C onstitutional L aw What Standing Test Should Apply to a Claim of False Advertising Under the Lanham Act?

CASE AT A GLANCE
Lexmark International, Inc. (Lexmark), sued Static Control Components, Inc. (Static Control), for various alleged intellectual property violations. Static Control countersued, claiming Lexmark violated the Lanham Acts false advertising prohibition. The district court dismissed Static Controls Lanham Act claims for lack of standing. The Sixth Circuit reversed. Lexmark urges the Supreme Court to endorse a standing test adopted from antitrust law and employed by four circuit courts. Three other circuits have followed a less stringent categorical test. Static Control urges the court to adopt the reasonable interest standing standard, utilized by two circuits, or the even broader zone of interests test. The circuits are split three ways on the question before the Court.

Lexmark International, Inc. v. Static Control Components, Inc. Docket No. 12-873 Argument Date: December 3, 2013 From: The Sixth Circuit
by Rachel K. Paulose

ISSUE
What prudential standard for standing must a litigant meet to sue for false advertising under the Lanham Act: (1) the Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519 (1983) (AGC) standard, as adopted by the Third, Fifth, Eighth, and Eleventh Circuits; (2) the categorical test, as adopted by the Seventh, Ninth, and Tenth Circuits; or (3) the reasonable interest test, as adopted by the Second and Sixth Circuits?

restriction that it may be used only once. Following this initial use, you agree to return the empty cartridge only to Lexmark for remanufacturing and recycling. If you dont accept these terms, return the unopened package to your point of purchase. A regular price cartridge without these terms is available. Lexmark sells non-Prebate cartridges, but those cartridges are marked at regular price and the customer may dispose of the used cartridge as he or she wishes. The non-Prebate cartridges contain a multiple-use microchip. Static Control is one of a number of companies that rell used Lexmark toner cartridges and resell them at a discount in the toner cartridge aftermarket. Static Control replicated Lexmarks microchip, which it sells to enable toner cartridges recycled by other merchants to function with Lexmark machines. Static Control claims Lexmark sent letters to remanufacturers threatening any remanufacturers that used Static Controls products to recycle Lexmarks Prebate cartridges. According to Static Control, Lexmarks letters claimed merchants using Static Controls products to recycle Lexmarks toner cartridges would violate the law and also violate Lexmarks intellectual property rights. Lexmark sued Static Control in 2002 for copying its microchip technology, which Lexmark claimed undermined its Prebate program, in violation of patent and copyright laws. The district court granted Lexmark a preliminary injunction. Both parties engaged in a spate of suits and countersuits. Static Control led a counterclaim alleging antitrust and unfair
PREVIEW of United States Supreme Court Cases

FACTS
Lexmark manufactures laser printers and corresponding toner cartridges. Lexmark developed and patented microchips for its printers and toner cartridges that cause Lexmark machines to reject any devices not containing its specialized microchip. In 1997, Lexmark established its Prebate program, which enables customers to obtain a 20 percent discount on marked Prebate toner cartridges in exchange for agreeing to use that cartridge only once and afterwards to return the cartridge directly to Lexmark for recycling. The Prebate cartridges contain a microchip that disables the cartridge after it has been fully used once as a means of partially self-enforcing the Prebate terms. The Prebate cartridges are typically marked with this agreement: RETURN EMPTY CARTRIDGE TO LEXMARK FOR MANUFACTURING AND RECYCLING Please read before opening. Opening this package or using the patented cartridge inside conrms your acceptance of the following license agreement. This patented [Prebate] Program cartridge is sold at a special price subject to a

108

competition, including for false advertising under the Lanham Act for the letters Lexmark sent to remanufacturers. Specically, Static Control alleged Lexmark falsely informed customers that [Static Controls] products infringe Lexmarks purported intellectual property. Static Control asserted Lexmark damaged Static Controls business and reputation by causing Static Controls customers to believe Static Control engaged in unlawful conduct. The relevant portion of the Lanham Act, codied at 15 U.S.C. 1125(a)(1), provides as follows: Any person who, on or in connection with any goods or services, or any container for goods, uses in commerce any word, term, name symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of face, which (A) is likely to cause confusion, or to cause mistake, or to deceive as to the afliation, connection, or association or such person with another person, or as to the origin, sponsorship, or approval of his or her goods, services, or commercial activities by another person, or (B) in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another persons goods, services, or commercial activities, Shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act. Static Control also led a separate lawsuit seeking a declaratory judgment nding its microchips, which it had redesigned by then, did not infringe any copyright. Lexmark counterclaimed for intellectual property claims against Static Control and certain remanufacturers. The lawsuits were consolidated into one action. Static Control appealed the district courts preliminary injunction. The Sixth Circuit vacated the injunction, dismissed certain of Lexmarks copyright claims, and remanded the case. The district court then dismissed Static Controls counterclaims, including its Lanham Act claims. Specically, the district court followed the line of cases stemming from Associated General Contractors of California, Inc. v. California State Council of Carpenters, (1983) (AGC) in holding the Lanham Act standing standard mirrored the federal antitrust standing standard. The AGC standard adopted by the district court is followed by the Third, Fifth, Eighth, and Eleventh Circuits. Articulated by then-Judge Alito, the AGC standard employs antitrust concepts in evaluating ve factors to determine standing. Those factors are as follows: (1) the nature of the plaintiffs injury; (2) the directness of the injury; (3) the proximity of the party to the injury; (4) the degree to which damages are speculative; (5) the danger of duplicative or complexly determined damages. At trial, an advisory jury (sitting to issue a verdict that would advise but not bind the trial judge) found Lexmark misused its patents and
PREVIEW of United States Supreme Court Cases

Static Control did not induce patent infringement. The district court denied Lexmarks motions for retrial and judgment as a matter of law. Both parties appealed to the Sixth Circuit. Arguing it did indeed possess standing, Static Control asserted the AGC standard did not reect the law in the Sixth Circuit. It urged the circuit court to follow the standard outlined in Frischs Restaurants, Inc. v. Elbys Big Boy of Steubenville, Inc., 670 F.2d 642 (6th Cir. 1982), holding that a Lanham Act claimant possesses standing if it alleges a likelihood of injury and causation. The Second Circuit described this as the reasonable interest standard, under which a Lanham Act claimant may show standing by alleging both a reasonable interest which must be protected under the alleged false advertising as well as a reasonably based belief that interest is likely to be damaged by the alleged false advertising. Before the Sixth Circuit, Lexmark urged the appellate court to adopt the slightly more restrictive standard known as the categorical test. Standing under the categorical test is restricted to actual competitors which assert unfair competition. The Seventh, Ninth, and Tenth Circuits employ the categorical test. The Sixth Circuit reversed the district courts dismissal of Static Controls Lanham Act claims and certain state law claims. The Sixth Circuit afrmed the district courts remaining rulings, including its dismissal of Static Controls antitrust claims. Specically, the Sixth Circuit held that the appropriate standing standard had already been determined by Frischs Restaurants (notwithstanding that case involved false association of trademark, not false advertising), and the court was not free to overturn its own precedent. The court held Static Control had sufciently alleged a Lanham Act claim because Static Control alleged a cognizable interest in its business reputation and sales to remanufacturers and sufciently alleged that these interests were harmed by Lexmarks statements to the remanufacturers that Static Control was engaging in illegal conduct. Lexmark led a petition for writ of certiorari on January 14, 2013. The United States Supreme Court granted certiorari on June 3, 2013.

CASE ANALYSIS
Lexmark acknowledges the Lanham Act, by its own terms, denes potential plaintiffs in the most general of terms. Still, Lexmark asserts, reading the statute in context makes clear congressional intent to impose prudential limitations on putative plaintiffs. The alternative would be to ood the federal courts with frivolous litigation. The only question, says Lexmark, is what prudential standing limitations should be construed under the Lanham Act. Lexmark urges the Court to impose the same standing limitations enunciated in AGC, an antitrust case, because the AGC test ensures that the private remedy Congress created is given its intended scope [and] the test offers concrete guidance to litigants and courts alike. Lexmark argues both the Clayton Act (under which the AGC test was rst applied) and the Lanham Act employ similar phrases, strike at similar injuries, and enforce a similar common law history. Thirty years of development make the AGC test the ideal standing test, according to Lexmark.

109

Specically, Lexmark claims the AGC test effectuates the Lanham Acts purpose to deter anticompetitive commercial conduct, matching the statutes text, history, and purpose. Lexmark argues the ve prongs of the AGC test apply equally well in the context of the Lanham Act. The rst question, which focuses on whether the injury committed is of the type Congress sought to redress, allows courts to focus on congressional intent. Lexmark cites 45 of the Lanham Act in asserting the intent of the act is to protect persons engaged in commerce against unfair competition. Lexmark urges that any plaintiff must be a marketplace competitor to possess standing. Lexmark states the Lanham Act intended to codify the common law. Therefore, Lexmark also supports the second and fourth prongs of the AGC, which focus on the directness of the injury and the degree to which damages are speculative, because Lexmark claims those factors echo common law limitations on similar causes of action. Moreover, Lexmark states AGCs third and fth factors, the plaintiffs proximity to the injurious conduct and the complexity of damages, are appropriate subjects of inquiry because they ensure the Lanham Act is enforced with an appropriate degree of protection for litigants on both sides of a matter. Applying the AGC test to this case, Lexmark argues Static Controls Lanham Act claims must be dismissed for lack of standing. Lexmark characterizes Static Control as a mere parts supplier in the toner cartridge aftermarket, and therefore not a direct competitor with Lexmark. Further, Lexmark claims it did not directly cause the injuries of which Static Control complains and is not most proximate to the alleged bad acts. Lexmark describes Static Controls damages as speculative and complex, which also militate against a nding of standing. Static Control agrees prudential limitations must be imposed in determining standing under the Lanham Act. Static Control asserts it possesses prudential standing because Lexmarks letters targeted its products, tainted its goodwill and name, and caused lowered revenues by frightening away its customers. However, Static Control criticizes the AGC test for a number of reasons. First, Static Control vigorously disagrees with Lexmarks characterization of the common law, arguing the Lanham Act veered from the common law in signicant respects. Static Control claims the genesis of the Clayton Act, and the Sherman Act, for that matter, differ dramatically from the origin of the Lanham Act, in that the antitrust statutes codied the common law. By contrast, Static Control states no commercial tort of false advertising existed at common law. Further, Static Control claims the Lanham Act eradicated certain common law bars against claims of false advertising. Moreover, Static Control argues the inclusive language of the Lanham Act demonstrates Congress meant to enable a broad class of plaintiffs to bring suit. Congressional intent favored overprotection rather than underprotection. Congressional use of the indenite terms likely injury and any person underscored the legislative design to ensure exibility in the use of the statute. According to Static Control, Lexmark is simply asking the Court to rule Congress did not mean what it said when it passed the Lanham Act.

Static Control dismisses Lexmarks other arguments in favor of the AGC test as inappropriate policy arguments. Still, Static Control responds to Lexmarks primary policy argument by insisting that its interpretation of the Lanham Act will not overwhelm the judicial system with frivolous litigation. Rather, Static Control claims any advertiser may limit the universe of potential plaintiffs by simply refraining from advertising falsely about specic merchants. Static Control reiterates it has been actually damaged by Lexmarks letters to remanufacturers, which Static Control claims caused a drop in its sales to Static Controls allegedly intimidated customers. Static Control alleges Lexmark falsely led customers to believe Static Controls products were illegal. Specically, it claims: Lexmark deliberately and falsely advertised to Static Controls customers that using Static Controls products to remanufacture Lexmark toner cartridges would violate the law. Static Control, as a company whose products were falsely maligned, must have standing to sue under the Act for damages caused by those false statements and to prevent future harm from their future repetition. Static Control states these allegations are sufcient to confer standing under the authorizing clause of the Lanham Act, which even Lexmark admits contains remarkably broad language. Lexmark alternatively reverts to the argument it made before the Sixth Circuit in suggesting the second best alternative in determining standing is the categorical test. Under the categorical test, only actual competitors that claim a competitive injury possess the requisite standing under the Lanham Act. Lexmark claims the categorical test also provides a clear rule for courts and litigants, imposes some reasonable limitations on a class of plaintiffs that would otherwise overwhelm the courts, and furthers the Lanham Acts purpose in protecting against unfair competition. Lexmark describes the categorical test as a simple, bright line rule. Because Lexmark does not compete with Static Control for any specic business, Static Controls suit must be dismissed for lack of standing even under the categorical test, according to Lexmark. Static Control dismisses the categorical test as one that dishonors the broad terms of the statute. Further, Static Control insists it is a competitor, broadly dened, of Lexmark. Static Control argues unfair competition, a phrase it acknowledges is used to describe the statutes intended remedy, should not be dened to mean parties that sell exactly the same types of products or directly compete in the marketplace. Instead, Static Control asserts Lexmark obviously views Static Control as a signicant competitive threat, as Static Controls microchips enable other merchants to compete with Lexmark in the aftermarket for toner cartridges. Moreover, Static Control states Lexmarks action in initiating this litigation proves it viewed Static Control as a competitor to its business. Lexmark urges the Court to rmly reject the broadest test, the reasonable interest test applied by the Sixth Circuit below. Under the reasonable interest test, any plaintiff who possesses a reasonable interest to be protected against the alleged false advertising as well as reasonable basis for believing that the interest is likely to be damaged may sue. Lexmark criticizes this test as a hopelessly broad and unclear test that deviates markedly from the Lanham
PREVIEW of United States Supreme Court Cases

110

Acts purpose to protect parties injured by competitive misconduct. Lexmark also describes the reasonable interest test as toothless because it does not actually impose any prudential limitations upon Article III standing. Static Control defends the reasonable interest test as the test that better reects what it asserts was the primary congressional intent in passing the statute: protecting business from false advertising. Interestingly, Static Control urges the Court to adopt a test even broader than the reasonable interest applied by the Sixth Circuit below. Static Control claims it need merely show its claim falls within the zone of interests protected by the Lanham Act. The zone of interests test was rst used in Administrative Procedure Act cases, but it has since been applied to other statutes, including the Endangered Species Act and the Civil Rights Act. Under the zone of interests test, a plaintiff may demonstrate standing by showing its claim arguably falls within the zone of interest protected or regulated by the statutory provision or constitutional guarantee invoked in the suit. Static Control insists the Court therefore need not fashion any prudential standing test specic to the Lanham Acts false advertising cause of action. No circuit court has applied the zone of interests test advanced by Static Control to Lanham Act cases.

of information in the marketplace. The outcome of this case will set a uniform standard to be hewed to by both businesses and their advisors.

Rachel K. Paulose is a graduate of Yale Law School. She worked as an associate at Williams & Connolly LLP. She has also served extensively in government, including as a law clerk to Eighth Circuit Court of Appeals Judge James B. Loken; trial attorney in the Voting Section, Civil Rights Division of the U.S. Department of Justice; assistant U.S. attorney; and a presidentially nominated, Senate conrmed United States Attorney. She can be reached at rkpaulose@hotmail.com. PREVIEW of United States Supreme Court Cases, pages 108111. 2013 American Bar Association.

ATTORNEYS FOR THE PARTIES

For Petitioner Lexmark International, Inc. (Steven B. Loy, 859.231.3000; Neal Katyal, 202.637.5600) For Respondent Static Control Components, Inc. (Seth D. Greenstein, 202.204.3500)

SIGNIFICANCE
Considerable confusion reigns as to the appropriate standard of standing in Lanham Act false advertising claims. The outcome of this case will clarify for the lower courts the standard a claimant must meet in order to establish standing under the Lanham Act. If for no other reason than to establish a basic guide for what is in fact a federal law, the Courts decision in this case will provide important direction for the lower courts. More conceptually, the outcome of this case will have implications for how businesses will direct their marketing to avoid claims of unfair competition. A broader test may encourage more litigation, and its proponents assert it will have the benet of deterring anticompetitive behavior. A bright line test will dampen litigation, and its proponents assert it will also encourage the dissemination

AMICUS BRIEFS
In Support of Petitioner Lexmark International, Inc. Defense Research Institute (Mary Massaron Ross, 313.983.4801) In Support of Respondent Static Control Components, Inc. American Antitrust Institute (Randy M. Stutz, 202.905.5420) International Trademark Association (Anthony J. Dreyer, 212.735.3000) In Support of Neither Party American Intellectual Property Law Association (Paul M. Smith, 202.639.6000) Law Professors (Angela Campbell, 202.662.9541)

PREVIEW of United States Supreme Court Cases

111