SCOTUS Allows False Advertising Claims vs Printer Cartridge Manufacturer

Cleaning printer toner cartridgeOn March 25, 2014, the Supreme Court of the United States unanimously ruled that Static Control Components, Inc., a seller of components for remanufacturing of used laser printer toner cartridges, may pursue false advertising claims against Lexmark International, Inc., a laser toner cartridge manufacturer. Lexmark International, Inc. v. Static Control Components, Inc., No. 12–873 (U.S. Sup. Ct. Mar. 25, 2014).

LEXMARK’S PLAN TO FOIL CARTRIDGE REMANUFACTURING. Lexmark had sold its cartridges under a “Prebate” program, in which customers could obtain a discount if they agreed to return their used cartridges to Lexmark instead of selling them to purveyors of “remanufactured” cartridges. Each Prebate cartridge contained a miocrochip that disabled the empty cartridge unless Lexmark replaced the chip. Static Control reverse-engineered microchips to mimic Lexmark’s chips, so that competitors of Lexmark could remanufacturer used Lexmark cartridges and sell them in the aftermarket.

STATIC CONTROL’S FALSE ADVERTISING COUNTERCLAIMS. In 2002, Lexmark sued Static Control, claiming, among other things, that its reverse-engineered chips circumvented a technological measure that controlled access to copyrighted software inside Lexmark printers, in violation of the Digital Millennium Copyright Act (DMCA). In addition, Lexmark sent letters to cartridge remanufacturers, claiming that using Static Control microchips would violate Lexmark licenses and constitute copyright infringement. Static Control counterclaimed against Lexmark for alleged antitrust violations and false advertising. Specifically, Static Control alleged that Lexmark “falsely informed customers that SCC’s products infringe Lexmark’s purported intellectual property,” and “misled . . . customers of SCC’s products that license agreements prohibit remanufacturing Lexmark toner cartridges, when no license agreements actually exist,” causing Static Control’s customers to believe that Static Control is engaging in illegal conduct and thereby damaging Static Control’s business and reputation.

PROCEEDINGS IN THE LOWER COURTS. In the course of ten years of litigation, including a jury trial, Lexmark’s claims against Static Control were all dismissed. See Static Control Components, Inc. v. Lexmark International, Inc., Nos. 09-6287/6288/6449 (6th Cir. Aug. 29, 2012). In the first instance, Static Control’s false advertising counterclaim was also dismissed, with the district court ruling that Static Components lacked “prudential standing” to bring the Lanham Act claim. On appeal, however, the U.S. Court of Appeals for the Sixth Circuit reversed, finding that it was sufficient for standing purposes that Static Components “alleged a cognizable interest in its business reputation and sales to manufacturers and sufficiently alleged that th[o]se interests were harmed by Lexmark’s statements to the remanufacturers that Static Control was engaging in illegal conduct.” Lexmark petitioned the Supreme Court for a writ of certiorari, which the Court granted.

SUPREME COURT REJECTS “PRUDENTIAL” STANDING DISMISSAL. In affirming the Sixth Circuit’s ruling, the Supreme Court rejected the notion that “prudential” standing principles could be invoked to bar Static Control’s claim. “Just as a court cannot apply its independent policy judgment to recognize a cause of action that Congress has denied,” Justice Antonin  Scalia wrote for the Court, “it cannot limit a cause of action that Congress has created merely because ‘prudence’ dictates.”

STANDING FOR FALSE ADVERTISING CLAIMS. In its March 25, 2014 ruling, the Supreme Court ruled that 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.” The element of proximate cause means that “a plaintiff suing under §1125(a) ordinarily must show economic or reputational injury flowing directly from the deception wrought by the defendant’s advertising; and that that occurs when deception of consumers causes them to withhold trade from the plaintiff.” However, according to Justice Scalia, proximate cause does not require that there be direct competition between the claimant and the defendant, and the claimant need not establish a direct link between consumer confusion and its injuries.

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