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

Facts

Petitioner Lexmark International, Inc. (“Lexmark”) is a major manufacturer of laser printers and toner cartridges. Typically, manufacturers like Lexmark dominate the aftermarket of toner cartridge sales, because manufacturers tend to produce printers compatible solely with their cartridges. However, other companies, known as remanufacturers, acquire used cartridges, refill them, and sell them at a lower cost on the aftermarket.

Lexmark developed and installed microchips for its printers and cartridges to ensure that its printers function only with cartridges that contain a matching microchip. 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. The microchips in Prebate cartridges enforce the Prebate terms by disabling the cartridges for future use until the microchips are replaced.

Respondent Static Control Components, Inc. (“Static”) is a leading supplier of parts for cartridge remanufacturers. Static replicated Lexmark’s Prebate microchip and sold the microchips to remanufacturers, thereby bypassing Lexmark’s Prebate restrictions. 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. 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.

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

While the case was pending, Static redesigned the microchip and sought declaratory relief from future copyright charges. Lexmark counterclaimed for both copyright and patent violations. These disputes were combined in a 2004 action.

Reviewing the preliminary injunction, the Sixth Circuit Court of Appeals rejected Lexmark’s copyright claims. However, on remand, the district court dismissed Static’s counterclaims. 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.

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

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. 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. 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.

The Supreme Court granted certiorari to determine the appropriate test for standing in a false advertising suit under the Lanham Act.

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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. The Seventh, Ninth, and Tenth Circuits follow a categorical test that limits standing to actual competitors. 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.

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

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

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. Similarly, Lexmark claims that the categorical test, which limits standing to actual competitors, would constrain the Lanham Act from overextending liability. DRI—The Voice of the Defense Bar (“DRI”) agrees, noting that the categorical test provides a straightforward rule with predictable results. According to DRI, such a strict test would reduce the time, quantity, and cost of litigation, because it would deter frivolous lawsuits. By contrast, DRI claims that the reasonable interest test provides courts with too little guidance, thus leading to unpredictable results.

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. According to the AAI, the reasonable interest test already requires plaintiffs’ interests to be commercial in nature and causally connected to the alleged falsehood. Because of these requirements, AAI contends, the reasonable interest test is an adequate safeguard against excessive litigation.

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. 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. Thus, they argue, the AGC test would be “a time-consuming, error-inviting diversion.”

OVER- AND UNDERINCLUSIVE STANDING RULES

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

DRI warns that over-extending standing will lead to over-enforcement of the Lanham Act. 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. In turn, DRI warns that consumers would ultimately suffer from this lack of information.

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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. 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. 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. 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.

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. 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. Lexmark claims that Congress intended to narrow the class of plaintiffs who could sue under the Lanham Act.

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. However, Static claims that the Court should adopt the zone of interests test, a more inclusive test than the reasonable interests test. 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. 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. 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. Static thus argues that the Court should apply a standard less stringent than the reasonable interests test applied by the Sixth Circuit.

Alternatively, Static argues that if the Court declines to apply the zone of interests test, it should apply the reasonable interests test. 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.” 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.

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. According to Lexmark, despite the plain language of the statute, Congress intended to provide a cause of action to a narrow class of plaintiffs. 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].” However, Lexmark argues that Congress could not have intended such broad language to be interpreted literally. Lexmark argues that this provision must be read in connection with Section 45 of the Lanham Act. According to Lexmark, Section 45 states the Lanham Act’s true purpose, which is to protect people engaged in commerce from unfair competition. Indeed, Lexmark notes that Congress made clear that “the intent of the act was to protect persons engaged in . . . commerce against unfair competition.”

Lexmark further argues that the Lanham Act’s legislative history suggests that it covers a narrow range of plaintiffs. 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. Here, Lexmark argues that proximate cause would require actual proof that specific customers were diverted from Static because of Lexmark’s actions. 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. 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.

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. 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. 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. 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.

Static argues that the AGC standing test does not definitively apply to false advertisement claims. 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. 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.

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. 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.

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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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