Brand Marketers: Beware of False Advertising
What This Means To You
- If you are a brand owner, you should keep a close eye on this case. Currently, courts differ on who has proper standing to bring a Lanham Act false advertising challenge, with some requiring that the adverse party is an “actual competitor.”
- The Supreme Court could choose to adhere to the "actual competitor” requirement or it could lower the bar for standing, which could potentially increase the number of false advertising challenges filed.
Recently, the U.S. Supreme Court agreed to hear arguments between printer maker Lexmark International Inc. and Static Control Components (SCC) in a case involving the proper standard for determining whether a party may bring a claim of false advertising. Currently, there is a split among the federal circuit courts, so the decision could have wide-ranging implications for brand owners.
The underlying case—initiated over a decade ago—surrounds Lexmark’s patent on microchips inside toner cartridges and SCC’s sale of computer chips to entities that refurbish and resell toner cartridges.
Lexmark filed suit against SCC, a company that specializes in remanufacturing laser printer toner. Although Lexmark remanufactures some of its own cartridges, it took several measures—including incorporating a microchip and firmware in its own toner cartridges—to prevent them from being refilled by third-party refurbishes. While SCC does not compete in the toner cartridge market, it developed and marketed its own chip that could be used to replace the Lexmark components to allow third parties to refill the cartridges and sell them at a lower cost.
Lexmark’s suit against SCC included claims for patent infringement relating to its cartridge design and copyright infringement relating to the computer code in its microchips. Contemporaneous with filing the suit, Lexmark began contacting SCC’s customers to inform them that SCC’s technology was infringing on Lexmark’s intellectual property. SCC filed false advertising counterclaims in response to Lexmark’s patent infringement lawsuit, stating that the allegations of infringement were damaging to SCC’s reputation and causing harm to its business.
False Advertising Tests
The threshold issue was whether SCC—which is not a direct competitor of Lexmark—had proper standing to bring a false advertising claim. The Lanham Act, creates a federal private cause of action for false advertising and unfair competition, including the right to bring action for false statements made by competitors about each other’s products. The Act grants standing to bring a claim to “any person who believes that he or she is or is likely to be damaged by the alleged false advertising or unfair competition.”
The tests to determine standing—namely, the “multi-factor test” and the “reasonable interest test”—have been applied rather inconsistently by multiple circuit courts. Notably, there is also the categorical test, a more restrictive standard adopted by some circuit courts, which holds that only an actual competitor can bring a false advertising claim. Under the categorical test, SCC would not have had standing to bring a false advertising claim against Lexmark.
In the district court case, the District Court for the Eastern District of Kentucky applied the “multi-factor test” used by the Supreme Court to determine standing in anti-trust claims and ultimately dismissed the false advertising claims due to lack of standing.
SCC appealed to the Court of Appeals for the Sixth Circuit where Lexmark argued that the “reasonable interest” standard is a particularly expansive approach and SCC did not have standing to make its claim because only direct competitors can make false advertising allegations. The Sixth Circuit disagreed, using the same test as the Second Circuit, and held the standing to bring a false advertising claim could be based on a showing of “reasonable interest” under which it is not necessary for the two parties to be direct competitors to bring a false advertising claim. The Sixth Circuit revived SCC’s claim, finding that it had sufficient standing to allege false advertising under the Act based on Lexmark's statements to its customers that SCC's products were infringing.
Undoubtedly, the Lexmark case will have enormous impact on false advertising law and will attract the attention of marketers and lawyers alike. While SCC tried to undermine the difference between these tests, the tests are applied differently and obviously yield different results.
The Supreme Court likely agreed to hear arguments to establish consistency between the various courts. Its decision will have a broad business reach, as false advertising claims are commonly raised in intellectual property infringement suits in any industry, and the decision will either expand or significantly limit the availability for a competitor to bring these types of action.