SPECIAL FOCUS: Supreme Court Adopts Broad Standing Test for False Advertising Plaintiffs
Author: Thomas Morrison*
On March 25th, the Supreme Court issued its long-awaited opinion regarding the test for standing in false advertising cases under Section 43(a)(1)(B) of the Lanham Act.1 Strangely enough, this was the Court’s first opinion in a Lanham Act false advertising case, perhaps because false advertising litigation only began to emerge in the 1980s, even though the statute itself is more than a half-century old. In any event, the wait was well worth it as the Court scrapped a competing jumble of standing tests that had been adopted by the circuit courts in favor of a broad, statute-based test that confers standing on parties beyond those who are direct competitors.
The Lexmark Case
Lexmark manufactures and sells laser printers as well as toner cartridges for those printers. While Lexmark designed its printers to work only with its own cartridges, a significant market grew up around so-called remanufacturers, who obtained used Lexmark cartridges, refurbished them, and resold them in competition with Lexmark’s cartridges. To combat this practice, Lexmark introduced a “Prebate” program, whereby its customers obtained discounts on Lexmark cartridges if they agreed to return the used cartridges to Lexmark. To enforce its Prebate agreement, Lexmark developed a microchip that disabled the cartridge after it ran out of toner.
Static Control was neither a cartridge manufacturer nor a remanufacturer. Rather, it made components that allowed manufacturers to remake Lexmark cartridges. To combat Lexmark’s microchip, Static Control developed its own microchip that mimicked the microchip in Lexmark’s Prebate cartridges. Thus remanufacturers who purchased Static Control’s microchip were able to refurbish and resell used Prebate cartridges. As Justice Scalia observed, “Lexmark did not take kindly to that development.”2
Lexmark sued Static Control for violations of Copyright Act and the Digital Millennium Copyright Act. Static Control counterclaimed for false advertising under the Lanham Act. Lexmark’s alleged false advertising was two-fold: (1) advising its customers that the Prebate terms were legally binding; and (2) sending letters to remanufacturers‒Static Control’s customers‒advising them that it was illegal to use Static Control’s products to refurbish Lexmark’s Prebate cartridges.3
The District Court granted Lexmark’s motion to dismiss the Lanham Act claim on the ground that Static Control lacked “prudential standing” because the real targets of Lexmark’s false advertising, and the parties most directly injured, were the remanufacturers.4 The Sixth Circuit reversed, and adopted the Second Circuit’s false advertising standing test, which essentially asks whether the plaintiff has a “reasonable [commercial] interest” in being protected from the false advertising in question. Under that standard, standing was clearly established.5
The Prior Standing Tests
The Supreme Court’s decision to accept certiorari was a welcome one, as no less than three vastly different tests for standing had been adopted.
(1) The “Direct Competitor” Test
Three circuits ‒ the Seventh,6 Ninth7 and Tenth8 ‒ conferred standing only on direct competitors. As the Supreme Court stated, while this standard provides a clear bright-line rule, it “categorically” prohibits suits by noncompetitors and “distort[s] the statutory language.”9 This approach was clearly at odds with the broad language of Section 43(a)(1), which permits lawsuits “by any person who believes he or she is or is likely to be damaged” by a violation of the statute.
(2) The “Multifactor” Test
Four circuits ‒ the Third,10 Fifth,11 Eighth12 and Eleventh13 Circuits ‒ applied a multifactor balancing test taken from the Supreme Court’s decision in an antitrust case.14 Among the five factors taken into account under this approach, the most important are (i) whether plaintiff’s alleged injury is the type the Lanham Act was intended to protect; (ii) the directness or indirectness of the alleged injury; and (iii) the proximity of the plaintiff to the allegedly wrongful conduct. The Supreme Court stated that this approach was a “commendable effort to give content to an otherwise nebulous inquiry,” but concluded that the approach “can yield unpredictable and at times arbitrary results.”15
(3) The “Reasonable Interest” Test
The Second Circuit ‒ which is the birthplace of much of the body of law relating to false advertising ‒ had long held that false advertising standing is available to any commercial plaintiff who can show that it has “a reasonable interest to be protected against the alleged false advertising.”16 The Fourth Circuit also adopted this test, although in dicta.17 The Sixth Circuit adopted this test in its Lexmark decision, holding that Static Control had standing under § 43(a) because its reputation and sales were harmed by Lexmark’s allegedly false statements to remanufacturers.18 The Supreme Court criticized this test because “it lends itself to widely divergent application” and can be read as requiring “only the bare minimum of Article III [constitutional] standing.”19
The Supreme Court’s Decision
The Court presented an extended, and somewhat academic, discussion of the doctrines of “constitutional standing” (the “case or controversy” requirement of Article III of the Constitution) and “prudential standing” (under which courts may decline to hear cases even though the “case or controversy” requirement is satisfied). Lexmark had argued that, under a “prudential standing” analysis, Static Control lacked standing to pursue a false advertising claim. But the Supreme Court ruled that the “prudential standing” analysis is inapplicable to cases where, as with the Lanham Act, the statute itself identifies those who may sue. Thus the only question in the case was whether the cause of action created by Section 1125(a) of the Lanham Act extended to Static Control.20
Accordingly, the Court had to decide whether Static Control fell within the class of persons covered by the broad language of Section 43(a)(1)‒which creates a cause of action for “any person who believes that he or she is likely to be damaged” by the defendant’s false advertising. To address that question, the Court stated that Static Control must satisfy two criteria: (1) the “zone of interests” test and (2) the “proximate cause” test.
(1) Zone of Interests
This element requires only that the plaintiff’s interests “fall within the zone of interests protected by the law invoked.”21 As the Court noted, this test is not “especially demanding.”22 The Court examined the legislative history of the Lanham Act and concluded that Congress intended to protect “persons engaged in commerce” against unfair competition.23 While this clearly excludes consumers from invoking the Lanham Act (a unanimous conclusion of every circuit court that has considered the question), the Court stated that it would also exclude a commercial entity whose complaint was that it was misled into purchasing shoddy goods. But otherwise, any plaintiff who can allege injury to “a commercial interest in reputation or sales” satisfies this test.24
(2) Proximate Cause
This element requires that the plaintiff’s injuries be “proximately caused” by the violation of the statute, i.e., whether the alleged injury “has a sufficiently close connection to the conduct the statute prohibits.”25 This 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.
26
Applying these two criteria to Static Control’s complaint, the Court first found that Static Control readily satisfied the “zone of interests” requirement, as it was an entity engaged in commerce whose business was allegedly damaged by Lexmark’s advertising.27 As to the “proximate cause” requirement, the Court recognized that this was not a “classic” false advertising case where the parties were direct competitors. However:
[A]lthough diversion of sales to a direct competitor may be the paradigmatic direct injury from false advertising, it is not the only type of injury cognizable under §1125(a).
28
Here, Static Control satisfied the “proximate cause” test for two reasons. First, its reputation was directly harmed by Lexmark’s claim that Static Control’s business was illegal:
[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.
29
In addition, because its microchips were sold for the sole purpose of being used by remanufacturers, who used them to refurbish Lexmark cartridges, if Lexmark’s false advertising diminished the remanufacturers’ business, it “necessarily” injured Static Control as well.30 While this injury required an “intervening link of injury to the remanufacturers,” Static Control’s claim was that the remanufacturers’ loss of sales of refurbished cartridges was accompanied by a corresponding decline in their purchase of microchips from Static Control.31
Why it matters: The Court ended its opinion by cautioning that it was merely holding that Static Control had “alleged an adequate basis to proceed” but that, to obtain relief, it would have to present “evidence of injury proximately caused by Lexmark’s alleged misrepresentations.”32 Despite this caveat, the Court’s decision serves as a ringing endorsement of the broad test for standing in false advertising cases exemplified by the Second Circuit’s “reasonable interest” standard.
The attempt to limit Lanham Act standing to direct competitors was always a cramped construction of the broad language of Section 43(a). Now, the only requirement is that the plaintiff be able to articulate (and prove) a basis on which it can show that the false advertising in question has resulted in some discernible injury to its reputation or sales. This is clearly the appropriate result, and should ensure that commercial plaintiffs who are impacted in any meaningful way by false advertising can seek redress under the Lanham Act.
* Mr. Morrison has litigated scores of false advertising cases over the past 35 years. He represented the plaintiff in
Ortho v.
Cosprophar, infra, the leading Second Circuit case on standing.
1Lexmark Int’l, Inc.v. Static Control Components, Inc., 2014 U.S. LEXIS 2214 (March 25, 2014).
2 2014 U.S. LEXIS 2214 at *7.
6L.S. Heath & Son, Inc. v.
AT&T Information Systems, Inc., 9 F.3d 561, 575 (7th Cir. 1995).
7Waits v.
Frito-Lay, Inc., 978 F.2d 1093, 1108-09 (9th Cir. 1992).
8Stanfield v.
Osborne Industries, Inc., 52 F.3d 867, 873 (10th Cir. 1995).
9 2014 U.S. LEXIS 2214 at *32.
10Conte Bros. Automotive, Inc. v.
Quaker State-Slick 50, Inc., 165 F.3d 221, 233-34 (3d Cir. 1998).
11Procter & Gamble Co. v.
Amway Corp., 242 F.3d 539, 562-63 (5th Cir. 2001).
12Gilbert/Robinson, Inc. v.
Carrie Beverage-Missouri, Inc., 989 F.2d 985, 990-91 (8th Cir. 1993).
13Phoenix of Broward, Inc. v.
McDonald’s Corp., 489 F.3d 1156, 1162-64 (11th Cir. 2007).
14Associated General Contractors v.
Carpenters, 459 U.S. 519 (1983).
15 2014 U.S. LEXIS 2214 at *31, 32.
16Ortho Pharmaceutical Corp. v.
Cosprophar, Inc., 32 F.3d 690, 694 (2d Cir. 1994).
17Mylan Labs, Inc. v.
Maktari, 7 F.3d 1130, 1139 (4th Cir. 1993).
18Lexmark v.
Static Control, 697 F.3d 387, 411 (6th Cir. 2012).
19 2014 U.S. LEXIS 2214 at *34.
20 2014 U.S. LEXIS 2214 at *20. This inquiry is sometimes referred to as “statutory standing.”
Id. at *19.
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Judge Judy Now the Plaintiff in a False Advertising Suit
Judge Judy is involved in a new lawsuit – and this time, she’s the plaintiff.
Calling it the first complaint she has filed on her own behalf in her 50-year legal career, TV judge Judith Sheindlin said a Connecticut-based law firm used clips of her show in local television ads and Internet videos without her permission. Sheindlin alleged misappropriation of her likeness and violation of her right of publicity under state law, as well as a federal Lanham Act claim for false endorsement.
The ads aired on local television stations in Connecticut and Massachusetts during the broadcast of the “Judge Judy” show and alternated images of Defendant John Haymond, a lawyer, and his daughters with clips from the show, “edited to imply that Sheindlin actually is interacting with Mr. Haymond and his daughters, though in reality she has never met him,” according to the complaint.
Sheindlin contacted Haymond and his firm in April 2013 to demand that they stop using the unauthorized advertisements. The defendants removed the ads from the firm’s Web site and YouTube channel but the television commercials continued as recently as March 6, 2014 the suit claims.
Haymond’s actions are “particularly egregious” in light of his obligations under the Connecticut Rules of Professional Conduct, Sheindlin’s complaint added. Rules 7.1 and 7.2 provide that lawyers “shall not make a false or misleading communication,” putting Haymond potentially on the hook for ethical violations.
In addition to injunctive relief, Sheindlin seeks disgorgement as well as actual and punitive damages. In a statement she said any monies recovered in the suit would be donated to a charity that provides college scholarships to women.
To read the complaint in Sheindlin v. The Haymond Law Firm, click here.
Why it matters: The claims of false endorsement and violation of publicity rights are typical, but the parties in the case make it unusual. Sheindlin noted in her complaint that the use of her image was particularly galling as she “has refrained from engaging in the commercial endorsement of the products or services of others” during her career.
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Fruit or Fruit Flavors? NAD Recommends Changes to Ads
Fruit or fruit flavors? To avoid misleading consumers, Hershey’s needs to improve its advertising to make clear that its Brookside Dark Chocolate line is made with fruit flavors, not actual pieces of fruit, the National Advertising Division recently recommended.
Competitor Mars, Inc. challenged Hershey’s ads, arguing that the layout and font sizes on packaging for the chocolate line misled consumers into believing they were eating real fruit, not pieces of fruit juice wrapped in chocolate. For example, the packaging features the name “Brookside Dark Chocolate Goji with Raspberry Flavors” but the word “Goji” appears much larger than the “Raspberry Flavors.” Mars contended this layout communicated to consumers that the Goji is real fruit while the raspberry is added fruit flavoring. Imagery like pictures of fresh fruit only amplified the incorrect message, Mars argued.
A television commercial exacerbated the message with a farm locale and repeated beauty shots of fresh fruit.
Hershey contended that consumers were not misled by either the commercial or the product packaging. The product name itself references fruit “flavors” and text on the bottom of the package states, “soft fruity flavored centers covered in smooth dark chocolate.” The commercial similarly used the term “flavored” and the country setting for the ad was selected to reinforce the “Brookside” name and logo, which includes a tree and stream, the advertiser said.
Lacking consumer perception evidence, the NAD stepped into the shoes of the consumer and found that while the product name did not inherently convey a message that the chocolate line contained real fruit, additional messages were conveyed by the layout and font sizes.
“Consumers could reasonably understand the product to have three distinct parts: dark chocolate, a real piece of the highlighted fruit (Acai, Goji, or Pomegranate), and, separately, other fruit flavors,” the NAD wrote. “A consumer could reasonably attach the word ‘flavors’ to the fruit directly next to it (blueberry, raspberry, or fruit), while not reading the word ‘flavors’ to apply to the fruit in substantially larger text on a separate line.”
Moreover, the NAD said the “overwhelming imagery of fresh fruit and chefs gathering and preparing fresh fruit” left consumers with a reasonable takeaway that the product contained actual fruit. Even with an oral qualified claim, the NAD found that “the visual cues presented in the advertisement are particularly striking, and serve to draw viewers’ attention away from the voiceover’s important message that the products are only ‘flavored’ with fruit juices, and rather convey an inaccurate message that the products contain actual fruit.”
The self-regulatory body recommended that Hershey’s modify Brookside packaging “to present the product name in a manner that makes it clear that all of the identified fruits are in fact ‘flavors’ and not actual pieces of fruit in the product.”
To read the NAD’s press release about the case, click here.
Why it matters: As the NAD noted, advertisers are responsible for all reasonable interpretations of their advertising, including messages they may not have intended to convey. For Hershey’s, this included a font size and layout of the product name on the packaging conveyed the takeaway that actual fruit was included, while the term “flavors” was de-emphasized. The NAD concluded that Hershey’s commercial similarly misled consumers with its “overwhelming imagery” of fruit.
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Settlements in 2nd Circuit’s Transformative Use Case, Dispute Between Beastie Boys and GoldieBlox
Two high-profile infringement cases settled last month, resolving disputes between a toy company and a rap group as well as ending litigation over an artist’s use of a photographer’s images.
The first case began with a viral online video. A toy company featured a parody of the Beastie Boys’ 1987 hit “Girls” in its GoldieBlox’s ad for its new line of engineering toys for girls. GoldieBlox struck first, arguing in a declaratory judgment action that the updated version of the song constituted fair use. The rap group responded with copyright and trademark infringement counterclaims, noting that in more than 20 years, it had never licensed its works for advertisements.
After much public back-and-forth, the parties reached a truce.
GoldieBlox agreed to issue a public apology to the Beastie Boys and posted the following on the company’s Web site. “As engineers and builders of intellectual property, we understand an artist’s desire to have his or her work treated with respect. We should have reached out to the band before using their music in the video.”
In addition, the toy company will make a payment based on a percentage of revenues “to one or more charities selected by the Beastie Boys that support science, technology, engineering and mathematics education for girls,” according to a statement from the rap group.
In the second case, a long-running dispute with ramifications for the boundaries of “transformative use” also came to an end. Photographer Patrick Cariou published a book of landscapes and classical portraits called Yes Rasta after spending six years living with Rastafarians in Jamaica. In a series of collages and paintings called Canal Zone, well known “appropriation artist” Richard Prince made use of the photographs. For example, in one collage, Prince tore 35 photographs out of the book and painted “lozenges” over the subjects’ facial features. Other pieces used enlarged or tinted photographs.
Cariou sued for copyright infringement and Prince raised a defense of fair use. Although a federal district court disagreed, the Second U.S. Circuit Court of Appeals ruled that Prince’s use of the photographs was transformative in the majority of his pieces and therefore constituted fair use.
However, the federal appellate panel remanded the case for a determination of five images the court said were so minimally altered they might not be considered fair use.
Facing continued litigation, the parties agreed to a settlement, the terms of which are undisclosed.
Why it matters: Both of the cases played out in the public eye, providing some lessons for advertisers. In the case of GoldieBlox, be careful what you wish for. The upstart company had the good fortune to create a viral ad, but its failure to get the proper permissions cast a shadow on its big debut. And the Cariou v. Prince case resulted in new case law examining the issue of transformative use.
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Notorious Infomercial Star Sentenced to 10 Years in Prison
Despite his promise never to lie in an infomercial again, a federal court judge sentenced Kevin Trudeau to 10 years in prison for criminal contempt after violating a consent decree with the Federal Trade Commission.
A federal jury found Trudeau guilty late last year of violating the 2004 decree in which he promised not to directly or indirectly produce and broadcast any deceptive infomercials that misrepresented the contents of any book. Trudeau then launched a new round of infomercials in 2006 to support a diet book, The Weight Loss Cure “They” Don’t Want You to Know About.
According to the FTC, Trudeau claimed he had discovered a secret and permanent weight loss plan that was suppressed by food companies and the government in an effort to keep people fat. In three half-hour infomercials, Trudeau set forth his plan, which he said did not require any exercise or dieting and allowed users to eat as much of whatever food they wanted.
But the government said Trudeau’s program was really a grueling regimen, limited to 500 calories per day and the use of prescription hormones. Jurors deliberated for less than one hour before finding the 50-year-old Trudeau guilty.
Seeking a two-year sentence, Trudeau told the sentencing judge that he “had a significant reawakening” due to his time spent in prayer and meditation while locked up since November. “If I ever write a book again, if I ever do another infomercial again, I promise no embellishment, no puffery, and absolutely no lies,” he told the court.
U.S. District Court Judge Ronald Guzman was unmoved by Trudeau’s apologies and promises and imposed a decade of prison time. Calling Trudeau “deceitful to the very core,” Judge Guzman said “he has steadfastly attempted to cheat others for his own gain” for years, adding that Trudeau has treated federal court orders “as if they were mere suggestions…or at most impediments to be sidestepped, outmaneuvered or just ignored.”
Why it matters: Trudeau’s legal woes will not end soon. In addition to his attorney telling CNN that Trudeau plans to appeal the sentence, he faces an ongoing civil action where the FTC is seeking recovery of a $37.6 million fine, which was levied in 2009.
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D.C. Court Rejects Zip Code Consumer Protection Suit, Creates Split
In a major win for retailers, a Washington, D.C., federal court judge dismissed a putative class action suit alleging that the requests of customers’ ZIP codes in connection with credit card purchases violated D.C. consumer protection statutes.
The decision allows businesses in the nation’s capital to breathe a sigh of relief. Courts in California and Massachusetts have reached the opposite conclusion, resulting in a wave of consumer class action suits against retailers in those states.
Click here to read the full story in Manatt’s Financial Services Law Newsletter.
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Noted and Quoted . . . AdAge Turns to Linda Goldstein to Unpack Supreme Court Decision Involving Standing Under Lanham Act
On March 28, 2014, AdvertisingAge published an article titled “Supreme Court Decision Could Mean More Ad Lawsuits,” for which Linda Goldstein, Chair of Manatt’s Advertising, Marketing & Media Division, weighed in on the important legal ramifications for marketers. The Court cleared up a previously murky area and ruled that a company need not be a direct competitor in order to have standing to sue under the Lanham Act.
According to Linda, “Ultimately [the decision] will lead to more lawsuits because historically there has been this question of whether use of the Lanham Act was limited to direct competitors. This really opens up the field to a wider spectrum of plaintiffs.”
To read the full article, click here.
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