False Advertising Claim Does Not Require Direct Competition: Replacement Parts Manufacturer Can Sue OEM
For years, federal courts have been split on whether a false advertising claim under the Lanham Act required that the plaintiff and defendant be in direct competition. Last week, the United States Supreme Court answered the question with a simple and straightforward response: “no.”
LexMark International manufactures laser printers and toner cartridges. In order to prevent “remanufacturers” from being able to refurbish used LexMark toner cartridges, LexMark gave customers a discount on new cartridges if they agreed to return empty cartridges to the company. In addition, LexMark installed a microchip in each cartridge that disabled the empty cartridge unless the chip was replaced by LexMark.
Static Control made and sold microchips that mimicked Lexmark’s and allowed remanufacturers to refurbish used LexMark toner cartridges that were equipped with the LexMark microchip. It is important to note that Static Control did not manufacture or remanufacture toner cartridges. Rather, it simply sold the replacement microchip to remanufacturers, who used them to refurbish and resell the used LexMark cartridges. Upset at Static Control’s product and the inevitable results, LexMark not only sued Static Control, but went on the offensive in the marketplace. Specifically, LexMark “sent letters to most of the companies in the toner cartridge remanufacturing business” and advised them that it was illegal to sell the refurbished LexMark cartridges and that it was illegal to use Static Control’s microchip to refurbish those cartridges. These claims, and others, were the basis of Static Control’s false advertising counterclaim against LexMark.
LexMark filed a motion to dismiss Static Control’s Lanham Act claim, arguing that Static Control lacked standing. The District Court agreed, stating that Static Control’s injury was “remote” and that Lexmark’s intent was to “dry up spent cartridges at the remanufacturing level” rather than at Static Control’s level. The Sixth Circuit reversed the dismissal of Static Control’s claim, which led to the appeal to the United States Supreme Court.
The Supreme Court rejected all of the various tests articulated by the litigants and the previous courts for determining whether a party had standing to bring a false advertising claim under the Lanham Act. Instead, it developed essentially a two-part test: (a) do the plaintiffs fall within the statute’s “zone of interest”, and (b) are the plaintiffs’ injuries proximately caused by the unlawful conduct? Using the language of the Lanham Act, the Supreme Court determined that the “zone of interest” for the Lanham Act was “injury to a commercial interest in reputation or sales.” As for proximate cause, the Supreme Court found that this requirement was met when “deception of consumers causes them to withhold trade from the plaintiff.” With this test, Static Control clearly had standing to bring a claim against LexMark.
The lesson from all of this? Be careful what you say out there. If your actions in the marketplace could proximately cause an injury to another’s “commercial interest in reputation or sales” then your actions may trigger litigation, even if that party is not a competitor.