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We See What You Did There: Supreme Court Labels ‘Prudential Standing’ as Misleading in Key False Advertising Row

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We See What You Did There: Supreme Court Labels ‘Prudential Standing’ as Misleading in Key False Advertising Row

Static Control Components, Inc. may bring a false advertising claim against Lexmark International, Inc. for telling Static Control’s customers that it was illegal to use Static Control chips in refurbished ink cartridges, the Supreme Court ruled in a unanimous opinion authored by Justice Antonin Scalia. The Court’s ruling greases the skids for false advertising plaintiffs, who now face a lower burden in demonstrating prudential standing, and likely has broad-reaching implications for other business litigation.

Lexmark manufactures and sells laser printers, which are designed only to use Lexmark-brand print cartridges. “Remanufacturers” acquire and refurbish used Lexmark toner cartridges for resale to Lexmark printer owners. In an effort to curb the market for remanufactured cartridges, Lexmark introduced a “Prebate” program, enabling its customers to purchase cartridges at a discount in exchange for returning empty printer cartridges. Lexmark enforced its Prebate terms, which customers assented to via shrinkwrap license, by installing a microchip in cartridges that would disable it when empty.

The Court’s ruling broadens the pool of potential plaintiffs in false advertising and other statutory causes of action...”

Static Control made and sold a microchip that enabled remanufacturers to refurbish and resell used Prebate cartridges. In 2002, Lexmark sued Static Control on patent infringement grounds. Static Control counterclaimed, alleging that Lexmark (i) purposefully misled customers to believe that they were required to return Prebate cartridges to Lexmark, and (ii) falsely advised remanufacturers that it was illegal to refurbish cartridges using Static Control’s products. Static Control alleged that those statements had materially misrepresented Lexmark’s and Static Control’s products.

The District Court dismissed that claim, finding that Static Control, as a supplier rather than a remanufacturer, did not have prudential standing to sue Lexmark because it was not the type of plaintiff and did not have the type of injury intended to be covered by the Lanham Act. The Sixth Circuit reversed, and the Supreme Court granted certiorari to solve a three-way circuit split and clarify the appropriate “prudential standing” test. The Court evaluated the multifactor balancing test (3rd, 5th, 8th, and 11th Circuits), the direct-competitor test (7th, 9th, and 10th Circuits), and the reasonable interest test (2nd and 6th Circuits), all of which limited the types of plaintiffs that could bring false advertising claims.

Remarkably, the Supreme Court discarded each of these existing “prudential standing” tests in favor of a new, streamlined approach focused on statutory interpretation. Specifically, a plaintiff seeking relief under a statutory cause of action must demonstrate that (i) his or her interests fall within the zone of interests intended to be protected by the statute, and (ii) a statutory violation proximately caused plaintiff’s injury. Under the new rule, a false advertising plaintiff need only allege an injury to a commercial interest in sales or business reputation flowing directly from a defendant’s misrepresentations.

Applying the new test, the Court held that Static Control’s alleged injuries — lost sales and reputational damage — are the types of commercial interests the Lanham Act protects and that Static Control’s reputational injuries and diminished sales flowed from Lexmark’s misrepresentations, despite the fact that Lexmark and Static Control were not direct competitors. The Court’s ruling broadens the pool of potential plaintiffs in false advertising and other statutory causes of action and may eliminate an often-litigated issue raised by defendants in Lanham Act cases.

Arent Fox is continuing to monitor this and other false advertising cases. Please contact Anthony V. Lupo, Randall A. Brater, Sarah L. Bruno, or Karen Ellis Carr with any questions.

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