns that over-extending standing will lead to over-enforcement of the Lanham Act. See Brief of Amicus Curiae DRI at 10–11. DRI cautions that an over-inclusive approach would have a chilling effect on the amount of information available in the marketplace, because businesses would be disinclined to release information for fear of litigation. See id. at 11. In turn, DRI warns that consumers would ultimately suffer from this lack of information. See id.

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Analysis

In this case, the Supreme Court will decide the proper standard for determining who can bring false advertising claims under the Lanham Act. The parties disagree as to the proper test to determine standing, and the federal circuits are similarly split between a number of alternatives.  

AGC TEST, REASONABLE INTERESTS TEST, & ZONE OF INTERESTS TEST

Petitioner Lexmark contends that the standard in Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519 (1983) (“AGC”), as applied in other Circuits, is the proper test for determining whether Static has standing in this case. See Brief for Petitioner at 2. In AGC, the Court outlined a series of factors to determine whether a plaintiff has standing to bring an antitrust action. Those factors are: (1) whether the alleged injury is one that Congress sought to redress in providing a private remedy; (2) the directness of the injury; (3) plaintiff’s proximity to the alleged injurious conduct; (4) the speculativeness of damages; and (5) the risk associated with duplicative damages or complexity in apportioning damages. See id. at 9-10. Applying this test, Lexmark says that (1) Section 43(a) is intended to protect commercial parties from unfair competition, and that Lexmark and Static are not in direct competition; (2) Static’s injuries were only indirect because Lexmark and Static are not in direct competition; (3) there is an “identifiable class of persons,” namely the remanufacturers, who are closer to Lexmark’s alleged anti-competitive conduct who are better suited to bring suit; (4) that Static’s damages are highly speculative because the harm is indirect and any alleged affect on Static may have been produced by “independent factors”; and (5) that if Static has standing, so do multiple entities that are closer to and further away from Lexmark, namely other suppliers and remanufacturers. See id.at 38-39. Lexmark argues that these factors weigh against Static having standing to sue; accordingly, the Court should overturn the lower decision, apply the AGC standard, and dismiss the complaint for lack of standing. See id.

Lexmark urges the Court to adopt the narrower AGC test because Static asserted a false advertising claim under Section 43(a) of the Lanham Act. See Brief for Petitioner at 3. According to Lexmark, although the plain language of the Lanham Act provides a cause of action for “any person who believes that he or she is or is likely to be damaged,” permitting a broad class of plaintiffs to assert false advertising claims would invite endless litigation and unduly burden the federal court system. See Brief for Petitionerat 4-5. Lexmark claims that Congress intended to narrow the class of plaintiffs who could sue under the Lanham Act. See Brief for Petitioner at 3.

Respondent Static counters that the Court should affirm the Sixth Circuit, which applied a reasonable interests test and concluded that Static had standing to assert a false advertising claim against Lexmark. See Brief for Respondent at 2. However, Static claims that the Court should adopt the zone of interests test, a more inclusive test than the reasonable interests test. See id. at 14-15. The zone of interests test turns on whether a plaintiff’s claim was within the “zone of interests” protected by the statute—here, Section 43(a) of the Lanham Act—authorizing the cause of action. See id. at 2. Under the zone of interests test, any commercial party, such as Static, has standing to bring suit, so long as their products are within the zone of interests protected by the Lanham Act. See Brief for Respondent at 2.Static asserts that under this test, it has standing to sue because Lexmark’s false advertising directly attacked Static’s products, and also because Lexmark’s false advertisements sought to eliminate Static’s lawful remanufacture of Lexmark’s cartridges. See id.at 12.Static thus argues that the Court should apply a standard less stringent than the reasonable interests test applied by the Sixth Circuit. See id. at 14-15.  

Alternatively, Static argues that if the Court declines to apply the zone of interests test, it should apply the reasonable interests test. See Brief for Respondentat 15. Static claims that it has standing under this test, which requires that a “claimant . . . demonstrate (1) a reasonable interest to be protected against the alleged false advertising and (2) a reasonable basis for believing that the interest is likely to be damaged by the false advertising.” Id.at 11-12. Here, Static argues that the Sixth Circuit, applying the reasonable interests test, correctly concluded that Static had standing because (1) Static sufficiently alleged a cognizable interest in sales to remanufacturers and (2) Lexmark’s statements to remanufacturers that Static’s business was illegal harmed these interests. See id. at 12.

LEGISLATIVE HISTORY AND CONGRESSIONAL INTENT

Lexmark argues that the AGC test best accords with Congress’s intent in enacting the Lanham Act and the statute’s legislative history. See Brief for Petitioner at 11. According to Lexmark, despite the plain language of the statute, Congress intended to provide a cause of action to a narrow class of plaintiffs. See Brief for Petitioner at 12-13. Lexmark acknowledges that Section 43(a) on its face suggests a broad class of plaintiffs for false advertising claims; the statute authorizes a civil suit “by any person who believes that he or she is or is likely to be damaged by [false advertising] act[s].” Id. at 14 (emphasis in original). However, Lexmark argues that Congress could not have intended such broad language to be interpreted literally. See id.Lexmark argues that this provision must be read in connection with Section 45 of the Lanham Act. See id.at 15; see also 15 U.S.C. § 1127. According to Lexmark, Section 45 states the Lanham Act’s true purpose, which is to protect people engaged in commerce from unfair competition. See Brief for Petitioner at 14; see also 15 U.S.C. § 1127. Indeed, Lexmark notes that Congress made clear that “the intent of the act was to protect persons engaged in . . . commerce against unfair competition.” See Brief for Petitioner at 23; see also 15 U.S.C. § 1127.

Lexmark further argues that the Lanham Act’s legislative history suggests that it covers a narrow range of plaintiffs. See Brief for Petitioner at 16. First, Lexmark claims that at common law, to establish standing in an unfair competition or trademark infringement suit, a plaintiff had to establish an actual injury that was proximately caused by the defendant. See id. at 17. Here, Lexmark argues that proximate cause would require actual proof that specific customers were diverted from Static because of Lexmark’s actions. See id.Moreover, Lexmark contends, the common law limited standing beyond the explicit statutory language, and here there is no indication that Congress, by enacting the Lanham Act, intended to expand the scope of plaintiffs. See id.Even more, Lexmark asserts that the Lanham Act’s Senate Report explicitly states that the Lanham Act should not be read to limit or extend the class of plaintiffs who have standing. See id.at 18.

Static counters Lexmark’s narrow reading of the Lanham Act and argues that Section 43(a) expanded common law limitations on the false advertising cause of action. See Brief for Respondentat 3. In Static’s view, the Lanham Act provides a cause of action to any person who can allege commercial harm as a result of false advertising. See id. at 42. Static argues that Lexmark inappropriately urges the Court to read standing factors from federal antitrust law into the Lanham Act, which addresses trademark and false advertising. See id. at 36. Furthermore, Static contends that because of the fundamental textual and policy differences between the antitrust and false advertising statutes, courts must apply different standing doctrines to the statutes. See id. 

Static argues that the AGC standing test does not definitively apply to false advertisement claims. See Brief for Respondent at 15. Static notes that in AGC, the Court reasoned that the Sherman and Clayton Acts imposed strict limits on standing in the context of litigation concerning anticompetitive restraints on trade. See id.at 37. Accordingly, Static argues, the Court should not adopt the AGC factors to determine prudential standing in the Section 43(a) Lanham Act context; in Static’s view, it is unclear whether AGC requires the application of prudential standing or merely states the substantive elements required for a Sherman or Clayton Act claim. See id.at 37.

Static further argues that Congress, by enacting the Lanham Act, deliberately expanded standing for false advertising claims in federal court because the common law inadequately addressed this area of the law. See Brief for Respondentat 42-43. Thus, according to Static, incorporating antitrust claim standards into the AGC test would be improper because the Lanham Act “jettisoned … common-law limitations on the scope of actionable false advertising [claims]” whereas the Sherman Act and Clayton Acts did not expand the class of plaintiffs who could pursue antitrust claims. Id. 

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Conclusion

This case presents the Supreme Court with the opportunity to state a definitive rule of law on the scope of plaintiffs eligible to bring false advertising claims under the Lanham Act. This case is particularly important given the growth of the technology industry, which has increased the need for printers and printer accessories and created robust aftermarkets. More generally, this case addresses the scope of false advertising liability in an era of ubiquitous advertising. Currently, the United States Courts of Appeals are split among various threshold tests for determining standing under the Lanham Act. Accordingly, the Court has the opportunity to clarify an important area of intellectual property that Congress originally addressed in 1946.

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Edited by 

Acknowledgments 

Additional Resources 

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