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October Term, 2013

March 25, 2014

Today the Supreme Court issued two decisions, described below, of interest to the business community.

Lanham Act—Standing to Bring False-Advertising Claim

Lexmark International, Inc. v. Static Control Components, Inc., No. 12-873 (previously discussed in the June 3, 2013, Docket Report)

The Lanham Act creates a federal private cause of action for “any person who believes that he or she is or is likely to be damaged” by false advertising or unfair competition. 15 U.S.C. § 1125(a)(1)(B). Today, in Lexmark International, Inc. v. Static Control Components, Inc., No. 12-873, the Supreme Court held that, to bring a claim under the Lanham Act, a party must allege that (1) injury to a commercial interest in sales or business reputation (2) proximately caused by the defendant’s prohibited conduct. In doing so, the Court largely replaced familiar principles of “prudential” standing with a statute-centered analysis of the right to sue under a particular federal statute.

Static Control produces a replacement microchip that allows Lexmark’s competitors to refurbish used laser-printer toner cartridges for use in Lexmark’s printers. Lexmark sued Static Control, alleging that its microchip infringed on Lexmark’s rights under the Copyright Act. Static Control countersued under the Lanham Act, alleging that Lexmark falsely told both toner-cartridge refurbishers (i.e., Lexmark’s competitors) and the consumers who buy the cartridges that the use of Static Control’s microchip was illegal. The district court concluded that Static Control lacked “prudential standing” to pursue its Lanham Act claims, applying the five-factor test for antitrust standing set forth in Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519 (1983). The Sixth Circuit vacated and remanded, instructing the district court to apply the Second Circuit’s “reasonable interest” test for standing under the Lanham Act.

In a unanimous opinion written by Justice Scalia, the Supreme Court affirmed the Sixth Circuit’s judgment but established a different analysis that intentionally avoided using the term “standing” outside the context of Article III. See slip op. 9 n.4. Clarifying the scope and application of prior precedent, the Court held that the question before it was not one of “prudential standing” but whether Static Control had a cause of action under § 1125(a) “apply[ing] traditional principles of statutory interpretation.” Slip op. 9. Under those principles, a plaintiff must allege an injury that comes within the zone of interests protected by the statute and was proximately caused by the alleged statutory violation. Slip. op. 10, 13. The Court identified the interests protected by the Lanham Act as lost sales and damage to business reputation. Slip op. 12–13. It also determined that a party like Static Control can demonstrate proximate causation—even if it is not a direct competitor of the defendant—if the defendant’s prohibited conduct will have a direct effect on the party’s sales or business reputation. Slip op. 14–15, 20–21. The Court rejected the “reasonable interest” test adopted by the Second and Sixth Circuits; the five-factor test applied by the Third, Fifth, Eighth, and Eleventh Circuits; and the categorical approach employed by the Seventh, Ninth, and Tenth Circuits (which had allowed only actual competitors to sue). Slip. op. 15–18.

Today’s decision is of interest to the business community because it dispels confusion over who may bring a false-advertising action under the Lanham Act, expanding the pool of potential plaintiffs in some circuits and contracting it in others. The Court’s reasoning may also clarify standing challenges under other federal statutes by discouraging recourse to “prudential” considerations and instead focusing the analysis on the statutory language creating the cause of action and the question of proximate causation.

Any questions about the case should be directed to Donald M. Falk (1 650 331 2030) in our Palo Alto office.

Federal Insurance Contributions Act—Tax Consequences of Severance Payments Upon Involuntary Termination

United States v. Quality Stores, Inc., No. 12-1408 (previously discussed in the October 1, 2013, Docket Report)

The Federal Insurance Contributions Act (FICA) imposes taxes on both employers and employees to fund Social Security and Medicare benefits. The taxes are levied on “wages.” 26 U.S.C. §§ 3101(a) and (b), 3111(a) and (b). With certain exceptions, “wages” are defined as “all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash.” Id. § 3121(a).

In United States v. Quality Stores, Inc., No. 12-1408, the Supreme Court held in an 8-0 opinion issued today that severance payments are “wages” for purposes of FICA. The definitional question arose because the withholding provisions of the Internal Revenue Code, which define “wages” in a fashion quite similar to FICA, contain a provision instructing that severance payments are to be treated “as if” they are wages. 26 U.S.C. § 3402(o)(1)(A). Furthermore, the heading of § 3402(o) refers to payments “other than wages.” The Sixth Circuit agreed with respondent that § 3402(o) suggests that severance payments are not “wages” for withholding purposes, and therefore they are not “wages” under FICA’s nearly identical definition.

In reversing, the Supreme Court held that, “as a matter of plain meaning, severance payments made to terminated employees” “are ‘remuneration for employment,’” just “like many other benefits employers offer to employees above and beyond salary payments,” and therefore are wages. Slip op. 4–5. The Court observed that this interpretation is supported by the fact that FICA at one point contained an explicit exception for severance payments, but that this exception had been repealed.

The Court rejected the Sixth Circuit’s conclusion that § 3402(o) brought severance payments outside the definition of “wages.” First, the Court concluded that severance payments fit within the definition of wages for withholding purposes just as they do for FICA, and that “§ 3402(o)’s command that all severance payments be treated ‘as if’ they were wages … is in all respects consistent with the proposition that at least some severance payments are wages.” Slip op. 8. The Court then explained that Congress’s choice of language in § 3402(o) was the result of the special context in which “supplemental unemployment compensation benefits” arose in the area of organized labor, and had nothing to do with any desire on Congress’s part to treat severance payments differently from other remuneration.

Any questions about this case should be directed to Thomas C. Durham (+1 312 701 7216) or Michele L. Odorizzi (+1 312 701 7309 ) in our Chicago office.

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