Preview of Supreme Court Argument in Extraterritorial Trademark Case
March 14, 2023
Photo by Ian Hutchinson on Unsplash
On March 21, the U.S. Supreme Court will hear oral argument in Abitron Austria GmbH v. Hetronic International, Inc. to decide when the federal trademark statute, known as the Lanham Act, applies to the use of trademarks outside the United States. The stakes are high—not just for the parties arguing over a $90 million damages verdict, but more generally for owners of U.S. trademarks facing foreign counterfeiters and U.S. consumers who sometimes buy those products. It is also possible that the Supreme Court will use this case to provide further guidance on the presumption against extraterritoriality, which is the interpretive tool U.S. courts use to assess the geographic scope of a wide range of federal statutes.
The Road to the Supreme Court
Section 32(1)(a) of the Lanham Act imposes civil liability on anyone who “use[s] in commerce” a registered trademark when “such use is likely to cause confusion, or to cause mistake, or to deceive.” Section 43(a)(1)(A)imposes civil liability on anyone who “uses in commerce” an unregistered trademark that “is likely to cause confusion, or to cause mistake, or to deceive.” In Steele v. Bulova Watch Co. (1952), the Supreme Court held that the Lanham Act applied to a U.S. citizen who put the Bulova trademark on watches he manufactured and sold in Mexico, at least some of which filtered into the United States, damaging Bulova’s reputation. In the seventy years since, lower courts have developed several different tests based on Steele.
Respondent Hetronic International, a U.S. company headquartered in Oklahoma, makes radio remote controls for heavy construction equipment. Petitioners, five Austrian and German companies, initially served as respondent’s European distributors but later began producing remote controls of their own and selling them under respondent’s brand. Respondent sued for trademark infringement under the Lanham Act. The jury found in its favor and awarded approximately $90 million in damages based on petitioners’ worldwide sales, although only 3% of those sales were destined for the United States. The judge also entered a permanent injunction barring petitioners from using the trademarks both inside and outside the United States.
The Tenth Circuit affirmed. With respect to sales destined for the United States, the court found that they were likely to cause confusion and reputational harm in the United States. With respect to other sales, the court articulated two rationales for upholding damages: (1) that once a statute applies extraterritorially, it captures all the defendants’ conduct; and (2) that sales abroad replaced export sales that respondent would otherwise have made. The court of appeals narrowed the injunction to countries where the respondent currently sells its products.
Briefs of the Parties and the United States
Petitioners argue that the Lanham Act does not apply extraterritorially, relying on the two-step framework the Supreme Court adopted in RJR Nabisco v. European Community (2016). At step one of that framework, the Court looks for a clear indication of extraterritoriality. At step two, the Court determines whether applying the provision is domestic by determining its “focus.”
At step one, petitioners maintain that the two provisions quoted above lack any clear indication of extraterritoriality. The Act’s broad definition of commerce, as “all commerce which may lawfully be regulated by Congress,” does not overcome the presumption, they say, any more than definitions in other statutes that the Court has characterized as boilerplate.
According to petitioners, applying the Lanham extraterritorially would also contravene a territorial principle for trademark law reflected in international conventions, like the Paris Convention. Allowing private parties to sue for damages based on conduct in other countries additionally creates international friction and invites retaliation, petitioners argue, pointing to various foreign laws enacted to counter other U.S. statutes.
Petitioners distinguish Steele on the ground that, in contrast to the present case, the defendant there was a U.S. citizen who engaged in some conduct in the United States. They also point out that Steele was decided before development of the Supreme Court’s current approach to extraterritoriality, asserting that “the Court has repudiated nearly every aspect of Steele’s reasoning.” Petitioners even suggest briefly that Steele should be overruled.
Turning to step two of the RJR analysis, petitioners argue that the “focus” of these two provisions is a trademark’s “use in commerce.” They reject the U.S. government’s suggestion (discussed below) that the focus is consumer confusion, positing that a provision’s focus must be some kind of conduct rather than some kind of effect.
Finally, petitioners attack the Tenth Circuit’s “diversion of sales” rationale for upholding the entire damages award. Applying the Lanham Act to purely foreign sales, they suggest, would exceed Congress’s commerce power and violate international treaties. If the Act is to apply to uses of trademarks abroad, it can only apply to foreign sales that are likely to cause confusion in the United States, which is to say the 3% of sales destined for the United States and not the other 97%.
Respondent counters that the Lanham Act overcomes the presumption against extraterritoriality. By defining commerce broadly as “all commerce which may lawfully be regulated by Congress,” Congress intended to regulate to the limits of its power. “Put simply, if Congress can impose liability for the infringing use of a trademark, it did impose that liability in the Lanham Act.”
Respondent further argues that the Supreme Court has already held in Steele that the Act overcomes the presumption against extraterritoriality and that the Court reaffirmed that position in later cases, distinguishing the Lanham Act from other statutes. Because Congress has authority to regulate foreign conduct that has substantial effects on U.S. commerce, the Lanham Act necessarily reaches such conduct, even if it occurs abroad.
In response to petitioners’ suggestion that Steele be overruled, respondent points out that the standards for overcoming statutory stare decisis are not met here. It also notes that Congress has amended the Lanham Act several times during the last 70 years and has never limited its extraterritorial application.
Applying the Lanham Act in cases like this, respondent argues, does not conflict with any principle of “territoriality” in international trademark agreements because that principle is only about priority of ownership. Here, respondent owns the marks in each relevant country. In case of a conflict with foreign trademark rights, respondent asserts that a U.S. court could defer to foreign law on grounds of international comity, citing Hartford Fire Insurance Co. v. California.
Alternatively, respondent argues that applying the Lanham Act here would be a domestic application of the statute at step two of the RJR analysis. The “focus” of the Act, it says, is not just preventing consumer confusion but also protecting the goodwill of trademark owners. The injury to a trademark owner from lost sales or its reputational harm is felt where the owner resides, in this case in the United States.
The Solicitor General’s Brief
In her amicus brief for the United States, the Solicitor General (SG) stakes out a middle ground. The SG agrees with petitioners that the Supreme Court should apply the modern presumption against extraterritoriality and that the two Lanham Act provisions give no clear indication of extraterritoriality. But in contrast to the petitioners, the SG argues that the focus of these provisions is consumer confusion. The Lanham Act does not punish all uses in commerce, she points out, but only those uses that are likely to cause confusion or mistake.
While acknowledging respondent’s point that the Lanham Act also protects the goodwill of trademark owners, the SG notes that the place of consumer confusion is also the place that an owner is most likely to suffer harm to its reputation. The SG further argues that treating consumer confusion as the focus of these Lanham Act provisions is consistent with Steele, noting that U.S. buyers in that case brought some of the Mexican watches back to the United States. Thus, foreign use of a trademark is actionable under the Lanham Act so long as it is likely to cause confusion in the United States.
Treating consumer confusion as the focus of the Lanham Act provisions would, the SG says, be consistent with international agreements like the Paris Convention. Those agreements do reflect a principle of territoriality. But this principle contemplates that each country may remedy confusion within its own territory.
Thus, in the SG’s view, damages may be awarded based on foreign use of a trademark, but only when it is likely to cause consumer confusion in the United States. U.S. trademark holders are entitled to capitalize on the goodwill their trademarks generate, but only their goodwill in the United States: “any misappropriation of French goodwill is for French law to redress.” The SG’s position suggests that respondent is not entitled to the entire $90 million it was awarded but a much smaller amount reflecting the 3% of petitioners’ sales that were destined for the United States.
In addition to the SG’s brief, a dozen other amicus briefs were submitted. Rather than attempt to summarize all of them, I discuss only the points that seem most significant.
The Territorial Principle
Four of the amicus briefs focus on the territorial principle reflected in treaties like the Paris Convention. The European Commission’s brief argues that EU and German law provide remedies for U.S. trademark holders for infringement in Germany and that extraterritorial application of the Lanham Act risks disrupting the international regime and violating the United States’ international obligations. An amicus brief from three German law professors discusses the territoriality principle as incorporated in German law, while a brief from an English law professor discusses the principle as incorporated in UK law. Finally, a brief by another German professor reviews the history of the territorial principle and emphasizes that “applying the Lanham Act to trademark infringement abroad would be a violation of international law.”
Unfortunately, none of these briefs distinguishes purely foreign sales from direct and indirect sales to the United States. Clearly, these four briefs think that applying the Lanham Act to purely foreign sales violates the territorial principle and possibly international law. But they are less clear about whether the same is true when a trademark is affixed abroad and the product is then sold directly into the United States or sold abroad with the United States as the intended destination—in other words, when sales carry the potential for consumer confusion in the United States. There are hints in some of the amicus briefs that the territorial principle does not bar application of the Lanham Act in such circumstance. The three German law professors, for example, write: “According to the territoriality principle, intellectual property rights … can only impose legal consequences, such as damages, on acts that have been committed within or have immediate effects withinthe territory of the country which granted the respective intellectual property rights” (emphasis added). Ultimately, however, the briefs are simply not clear.
With respect to whether applying the Lanham Act to foreign uses of trademarks violates international law, none of these briefs identifies a specific provision of the Paris Convention or other treaty that forbids it. Their assertions about violating international law seem to be based on the general principle of territoriality. Given the “great weight” that the Supreme Court typically gives to the executive’s interpretation of treaty obligations, the SG’s position that the United States would not violate its international commitments by applying the Lanham Act to foreign uses of trademarks that are likely to cause confusion in the United States seems likely to carry the day.
Support for the Vanity Fair Test
The amicus briefs by the American Bar Association and the Intellectual Property Owners Association express support for the three-part test adopted by the Second Circuit in Vanity Fair Mills, Inc. v. T. Eaton Co. (1956), which considers (1) whether the defendant’s conduct has a substantial effect on U.S. commerce; (2) whether the defendant is a United States citizen; and (3) whether there is a conflict with foreign trademark rights. The International Trademark Association takes a similar position.
Two other briefs argue, however, that whether the Lanham Act applies should not turn at all on the citizenship of the defendant. The American Intellectual Property Law Association contends that the U.S. citizenship of the defendant was not critical to the Supreme Court’s decision in Steele. An amicus brief by three U.S. intellectual property professors (Margaret Chon, Timothy Holbrook, and Marketa Trimble) points out that the “same presumption against extraterritoriality” applies to U.S. citizens “unless Congress clearly, affirmatively indicates that it intends to regulate U.S. citizens’ conduct abroad.”
Support for the SG’s Position
The amicus brief I filed supports the SG’s position. I explain why it is appropriate to apply the Supreme Court’s current version of the presumption (which dates from 2010) retroactively to a statute enacted in 1946. I also explain why the Court’s failure to apply the presumption in Steele does not prevent it from doing so here.
Finally, I suggest that, if the Court agrees with the SG that the focus of the Lanham Act provisions is consumer confusion, it should not additionally require conduct in the United States that is “relevant to” that focus. Although RJR Nabisco suggests that domestic application of a statute requires that “conduct relevant to the statute’s focus occurred in the United States,” the Court has required such conduct only when the focus of the statute was conduct. By contrast, the Court has not required conduct in the United States when the focus of the statute was something other than conduct (e.g., the transaction in Morrison v. National Australia Bank, or the injury in RJR Nabisco). “When the focus of a provision is something other than conduct,” I write, “requiring domestic conduct would only frustrate Congress’s intent by excluding from the scope of the provision some cases that were ‘the ‘focus’ of congressional concern’” (quoting Morrison).
Conflicts with Foreign Trademark Rights
Several of the briefs address the possibility of conflicts with foreign trademark rights, although no conflict appears to exist in this case. Each suggests some deference to foreign law as a matter of comity. The American Bar Associationsuggests that U.S. courts should “defer to the defendant’s foreign trademark rights when those rights are clearly established.” The U.S. intellectual property professors suggest that courts should conduct a “case-by-case” comity analysis not just when the defendant has trademark rights under foreign law but also when such rights do not exist in foreign law or foreign law has exceptions that would make the conduct non-infringing. The American Intellectual Property Association suggests considering comity in determining appropriate remedies.
Each of these briefs fails to grapple, however, with the situation where the trademark is affixed in one country (e.g., Germany) and sold to another (e.g., the United States). The European Commission’s brief suggests that German law, like U.S. law, determines infringement based on the likelihood of consumer confusion in Germany. If that is true, then German law would not conflict with U.S. law even if the defendant held a valid German trademark. By the same token, German law would provide no remedy if the plaintiff held a valid German trademark. In either case, the application of U.S. law seems justified.
It is also worth noting that the Supreme Court has been skeptical of case-by-case comity analyses in the past, characterizing such an approach as “too complex to prove workable.” Given that no conflict with German law appears to exist in this case and the question has not been thoroughly briefed by the parties, the Court might be well advised not to address conflict with foreign trademark laws and allow that issue to percolate further in the lower courts.
A Trademark Owner’s Perspective
Perhaps the most interesting amicus brief was the one by Stussy, a California street fashion brand. The brief offers the perspective of a U.S. clothing manufacturer plagued by counterfeiters operating abroad and offering their wares over the internet. It argues for broad extraterritorial application of the Lanham Act as the only effective way to combat worldwide counterfeiting.
Stussy acknowledges that the EU has robust remedies for trademark owners. “The EU is the exception, not the rule,” however. “The overwhelming majority of countries where counterfeiting is most widespread do not have robust remedies; that is precisely why there is so much counterfeiting in those countries.” In response to petitioners’ argument that only 3% of its sales reached the United States, Stussy observes that “the percentage is small only because Abitron’s worldwide infringement is so large. In other words, Abitron argues it should get favorable treatment because the egregiousness of its conduct makes the domestic portion of its ill-gotten profits small in relative terms.”
At bottom, Stussy argues that U.S. courts should act as a one-stop shop for owners of U.S. trademarks faced with foreign counterfeiters. “In most cases,” it notes, “counterfeits are sold simultaneously in many countries. If there is no extraterritorial jurisdiction, SMEs [small and medium enterprises] would have to sue the same defendant over and over in dozens of countries, often to recover a small amount per country.” It concludes: “When a counterfeiter sells worldwide, the American court should be able to order it to stop selling worldwide.” I suspect Stussy’s argument for broad extraterritorial application of the Lanham Act will not carry the day with the Supreme Court, but it is a perspective worth hearing.
TLB will report on the oral arguments in Abitron as soon as possible after March 21. One can expect the Court’s decision in late June.