Wednesday, March 26, 2014

We all stand: Static Control can sue

Lexmark International, Inc. v. Static Control Components, Inc., No. 12–873 (March 25, 2014)

Justice Scalia, writing for a unanimous Court, affirmed the Sixth Circuit, in the process articulating a new standard: “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.”

I’m not surprised that the result of the Court taking the case was a new articulation of the standard; it’s the kind of thing only the Supreme Court can do. Like it or not, the Supreme Court just has a different view of cases than district or appellate courts, and can make very big moves even in statutory interpretation. (Side note: I literally used to think that this day would never come.)

This opinion bears some similarities to another Lanham Act Scalia opinion, Wal-Mart v. Samara Bros., also for a unanimous Court, also presenting itself as simple statutory interpretation, also adopting a standard for which no party advocated. In Wal-Mart, the new rule was designed to limit the post-Taco Cabana flood of unmeritorious claims. Here, the new standard could mean that more plaintiffs get past the pleading stage, though it remains to be seen whether the Second Circuit in particular will read this as a signal to cut back on its own “reasonable interest” results and whether lower courts will read Iqbal/Twombly aggressively to achieve the same results as Conte Bros.-type tests through proximate causation rulings. Also, it remains to be seen whether courts will apply this reasoning, which speaks in terms of §43(a) generally and not §43(a)(1)(B), to trademark cases and require plaintiffs to allege proximate causation of their claimed harms.

Brief reminder: Lexmark makes laser printers and toner cartridges. Remanufacturers refill used Lexmark cartridges and sell them; Lexmark has tried various means to stop this, including a microchip designed to disable empty cartridges until replaced by Lexmark, as part of its “Prebate” line. Static Control isn’t a remanufacturer, but it’s the market leader in selling cartridge components, including chips that can be used to defeat Lexmark’s scheme. Lots of litigation ensued; here we consider only Static Control’s false advertising counterclaim.

Section 43(a) “creates two distinct bases of liability,” false association and false advertising. Static Control alleged the latter, with two types of claims: (1) Lexmark purposely misled users to believe that they were legally bound by Lexmark’s Prebate terms and obliged to return cartridges to Lexmark after one use. (2) Lexmark sent letters to most remanufacturers falsely advising them that it was illegal to sell refurbished Prebate cartridges. This allegedly was a misrepresentation of “the nature, characteristics, and qualities” of both its own products and Static Control’s products. In a footnote, the Court noted that Lexmark argued that this wasn’t “commercial advertising or promotion,” but that question was not before the Court. (As the law professors’ amicus brief I worked on noted, at least one element of the standard Gordon & Breach test for commercial advertising or promotion will quickly need revisiting—the part that requires that the plaintiff be in commercial competition with the defendant; if that sticks, then all this ink spilled on standing will be irrelevant.)

The Court first makes its (Scalia’s) displeasure with the concept of “prudential standing” known. The label is misleading. Article III limits federal courts’ jurisdiction to cases and controversies, so there’s an “irreducible constitutional minimum of standing.” That is a concrete and particularized injury in fact fairly traceable to the defendant’s action, likely to be redressed by a favorable decision. Static Control concededly had Article III standing based on its allegations of lost sales and damage to its business reputation. The idea of nonetheless refusing to decide a case on prudential grounds is in tension with the Court’s statement that “a federal court’s ‘obligation’ to hear and decide” cases within its jurisdiction “is ‘virtually unflagging.’” However, the Court has also used the language of prudential standing. But really, what the Court was properly doing in cases such as Associated General Contractors (the antitrust case from which Conte Bros. derived its Lanham Act standing test) was statutory interpretation of the scope of the remedy created by the underlying statute. Static Control argued that prudential standing should be measured by the “zone of interests” test, and though the Court has used the language of prudential standing in the past, zone of interests isn’t really a prudential test either. Instead, whether a plaintiff is within a statute’s zone of interest “is an issue that requires us to determine, using traditional tools of statutory interpretation, whether a legislatively conferred cause of action encompasses a particular plaintiff ’s claim.” So we ask whether Static Control falls within the class of plaintiffs Congress authorized to sue under §43(a). “Just as a court cannot apply its independent policy judgment to recognize a cause of action that Congress has denied, it cannot limit a cause of action that Congress has created merely because ‘prudence’ dictates.” This inquiry shouldn’t really be labeled “statutory standing” either, since the absence of a valid cause of action doesn’t implicate subject matter jurisdiction.

We can’t read the statute’s reference to “any person who believes that he or she is likely to be damaged” by a defendant’s false advertising literally, since that would allow anyone who satisfied Article III to sue, and we’re sure Congress didn’t mean that, given zone of interests analysis and proximate causation as a background principle.

Zone of interests: plaintiffs can only sue if their interests fall within the zone protected by the law under which they’re trying to sue. This is a background rule of general application, no matter what.  The breadth of the zone varies according to the statute at issue. Fortunately, identifying the Lanham Act’s zone of interests is easy, because of the “unusual, and extraordinarily helpful,” detailed statement of the statute’s purposes in §1127:

The intent of this chapter is to regulate commerce within the control of Congress by making actionable the deceptive and misleading use of marks in such commerce; to protect registered marks used in such commerce from interference by State, or territorial legislation; to protect persons engaged in such commerce against unfair competition; to prevent fraud and deception in such commerce by the use of reproductions, copies, counterfeits, or colorable imitations of registered marks; and to provide rights and remedies stipulated by treaties and conventions respecting trademarks, trade names, and unfair competitionentered into between the United States and foreign nations.

Mostly these purposes relate to false association, and a typical false-advertising case implicates only the goal of “protect[ing] persons engaged in [commerce within the control of Congress] against unfair competition.”  Unfair competition was a “plastic” concept in common law, but “was understood” (nice passive voice!) to cover “injuries to business reputation and present and future sales.” (Citing the YLJ in 1929.)  Thus, to come within §43(a)’s zone of interests, a plaintiff “must allege an injury to a commercial interest in reputation or sales.” Consumers, including business consumers, may have injuries in fact, but can’t bring Lanham Act claims.

Next, we presume that a statutory cause of action is “limited to plaintiffs whose injuries are proximately caused by violations of the statute.”  Reading a proximate cause requirement into §43(a) is therefore also appropriate.  Proximate cause can be tricky, but the basic question is “whether the harm alleged has a sufficiently close connection to the conduct the statute prohibits.”  Harm that’s too remote isn’t actionable, and that usually includes harm derivative of “misfortunes visited upon a third person by the defendant’s acts.” True, “all commercial injuries from false advertising are derivative of those suffered by consumers who are deceived by the advertising.” But because the Lanham Act allows only those who are injured commercially to sue, that intervening step isn’t fatal to showing proximate cause: a plaintiff can be directly injured (for our purposes) by a misrepresentation even when a third party was the one who relied on the misrepresentation.  (Hey, this is an argument for a reliance requirement in trademark as well as false advertising: without consumer reliance of some sort, the plaintiff can’t have been injured!)

As a result, a §43(a) plaintiff “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.”  Ordinarily, that won’t cover injuries to a fellow commercial actor that then hurt the plaintiff—a competitor forced out of business by false advertising can sue, but not the landlord or others who suffer from the competitor’s “inability to meet [its] financial obligations.”  In a footnote, the Court emphasized that Iqbal/Twombly require proximate cause to be adequately alleged in the complaint.

Lexmark argued that the antitrust-based test of Conte Bros. was the way to implement these principles, or that only competitors should be able to sue. Some amici argued for the reasonable interest test instead.  None of these tests was meritless, but no. “[A] direct application of the zone-of-interests test and the proximate-cause requirement supplies the relevant limits on who may sue.”

Why not Conte Bros.? That test had five factors: (1) Is the plaintiff’s injury of a type that Congress sought to redress in providing a private remedy? (2) The directness or indirectness of the asserted injury. (3) The proximity or remoteness of the party to the alleged injurious conduct. (4) The speculativeness of the damages claim. (5) The risk of duplicative damages or complexity in apportioning damages.  While this approach “reflects a commendable effort to give content to an otherwise nebulous inquiry,” it’s still not quite right.  (1) seems to be about the zone of interests, and (2) and (3) relate, redundantly, to proximate causation.  But these aren’t factors to be weighed; they’re requirements to be met in every case. 

And (4) and (5) really go off the rails.  Though difficulty of ascertaining damages caused by a remote injury is one reason we have a proximate cause requirement, difficulty in ascertaining and apportioning damages isn’t “an independent basis for denying standing where it is adequately alleged that a defendant’s conduct has proximately injured an interest of the plaintiff’s that the statute protects.” Even when losses aren’t sufficiently quantifiable for damages, injunctive relief or disgorgement of defendant’s profits may still be available.  “Finally, experience has shown that the Conte Bros. approach, like other open-ended balancing tests, can yield unpredictable and at times arbitrary results. See, e.g., Tushnet, Running the Gamut from A to B: Federal Trademark and False Advertising Law, 159 U. Pa. L. Rev. 1305, 1376–1379 (2011).”

The direct competition test provided a bright line, but only at the expense of distorting the statutory language.  A noncompetitor would have a harder time establishing proximate cause, but a blanket rule would read too much into the phrase “unfair competition,” which—by the time the Lanham Act was adopted—“was understood not to be limited to actions between competitors.” “One leading authority in the field wrote that ‘there need be no competition in unfair competition,’ just as ‘[t]here is no soda in soda water, no grapes in grape fruit, no bread in bread fruit, and a clothes horse is not a horse but is good enough to hang things on.’”

The reasonable interest test was vague, and could be understood to require only Article III standing.  Courts were tired of grappling with it.  Also, the relevant question isn’t whether the plaintiff’s interest is reasonable, but whether the Lanham Act protects that interest; likewise, it’s not whether there’s a reasonable basis for the plaintiff’s claim of harm, but whether there is proximate cause.  Thus, zone of interests plus proximate cause provides clearer and more accurate guidance.

Applying these principles to the present case, Static Control was within the zone of interests protected by Congress.  Its alleged injuries, “lost sales and damage to its business reputation” were injuries to “precisely the sorts of commercial interests the Act protects.” And it sufficiently alleged proximate cause.  Though sales diversion from a competitor might be the paradigmatic direct injury, it’s not the only kind.  First, Static Control alleged that Lexmark disparaged it by asserting that its business was illegal.  “When a defendant harms a plaintiff ’s reputation by casting aspersions on its business, the plaintiff ’s injury flows directly from the audience’s belief in the disparaging statements.”  (Note that this discussion might seem to make the Lanham Act available to beef producers aggrieved by news stories about pink slime—but there “commercial advertising or promotion” will have to play the leading role.)

As a result, §43(a) is available not only when a product is denigrated by name, but also when “the defendant damages the product’s reputation by, for example, equating it with an inferior product.” (Citing false equivalency claims.) A defendant who “seeks to promote his own interests by telling a known falsehood to or about the plaintiff or his product” proximately caused the plaintiff ’s harm.  (Delete “known” for Lanham Act liability.) “[W]hen 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.”  A carmaker who disparages the airbags in a rival’s cars proximately harms both the rival carmaker and the airbag supplier.

Also, Static Control adequately alleged proximate cause by alleging that it made microchips that were necessary, and only useful for, refurbishing Lexmark cartridges.  Any false advertising that reduced the remanufacturers’ business therefore necessarily injured Static Control as well.  As alleged, “there is likely to be something very close to a 1:1 relationship between the number of refurbished Prebate cartridges sold (or not sold) by the remanufacturers and the number of Prebate microchips sold (or not sold) by Static Control.” Given such an integral injury, proximate cause would exist.  Sure, there’s an intervening link of injury to the remanufacturers, which might ordinarily destroy proximate cause, but that’s because there’s ordinarily a discontinuity between the injuries of the direct and indirect victims, such that injury to the latter might have resulted from any number of reasons.  Here, though, “Static Control’s allegations suggest that if the remanufacturers sold 10,000 fewer refurbished cartridges because of Lexmark’s false advertising, then it would follow more or less automatically that Static Control sold 10,000 fewer microchips for the same reason.”  This wouldn’t require speculative or uncertain inquiries. 

However, Static Control would ultimately have to show injury proximately caused by Lexmark’s alleged misrepresentations. It was just entitled to a chance to prove its case.

How will proximate cause work with “affiliation confusion,” I wonder?  Many judges, I expect, will continue to be sympathetic to trademark plaintiffs’ harm stories.  But if being in the zone of interests protected isn’t enough, and you also need proximately caused harm, that at least opens up some space to contest these trademark narratives.

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