- Posted on: May 15 2014
Last month, the Supreme Court issued a game changing decision on the ability to bring claims under the federal false advertising law, but what does it mean for the average consumer?
In Lexmark v. Static Control, the Supreme Court clarified and loosened the rules governing standing in false advertising cases brought under the federal Lanham Act. Why should the average American consumer care about an obscure aspect of federal procedure? Because at its core, this is a case about consumer access to discount printer toner cartridges and competitive product options. And don’t we all hate paying for overpriced printer toner?
Lexmark makes printers. Like most modern desktop printers, the ink cartridges contain a little chip that helps your computer monitor the status of the ink tanks. Lexmark would prefer that the owners of its printers purchase ink tanks directly from Lexmark, rather than other refurbished tanks supplied by other re-manufacturers. Static Control Components manufactures little chips that are purchased by third party ink tank re-manufacturers. These chips allow companies other than Lexmark to re-manufacture/refill empty Lexmark ink tanks an resell them.
Lexmark and Static Control have been litigating for years over these chips. In an earlier appeal of another aspect of this case (decided almost a decade ago), the Sixth Circuit looked at Lexmark’s claim that Static Control’s chips violated the anti-circumvention provisions of the Digital Millennium Copyright Act. Those provisions basically make it illegal to hack encryption systems that are in place to prevent the copying of copyrighted materials. Lexmark asserted that Static Control’s chips were basically a hack, but was unsuccessful on that claim.
In this more recent aspect of the case, in response to Lexmark’s claim for copyright infringement (asserting that its chips contained copyrighted source code), Static Control filed a counterclaim for false advertising. The counterclaim was based on Lexmark’s toner cartridge “prebate” program, which was designed to encourage customers to return used cartridges to Lexmark. Static Control alleged that Lexmark had misled consumers by falsely implying that they had a legal obligation to return used cartridges, and also that Lexmark had misled re-manufactures by telling them that it was illegal to re-manufacture Lexmark cartridges. Lexmark sought dismissal of this counterclaim, asserting that Static Control did not have standing to bring such a claim.
What Is Standing?
Standing is based on the common sense notion that not anyone can bring a legal claim. If a drunk driver crashes into your neighbor’s parked car, your neighbor can try to recover for the damage, but you cannot. You wouldn’t be a proper party to such a suit because your property was not damaged. That is the essence of standing, but it becomes more complicated when the claims are based on intellectual property and other intangible rights.
The trial court dismissed Static Control’s false advertising counterclaim on standing grounds, concluding that because Static Control does not re-manufacture the toner cartridges or sell the re-manufactured cartridges, it lacks standing to bring the false advertising claim. In so doing, the trial court basically said that only a direct competitor can bring a false advertising claim. This was one of a couple ways that federal courts had been looking at this issue. The other most prevalent way was to examine the federal law to try to determine whether the plaintiff was the type of party that Congress intended for the law to protect, which is more forgiving but also a quite unpredictable rule.
What Did the Supreme Court Say?
The Supreme Court rejected all of the ways that other federal courts had previously decided this issue and set forth a new rule: “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.” In other words, the party asserting false advertising does not have to be a direct competitor. But at the same time, not just anyone can bring a false advertising claim–the plaintiff must have suffered lost sales or loss of business reputation that was caused by the false advertising.
That means that if Static Control lost sales of its chips based on the alleged misrepresentations, then it has standing and can pursue its counterclaim. More broadly, this means that any party whose commercial interests are harmed by false advertising can seek to recover for such harm, regardless of whether they are a direct competitor. That translates to more potential businesses policing false advertising in the marketplace.
What Does This Mean for the Average Consumer?
The practical effects of this decision are yet to be seen. In general, a rule that allows more people to seek remedies for false advertising should encourage truth in advertising. Moreover, as in the case of Lexmark and Static Control, when the allegedly false advertising is trying to deter and limit competition, such a rule would have the opposite effect of encouraging more robust competition, which generally drives down prices for consumers. And who can argue with more affordable toner cartridges?
Posted in: Commercial Litigation