Lexmark may have crossed the line into false advertising when it told manufacturers of refurbished ink cartridges that it was illegal for them to use microchips designed to allow them to operate in Lexmark printers, the U.S. Supreme Court ruled today.
In a unanimous decision penned by Justice Antonin Scalia, the court ruled that Static Control could bring a Lanham Act case against Lexmark for sending letters to the chipmaker's customers saying it was illegal for them to use Static Control chips in refurbished ink cartridges. Static Control reverse-engineered chips that Lexmark had developed to try and prevent competitors from undercutting it in the lucrative printer ink business.
The decision gives a potentially powerful weapon to free-data advocates who say companies are using laws like the Digital Millenium Copyright Act to squelch competition and even criminalize the use of technology that gets around digital rights-management software and other controls on how customers use data. Companies will have to be careful before accusing a competitor of violating patent laws or saying unauthorized technology is inferior or illegal.
The decision goes beyond that, however, wiping away a judicially created doctrine known as "prudential standing" that had allowed courts to dismiss lawsuits simply because they didn't think the plaintiff had the right to sue. The ruling doesn't affect constitutional standing -- the requirement that federal courts only hear cases brought by parties who have suffered an actual injury -- but it broadens the number of companies that can sue over alleged violations of federal statutes. Various federal circuits, struggling to interpret some ambiguous Supreme Court decisions, had employed different tests to determine whether companies including firms that weren't direct competitors could sue for false advertising.
"It’s a landmark case on the issue of standing," said Miller Baker, a partner with McDermott, Will & Emery who represented Static Control. "It clears up a lot of confusion about the law that can be traced to prior Supreme Court decisions."
Lexmark initially sued Static Control for providing chips it said facilitated patent infringement. The printer manufacturer had a "Prebate" program that encouraged customers to return their cartridges to the company for a rebate -- backed up by a shrinkwrap license agreement they supposedly assented to when they opened the box -- and used the microchip to try and ensure that customers couldn't install competing cartridges in their machines.
Static Control supplied toner, replacement parts as well as chips that mimicked the Lexmark chip to companies that refilled and refurbished Lexmark cartridges. It countersued Lexmark on a variety of claims including patent abuse and false advertising. A trial court dismissed Static Control's counterclaims but the Sixth Circuit Court of Appeals reinstated the Lanham Act claims, saying that even though the company wasn't a direct competitor of Lexmark it might have suffered harm.
The Supreme Court agreed, saying Static Control deserves a shot at convincing a jury it suffered business harm because of Lexmark's statements.
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, without the need for any “speculative . . . proceedings” or “intricate, uncertain inquiries.
The decision was assigned to Scalia because of his strong interests in standing and statutory interpretation, Baker said. In it, the conservative justice was able to sweep away the somewhat squishy doctrine of prudential standing and replace it with a directive for judges to look strictly at the text of a federal statute to determine whether a plaintiff lies within the "zone of interests" Congress intended:
Whether a plaintiff comes within “the ‘zone of interests’” 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.
What Scalia said, in a nutshell, is "it's not legitimate for courts to not hear a case because they don't feel like it," said Mark McKenna, a professor at Notre Dame Law School. He studied the practical effect of prudential standing rules on false-advertising cases, along with Deborah Gerhardt and Kevin McGuire of the University of North Carolina and found significant disparities in who was allowed to sue.
This decision "basically forces all of the circuits to redo their tests," which is rare for the Supreme Court, since it more often picks one circuit's test and orders the rest to follow it.
The Lanham Act is a powerful tool for policing anticompetitive behavior and often appears intertwined with antitrust law. The prudential standing rule the court discarded today was adapted from similar tests used to determine who can file an antitrust suit. Today's decision doesn't affect well-settled law covering who has standing to sue over environmental regulations, say, or government wiretapping, and will have its biggest impact on business litigation.
