Thursday, March 27, 2014

Lexmark International v. Static Control Components

On March 25, 2014, the United States Supreme Court unanimously decided Lexmark International, Inc. v. Static Control Components, Inc., a case about alleged unfair competition involving false and misleading advertising.  Here is how the decision syllabus describes the posture of the case:
Petitioner Lexmark sells the only style of toner cartridges that work with the company’s laser printers, but “remanufacturers” acquire and refurbish used Lexmark cartridges to sell in competition with Lexmark’s own new and refurbished ones.  Lexmark’s “Prebate” program gives customers a discount on new cartridges if they agree to return empty cartridges to the company.  Each Prebate cartridge has a microchip that disables the empty cartridge unless Lexmark replaces the chip.  Respondent Static Control, a maker and seller of components for the remanufacture of Lexmark cartridges, developed a microchip that mimicked Lexmark’s.  Lexmark sued for copyright infringement, but Static Control counterclaimed, alleging that Lexmark engaged in false or misleading advertising in violation of §43(a) of the Lanham Act, 15 U.S.C. §1125(a), and that its misrepresentations had caused Static Control lost sales and damage to its business reputation.  The District Court held that Static Control lacked “prudential standing” to bring the Lanham Act claim, applying a multifactor balancing test the court attributed to Associated Gen. Contractors of Cal., Inc. v. Carpenters, 459 U. S. 519.  In reversing, the Sixth Circuit relied on the Second Circuit’s “reasonable interest” test.
The Supreme Court sided with Lexmark International's competitor, holding that "Static Control has adequately pleaded the elements of a Lanham Act cause of action for false advertising."

One importance consequence of this decision may be to extend liability for damage caused to the reputation not only of direct competitors, but to other parties suffering harm to their reputations. The Supreme Court illustrated this with a hypothetical example:
The District Court emphasized that Lexmark and Static Control are not direct competitors. But 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. Consider two rival carmakers who purchase airbags for their cars from different third-party manufacturers. If the first carmaker, hoping to divert sales from the second, falsely proclaims that the airbags used by the second carmaker are defective, both the second carmaker and its airbag supplier may suffer reputational injury, and their sales may decline as a result. In those circumstances, there is no reason to regard either party’s injury as derivative of the other’s; each is directly and independently harmed by the attack on its merchandise.
Although this decision focuses on standing (that is, whether or not Static Control Components met the procedural requirements to sue Lexmark International), its effects may be more far-reaching for establishing a new legal standard for false advertising. As the Supreme Court stated,
To 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.
Plaintiffs may find this a relatively easy threshold to reach.

In Lexmark International, Inc. v. Static Control Components, Inc., the Supreme Court showed its bolder side in unanimously making new intellectual property law.  A more liberal standing requirement may mean more false advertising lawsuits, less false advertising, or, more likely, a somewhat complex interaction of the two.

Cavere mala fide clamator!

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