Business consumer can't bring Lanham Act claim after Lexmark

Locus Telecommunications, Inc. v. Talk Global, LLC, No. 14–1205, 2014 WL 4271635 (D.N.J. Aug. 28, 2014)

Defendant Expansys allegedly made a false statement on a website promoting its product, personal identification numbers (“PINs”) used to add minutes to prepaid cell phones. Locus resells such PINS to distributors, who sell them to retailers.  Expansys allegedly operated a website through which consumers would be able to redeem their PINs to refill prepaid plans with various wireless carriers, marketing Expansys PINs as “The Easiest Way To Refill a USA PrePay Plan.”  Locus allegedly relied on this claim, but the PINs didn’t work on the website, precluding Locus, its retailers, and PIN buyers from being able to redeem them. This allegedly hurt Locus’s sales and goodwill, and Locus sued for violation of the Lanham Act as well as state law claims.

The court determined that “the injury of which Locus complains does not stem from conduct by Expansys which unfairly diminished Locus’s competitive position in the marketplace.”  Instead, it stemmed from the inducement to buy the Expansys PINs, and Lexmark excluded injury to entities “hoodwinked into purchasing a disappointing product” from its explanation of the Lanham Act’s scope.  Even though Locus bought for resale, it was still a purchaser.  As Lexmark said, “[e]ven a business misled by a supplier into purchasing an inferior product is, like consumers generally, not under the [Lanham] Act’s aegis.”  But “a Lanham Act claim for false advertising requires some deception by the defendant which causes consumers to withhold trade from the plaintiff.”  (Note that Locus alleged exactly that, but only by the mechanism of Locus believing the falsehood and acting on it, as opposed to others believing it.)

The Lanham Act claim had to be dismissed with prejudice, and the court declined to exercise supplemental jurisdiction over the state law claims.  The court also declined to impose Rule 11 sanctions on Locus and its counsel, because the circumstances weren’t exceptional.  “[T]he Court cannot conclude that Locus filed the claim upon frivolous grounds for contending that it fell within the Lanham Act’s zone of interest, as articulated in Lexmark. At most, Locus and its counsel may have sought to expand the breadth of the Lexmark holding, and Rule 11 is not designed to deter good faith efforts to extend or modify existing law.”