The Supreme Court Decides that False Advertising Standing Requires Economic or Reputational Injury Proximately Caused by Defendant’s Advertising
On March 25, 2014, the Supreme Court decided the relevant test for determining if a plaintiff has standing to sue for false advertising in the case of Lexmark Int’l, Inc. v. Static Control Components, Inc. Prior to the Supreme Court’s decision, the Circuit Courts were split on what was needed to establish standing in a false advertising case. In Lexmark, the Supreme Court rejected the various tests applied by the Circuit Courts and held that “[t]o invoke the Lanham Act’s cause of action for false advertising, a plaintiff must plead (and ultimately prove) an injury to a commercial interest in sales or business reputation proximately caused by the defendant’s misrepresentations.”
In the Lexmark case, Lexmark sued Static Control for copyright infringement based on Static Control’s development and sale of a microchip that allowed Lexmark’s competitors to refurbish and resell Lexmark toner cartridges that were designed to be returned to Lexmark. Static Control asserted several counterclaims, including one for false advertising under Section 43(a) of the Lanham Act (15 U.S.C. § 1125(a)(1)(B)). Static Control’s claim was based, in part, on letters Lexmark sent to its competitors advising them that it was illegal to use Static Control’s products to refurbish Lexmark toner cartridges. Static Control alleged that Lexmark’s statements were material misrepresentations that were likely to cause injury to Static Control by diverting sales from Static Control to Lexmark and injuring Static Control’s business reputation.
Relying on a multifactor balancing test, the District Court found that Static Control lacked standing to bring a claim for false advertising and granted Lexmark’s motion to dismiss. The Sixth Circuit reversed, applying the Second Circuit’s “reasonable interest” test and finding that Static Control had 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.”
The Supreme Court granted certiorari to decide the appropriate standard for determining whether a plaintiff has standing to maintain an action for false advertising under the Lanham Act. The Supreme Court analyzed § 1125(a) to determine if the cause of action set forth therein extends to plaintiffs like Static Control. The Supreme Court held that a plaintiff must allege an injury to a commercial interest in reputation or sales to fall within the required zone of interests in a suit for false advertising. Furthermore, to comply with the proximate-cause requirement, plaintiff 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. Applying these standards, the Supreme Court found that Static Control was within the class of plaintiffs whom Congress authorized to sue under § 1125(a) because it alleged lost sales and damage to its business reputation due to Lexmark’s misrepresentations.
It appears that the Supreme Court’s decision will broaden the class of plaintiffs who have standing to sue for false advertising. This is certainly the case in those Circuit Courts that previously required a plaintiff to be a direct competitor of the party accused of false advertising. The Supreme Court specifically noted that Static Control would not have satisfied that requirement. Instead, it explained that “when 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.”