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Marketers beware: A Supreme Court ruling this week could lead to more false-advertising lawsuits.
The unanimous decision issued Tuesday set new rules for which companies have the standing to sue under the decades-old Lanham Act, a federal law businesses use when suing each other over false ad claims. Previously, lower courts had interpreted the statute inconsistently, with some allowing for more lawsuits and others taking a more restrictive stance.
But what Tuesday's decision makes clear is that a company does not have to be a direct competitor to sue another company. And that, said several ad lawyers, could raise the legal risk for marketers. "Ultimately it will lead to more lawsuits because historically there has been this question of whether use of the Lanham Act was limited to direct competitors," said Linda Goldstein, a partner with Manatt, Phelps & Phillips "This really opens up the field to a wider spectrum of plaintiffs."
Also, by simply weighing in on the Lanham Act, the Supreme Court has raised the profile of the law, which by itself could spark more company vs. company lawsuits. "Sometimes people think of it as a nuclear option that you want to use sparingly," said Randy Miller, an ad lawyer at Venable LLP. But the new attention given by the court "make clear that not only is it available … but it's actually broader than people thought."
The case involved a company called Lexmark International that makes printer cartridges. The company is at odds with a company called Static Control, which makes microchips that allow for other companies to remake used Lexmark cartridges so that they can be used again. Lexmark prefers that consumers return cartridges for a "prebate" that can be used for discounts on new cartridges.
Using the Lanham Act, Static Control alleged that Lexmark " 'purposefully misleads end-users' to believe that they are legally bound by the prebate terms and are thus required to return the prebate-labeled cartridge to Lexmark after a single use," according to court documents. A district court ruled that Static lacked standing to sue, but an appellate court reversed that decision.
The Supreme Court decision allowed Static Control's claim to proceed, even though Static is not a direct competitor of Lexmark. In doing so, the court set new rules for who has standing in such cases. The opinion, authored by Justice Antonin Scalia, stated that "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."
Ms. Goldstein noted that the opinion will not alter typical "brand war" cases in which one company sues a direct competitor for false advertising. Rather, the ruling opens the door for suppliers and other interested parties to sue.
As a result, marketers crafting ad campaigns should give "a little more thought to who might sue you," said Peter Raymond, a litigation partner with Reed Smith who specializes in false advertising cases. "Sometimes for one reason or another you kind of know your direct competitor may not assert a claim," he said. "But now you have to think about more remote injuries and people who you didn't even think about who might sue you if you are not careful about what you say in your advertising."
He noted that the Lanham Act is still not available for consumers or consumer groups, which typically must rely on state consumer protection statutes.