Supreme Court to Consider Lanham Act Standing
What factors should determine standing to sue for false advertising under the Lanham Act?
The U.S. Supreme Court has agreed to answer that question in a case from the 6th U.S. Circuit Court of Appeals involving a suit between Static Control Components Inc. (a maker of microchips for toner cartridges) and Lexmark, a laser printer manufacturer.
To impede third parties called “remanufacturers” from acquiring used Lexmark toner cartridges and refilling them with ink to resell at a lower cost, Lexmark added a patented microchip that disabled its cartridges when they ran out of toner. Static Control responded by creating a microchip to override Lexmark’s chip, which would allow a remanufacturer to refill and resell the cartridge. Lexmark then filed a copyright infringement suit against Static Control for violations relating to a source code. Static Control counterclaimed under federal and state antitrust and false advertising laws that Lexmark unlawfully excluded aftermarket competition, reduced competition, and increased prices, and that Lexmark falsely told remanufacturers that Static Control had infringed upon Lexmark’s patents.
A federal court judge dismissed the Static Control’s claim, holding that Static Control lacked standing to bring a claim under the Act. The 6th Circuit reversed, broadening the split among the federal appellate courts, which use different frameworks to determine standing pursuant to the Lanham Act.
The panel looked to its sister circuits for guidance and found three different standards. The 3rd, 5th, 8th, and 11th Circuits reference antitrust standing when considering the issue. Another group of courts – the 7th, 9th, and 10th Circuits – permits standing under the Act “only by an actual competitor making an unfair competition claim.”
The 2nd Circuit has adopted what it calls the “reasonable interest” approach, “finding that the claimant has standing if the claimant can demonstrate (1) a reasonable interest to be protected against the alleged false advertising and (2) a reasonable basis for believing that the interest is likely to be damaged by the alleged false advertising.”
The 6th Circuit broadened the three-way split among the jurisdictions by following the 2nd Circuit’s approach. “Static Control alleged a cognizable interest in its business reputation and sales to remanufacturers and sufficiently alleged that these interests were harmed by Lexmark’s statements to the remanufacturers that Static Control was engaging in illegal conduct. This is sufficient to state a claim under the Lanham Act.”
The Justices will hear oral argument on the case next term.
To read the 6th Circuit’s decision in Static Control v. Lexmark International, click here.
To read Lexmark’s cert. petition to the U.S. Supreme Court, click here.
To read Static Control’s response brief in opposition to cert., click here.
Why it matters: The case presents the first opportunity for the Justices to weigh in on a false advertising Lanham Act suit and settle a three-way split among the federal appellate courts about who can bring claims under the Act. The decision regarding which of the three tests the Court will select – the multifactor analysis of antitrust law, the direct competitor standard, or the “reasonable interest” approach – will have a significant impact on potential plaintiffs. A reversal of the 6th Circuit’s decision could narrow standing and limit some parties from bringing suit under the Lanham Act.
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FTC Sues Over “Assistance and Facilitation” of TSR Violations
The failure of Independent Resources Network Corp., a payment processor, to investigate “alarmingly high” chargeback rates led to a complaint filed by the Federal Trade Commission and allegations that it “assist[ed] and facilitat[ed]” telemarketing credit card fraud in violation of the Telemarketing Sales Rule.
According to the agency, Independent Resources Network Corp. knew or consciously avoided knowing that it was providing a helping hand to a scam operated by Innovative Wealth Builders, Inc.
The average chargeback rate in the United States is well below one percent, according to the FTC, but IWB’s chargeback rate averaged above 20 percent for several years – and even exceeded 40 percent on multiple months.
“Despite knowing, or consciously avoiding knowing, the illegal nature of the IWB business, Independent processed millions of dollars of credit card transactions for IWB, thereby earning considerable fees for itself while allowing IWB to harm thousands of consumers who purchased the IWB bogus credit card interest rate reduction services,” the FTC alleged. The charges against Independent were filed as an amended complaint by the agency, which originally filed suit against IWB in January 2013.
The underlying telemarketing scheme involved cold calls made by IWB offering to reduce the interest rates on consumers’ credit cards and pay off their debts more quickly, all for a “one-time lifetime fee” ranging from $500 to $2,000. IWB did not make good on its promises, the FTC said.
In addition to the eyebrow-raising chargeback rates, the agency said Independent was aware that IWB had an “F” rating with the Better Business Bureau of West Florida when it began processing the company’s payments. According to the complaint, Independent received thousands of copies of chargeback disputes from consumers, stating that “IWB had not reduced their credit interest rates, saved them money on their credit card debts, or helped them pay off their debts faster,” and made unauthorized charges to their credit cards, according to the complaint.
Independent also received multiple fraud alerts from Discover card regarding the company, was alerted to the fact that MasterCard placed IWB in the highest fraud category, and was made aware of an investigation by the Florida Attorney General’s Office into IWB’s practices.
To read the FTC’s complaint against Independent, click here.
Why it matters: The FTC’s complaint provides a warning that the agency will take action against companies it believes assist and facilitate alleged wrongdoing. In this suit, the “alarmingly high” chargeback rate should have tipped off the defendant that its client was engaged in illegal activity, the agency argued. Payment processors or others along the chain of commerce should be careful to watch for signs of potential scams. As the agency noted in a press release, the suit is part of an “ongoing crackdown” on those “that turn a blind eye to fraud.”
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Drink Up: False Advertising Class Action Against 5-Hour Energy to Continue
The maker of the 5-Hour Energy drink must continue to defend a consumer class action alleging false advertising after a federal court judge declined to dismiss the suit.
Florida resident Michael Feiner claimed he purchased the beverage at a 7-11 based on the promise that he would receive five straight hours of energy with “no crash later.” But Feiner said his 30-minute high resulted in a crash complete with dizziness, nausea, and headache, and he filed a class action suit under Florida’s Deceptive and Unfair Trade Practices Act.
According to his complaint, 5-Hour Energy’s superiority claims (“coffee and soda help a little, but how long do they last before you’re back for more?”) also failed because the drink does not last longer, perform better, or wear off without a crash, as promised. Further, he claimed that the company had knowledge of studies confirming that the dietary supplement does not outperform competing products.
Innovation Ventures, also known as Living Essentials, moved to dismiss the suit. The bottles and displays are not misleading when taken as a whole, the defendant argued, because of additional language on the bottles and displays clarifying that “no crash means no sugar crash.”
U.S. District Court Judge William P. Dimitrouleas disagreed. “Whether the representations on the bottles and displays when taken as a whole are, in fact, misleading is a question to be resolved at later stages of this litigation,” he wrote.
At the earliest stage of the case, Feiner satisfied the pleading requirements by identifying claims that he contended are deceptive and stating that he would not have purchased 5-Hour Energy but for his reliance on the allegedly deceptive representations, and that he was damaged in the amount of the difference between the premium price he paid for the drink and the price he would have paid had he known that the product was not accurately labeled.
Therefore, the court declined to dismiss the suit.
To read the order in Feiner v. Innovation Ventures, click here.
Why it matters: The Florida false advertising suit against 5-Hour Energy is only one of several putative class actions making similar claims against Innovation Ventures. Just days after Judge Dimitrouleas denied the defendant’s motion to dismiss, the U.S. Judicial Panel on Multidistrict Litigation consolidated nine false advertising suits against the dietary supplement maker in the central district of California. In addition to the Feiner case, the MDL will include suits from Alabama, California, Illinois, Louisiana, Missouri, and Ohio. “The Central District of California is a convenient and accessible forum with the resources to devote to this litigation, and centralization before [U.S. District Court Judge Philip Gutierrez] permits the panel to assign the litigation to an experienced judge with some familiarity with the issues in this litigation,” the panel said. Six other cases not included in the original consolidation motion may also be added to the MDL, the panel noted.
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Nutrition Labels for Alcohol?
Alcoholic beverages may soon feature nutrition labels similar to those on food packaging. The Alcohol and Tobacco Tax and Trade Bureau recently announced that beer, wine, and spirits companies may use labels that inform consumers about items such as serving size, servings per container, calories, carbohydrates, protein, and fat per serving.
“We are making this change to allow industry members to provide truthful, accurate, and specific information to consumers about the nutrient content of their products on a per serving basis,” according to TTB Ruling 2013-2.
The statements may also include information about the alcohol content of the product as a percentage of alcohol by volume, as well as a statement of the fluid ounces of pure ethyl alcohol per serving.
The Bureau’s announcement about voluntary statements appears to be the first step toward a final rule that will mandate such information. In 2007, the TTB issued proposed rules that would have required such statements, but they are still under consideration.
In the interim, if alcohol beverage companies choose to include serving facts, they must be “truthful, accurate, and specific” and numerical statements of alcohol content must be truthful and “verifiable,” the TTB emphasized. If industry members conform to the samples in the TTB’s ruling, they need not apply for new label approval, the Bureau said.
Some alcohol beverage companies support the idea of the labels. Other industry members have expressed less enthusiasm. A spokesperson for the Wine Institute indicated support for the labels but said that the organization knew of no wine companies planning to make use of them, as “such information is not a key factor in consumer purchase decisions about wine.”
Why it matters: The inclusion of serving facts and numerical statements of alcohol content is voluntary – for now. The Bureau could make the labels mandatory if it finalizes the rules proposed in 2007. In a press release about the ruling, it noted that the “TTB is providing this interim guidance on the use of optional Serving Facts statements on labels and in advertisements pending the completion of rulemaking on this matter.” In addition, the Bureau cautioned that “we will take appropriate action with regard to labeling or advertising representations that mislead the consumer about the nutritional value or health effects of alcohol beverages.”
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Noted and Quoted . . . Linda Goldstein Talks to AdAge on Potential Impact of PRISM Program
On June 10, 2013, Linda Goldstein, Chair of Manatt’s Advertising, Marketing & Media Division, discussed the potential impact the Prism data surveillance scandal could have on consumer attitudes and whether it may provide impetus for additional privacy legislation.
In an article published by AdAge, “Prism Could be a Watershed Moment for Online Privacy Legislation,” Goldstein said: “The privacy legislation has been a bit on the back burner, and I think this may help focus more attention on it and perhaps put it back on the front burner. This could have a significant impact on consumer attitudes which ultimately could impact consumers’ willingness to share information with brands.”
To read the full article, click here.
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