Tuesday, September 04, 2012

Lexmark v. Static Control: the false advertising years

Static Control Components, Inc. v. Lexmark Intern., Inc., --- F.3d ----, 2012 WL 3765010 (6th Cir.)

Okay, I thought Lanham Act standing couldn’t get further bollixed.  My mistake!  Copyright folks know this long-running dispute as the source of one limit on the use of the DMCA to protect against aftermarket competition.  But there are patent, antitrust, and advertising law pieces as well; I’m only going to talk about the Lanham Act and design patent claims.

Lexmark makes laser printers and toner cartridges for them.  Other companies buy used cartridges, refill them, and sell them to owners of Lexmark printers.  Static Control sells the microchips used in the cartridges, along with other parts, to these remanufacturers, but it is not a remanufacturer; Lexmark sells cartridges but not parts.

After many years, the only issues submitted to a jury were Lexmark’s claim of inducement of patent infringement against Static Control and Static Control’s defense of patent misuse, though the jury’s findings on misuse were advisory.  The jury found no inducement and misuse by Lexmark.

Among the issues on appeal were the court’s dismissal of Static Control’s false advertising claims.  Static Control argued that Lexmark falsely advertised by telling customers that Static Control’s products infringed Lexmark’s IP and misled customers into thinking that Lexmark’s licenses prohibited remanufacturing.  The district court dismissed this counterclaim because Static Control, in the court of appeal’s words, “lacked antitrust standing.”  Though I don’t like Conte Bros., the district court at least described it more closely: the factors for antitrust standing are the same as for Lanham Act standing.  Now, this isn’t actually true either, as I’ve written; Conte Bros. already involved a bit of sleight-of-hand performed on the antitrust standing test.  But at least the district court’s description suggests that we will look at the types of plaintiffs and conduct that the Lanham Act was designed to address in applying the factors, rather than at whether the Lanham Act plaintiff would have antitrust standing.

In the Sixth Circuit, the most recent precedent was Frisch's Rests., Inc. v. Elby's Big Boy of Steubenville, Inc., 670 F.2d 642 (6th Cir. 1982), which held that a Lanham Act claimant need not demonstrate actual losses as a result of the defendant's misleading use of the claimant's trademarks in its advertisements, only a “‘likelihood of injury and causation,’” aka the Second Circuit’s “reasonable interest” approach.  Lexmark argued for the adoption of a categorical competitors-only test, as adopted by some circuits distinguishing between §43(a)(1)(A) and (a)(1)(B).  Other circuits use Conte Bros. (which, again, distinguishes between trademark and false advertising standing, though the court of appeals here pointed out that the Third Circuit purports to reject any distinction between the two but simultaneously applies the five-factor antitrust-derived test to false advertising claims).  The court of appeals quoted, without explicitly approving, the Second Circuit’s observation that Conte Bros. unnecessarily complicates the standing inquiry.

So, following the Third Circuit’s “reasoned analysis rejecting a distinction between these two types of claims for purposes of standing,” the panel was bound by Frisch’s.  As a result, Static Control sufficiently alleged a Lanham Act claim: its business reputation and sales to remanufacturers were harmed by Lexmark’s statements to those remanufacturers.  Reversed and remanded.  In a footnote, the court commented that even if it did adopt the Conte Bros. test, Static Control might still have standing.  Static Control’s allegations went beyond conduct alleged to violate the Sherman Act (as to which the claim had been dismissed), particularly the allegation that Lexmark falsely advertised that Static Control was a patent infringer.

The district court also dismissed Static Control’s state-law counterclaims for unfair competition and false advertising under North Carolina law for lack of standing, on the theory that the test was identical.  The North Carolina courts hadn’t addressed the issue of standing under the state’s UDTPA statute, the state-law equivalent of the Sherman, Clayton, and Lanham Acts, but the district court applied “North Carolina's general rule that federal case law is persuasive and instructive in construing North Carolina's own antitrust statutes.”  However, a North Carolina case has held that the federal antitrust standing test doesn’t apply to the question of which indirect purchasers have standing under North Carolina statutes; though Static Control was a supplier, it argued that the case supported the general idea that it could have standing.  The court of appeals decided that it had to “closely examine North Carolina's departure from federal law on the question of standing for indirect purchasers to determine whether North Carolina would similarly depart on the question of standing for suppliers.”

Comment: For the false advertising counterclaim, which is apparently encompassed by this analysis, the whole journey is a frolic and detour.  We should (also) be asking how North Carolina treats false advertising claims under the UDTPA.  Absent some consideration of false advertising, this discussion is like asking whether the plaintiff in a malpractice case has standing to sue her doctor by evaluating whether the doctor defamed her.

Anyway, after extensive analysis of antitrust law at the state and federal level over time, the court of appeals held that North Carolina wouldn’t apply the federal antitrust standing factors to cases like this one.  So the counterclaims go back to the district court too—apparently both state antitrust and state false advertising.

The court then denied Static Control’s request to treat the advisory jury findings of patent misuse as binding on a subsequent factfinder; this would be relevant to the false advertising claims.

The district court had invalidated two of Lexmark’s design patents, and the court of appeals affirmed.  Functionality will invalidate a design patent, which must be ornamental.  “An article is less likely to be ornamental if it is not observed, and the Federal Circuit looks not just to whether the article is ever seen but whether the appearance of the article may become a ‘matter of concern’ at any point during the article's ‘normal and intended use.’”  The district court held that the design of the cartridges was primarily functional because the design of the printer dictated the exact design of the cartridge, relying on a Federal Circuit case finding a key not patentable because its shape was dictated by its function of fitting in the corresponding lock, which indeed seems to be on all fours with the situation here.  Also, “even though the cartridges may be seen at some point during their lifetime, at no point was their appearance a matter of concern to the end-user.”

Lexmark argued that the district court improperly shifted the burden of proof onto Lexmark to show validity.  In particular, Lexmark objected to the lack of survey evidence showing that consumers didn’t consider the cartridge’s appearance to be a matter of concern, and argued that it showed pictures of the cartridges on its website and on the boxes, creating a genuine issue of material fact.  The court of appeals disagreed.  “Lexmark itself explained that the advertisements containing photographs were primarily to assist the customer in selecting the cartridge that was compatible with the printer they owned.”  Their appearance had no other role in the purchase decision.  Lexmark wanted more evidence, but photos of the product weren’t enough to create a material issue of fact; Static Control’s evidence of functionality was undisputed and clear and convincing evidence of validity.

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