The case here is between Lexmark International, Inc., a company that manufactures and sells printers (including their components like ink/toner cartridges), and Static Control, a company that manufactures and sells components that mimic those made by Lexmark, which then allow for other companies to refurbish and sell formerly-used Lexmark cartridges. It is important to note that Static Control themselves are not in the business of making and selling refurbished ink cartridges–rather, they just make the components that allow others to do so. Understandably, Lexmark would prefer that customers do not buy third-party goods, and so has their own rebate/refurbish program, “Prebate”, in place. The Prebate program was printed on the packaging of the refurbished ink cartridges, which notified customers and indicated that they would assent to the terms when the box was open–a practice commonly known as “shrink wrap licensing”. This term was further enforced by the use of a microchip embedded on the cartridge, which would not allow customers to install cartridges that were made by competing companies. Only Lexmark themselves could replace the chip in order for the Prebate cartridge to be used again.
With Static Control, as they are in the business of manufacturing components that can mimic and replace the ink/toner components made by Lexmark themselves, this allows other third-party companies not affiliated with Lexmark to refurbish and sell Lexmark ink cartridges. Initially the court dismissed Static Control’s Lanham Act claim, but this has now been reversed by the Sixth Circuit Court of Appeals, and the case continues with Static Control claiming that their company has suffered losses and damages due to Lexmark’s supposed false advertising.
Legal Issues at Hand
Initially the District Court granted Lexmark’s motion to dismiss Static Control’s Lanham Act claim on the basis that SC lacked “prudential standing”, using the multifactor balancing test it attributed to Associated Gen. Contractors of Cal., Inc. v. Carpenters, 459 U. S. 519 (1983). The District Court claimed that there were more direct plaintiffs involved, and that Static Control’s injury was merely a remote incident due to the “supposed manipulation of consumers’ relationships with remanufacturers”.
This decision however, has been reversed by the Sixth Circuit, which is taking into account three competing approaches to see whether or not the plaintiff has a right to sue under the Lanham Act: The Third, Fifth, Eighth, and Eleventh Circuits all refer to “antitrust standing of [Associated General Contractors] factors in deciding Lanham Act standing”, which is what the District Court did. The Seventh, Ninth and Tenth Circuits use a categorical test, permitting Lanham Act suits only by an actual competitor. Lastly, the Second Circuit applies a “reasonable interest” approach, under which a Lanham Act plaintiff “has standing if the claimant can 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 alleged false advertising.” Here, the Sixth Circuit is applying the Second Circuit’s reasonable-interest test and has concluded that Static Control does have a standing because it “alleged a cognizable interest in its business reputation and sales to remanufacturers and sufficiently alleged that th[o]se interests were harmed by Lexmark’s statements to the remanufacturers that Static Control was engaging in illegal conduct.”
By granting certiorari to decide the “appropriate analytical framework for determining a party’s standing to maintain an action for false advertising under the Lanham Act”, we have to first look at the prudential standing of the issue. Lexmark based its “prudential standing” arguments mostly on the Associated General Contractors, however the Sixth Circuit did not describe their analysis in that case in those terms. They sought to “ascertain” 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. 459 U. S., at 529, 532. It was held that the statute limited the class to plaintiffs whose injuries were proximately caused by a defendant’s antitrust violations. Id., at 532–533. Later decisions confirm that Associated General Contractors rested on statutory, not “prudential,” considerations. As such, Lexmark’s arguments thus do not deserve the “prudential” label. On the other hand, Static Control argues that “prudential standing” should be measured by using the zone-of-interests test. Whether a plaintiff comes within “the ‘zone-of-interests’” is an issues that requires the court to determine, using legislatively conferred cause of action encompasses a particular plaintiff’s claim. Here, the questions this case presents is whether Static Control falls within the class of plaintiffs whom Congress has authorized to sue under §1125(a). The court is not asking whether Congress should have authorized Static Control’s suit, but whether Congress in fact did so. Just as a court cannot apply its independent policy judgement to recognize a cause of action that Congress had denied, it cannot limit a cause of action that Congress has created merely because “prudence” dictates.
Therefore, the straightforward question here is one of statutory interpretation: Does the cause of action in §1125(a) extend to plaintiffs like Static Control? In the case of NBA v. Motorola, 105 F.3d 841 (1997), the NBA claimed in their cross-appeal that Motorola’s product was misleading, as it was not actually collecting and presenting exact, up-to-date information about the game; however, this was ultimately dismissed by the courts as they found “[t]he statements as to the particular origin of game updates constitute nothing more than minutiae about SportsTrax.” 939 F. Supp. at 1110; they did not mislead purchasers about the purpose of the product, which was to give them information about basketball games at fairly recent intervals. Here, we decide if Static Control has the right to sue Lexmark under §1125(a). Given the principles of zone-of-interests, a plaintiff must allege an injury to a commercial interest in reputation or sales, and then the principle of proximate cause, where the plaintiff must ordinarily 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. After applying these principles, as well as the adaption of the reasonable interest test, the court concludes that Static Control does come within the class of plaintiffs whom Congress authorized to sue under §1125(a).
In unanimous decision penned by Justice Antonin Scalia, argued December 3, 2013 and decided on March 25, 2014, the court ruled that Static Control could bring a Landham Act case against Lexmark for sending letters to the chipmaker’s customers saying it was illegal for them to use Static Control chips i refurbished ink cartridges. SC reverse-engineered chips that Lexmark had developed to try and prevent competitors from undercutting it in the lucrative printer ink business.
Unanimous U.S. Supreme Court held that a plaintiff may bring a false advertising claim under the Lanham Act, 15 U.S.C. §1125(a), even where the plaintiff is not a direct competitor of the defendant. The U.S. Court of Appeals for the Sixth Circuit reversed. After considering three possible approaches used in other circuits, it applied a “reasonable interest” standard. The Sixth Circuit concluded that Static Control had standing because it had alleged a reasonable interest to be protected – i.e., its reputation and sales – and a reasonable basis to believe those interests had been harmed by Lexmark’s supposed false statements.
It is important to note that while the court agreed that Static Control has alleged an adequate basis to proceed under §1125(a), it cannot obtain relief without evidence of injury proximately caused by Lexmark’s alleged misrepresentations. This case only concludes that Static Control is entitled a chance to prove its case.
The decision gives a potentially powerful weapon to free-data advocates who say companies are using laws like the Digital Millenium Copyright Act to squelch competition and even criminalize the use of technology that gets around digital rights-management software and other controls on how customers use data. Companies will have to be careful before accusing a competitor of violating patent laws or saying unauthorized technology is inferior or illegal. In addition, this ruling also gets rid of a judicially created doctrine known as “prudential standing” that had allowed courts to dismiss lawsuits simply because they didn’t think the plaintiff had the right to sue. The ruling does not affect constitutional standing – the requirement that federal courts only hear cases brought by parties who have suffered an actual injury – but it broadens the number of companies that can sue over alleged violations of federal statutes. “It’s a landmark case on the issue of standing,” said Miller Baker, a partner with McDermott, Will & Emery who represented Static Control. “It clears up a lot of confusion about the law that can be traced to prior Supreme Court decisions.”
Lexmark Int’l v. Static Control Components, Inc., 253 F. Supp.2d 943 (E.D. Ky. 2003) http://itlaw.wikia.com/wiki/Lexmark_v._Static_Control
Lexmark Int’l v. Static Control Components, Inc., 572 U.S._(2014), Opinion of the Court:http://www.supremecourt.gov/opinions/13pdf/12-873_n75o.pdf
Langworthy, Elisabeth A & Neustadt, Daniel C. 2014 “Supreme Court clarifies standing requirements for Lanham Act false advertising claim.” Lexology, March 26. http://www.lexology.com/library/detail.aspx?g=68ab0b0d-71dd-4a41-a194-00e3df8a0005
Fisher, Daniel, 2014. “Lexmark may be liable for attacking Printer-Cartridge rivals, Supreme Court says.” Forbes, May 25. http://www.forbes.com/sites/danielfisher/2014/03/25/lexmark-may-be-liable-for-attacking-printer-cartridge-rivals-supreme-court-says/
The Lanham Act, 15 U.S.C. §§ 1051 http://www.law.cornell.edu/uscode/text/15/chapter-22
– Jung-Wei Chen & Irina Lozhkina