Supreme Court Focuses on Consumer Confusion in Extraterritorial Trademark Case
March 22, 2023
Yesterday, the Supreme Court heard oral argument in Abitron Austria GmbH v. Hetronic International, Inc. The question before the Court is when the federal trademark statute, known as the Lanham Act, applies to the use of trademarks outside the United States.
The respondent, a U.S. company that makes radio remote controls for heavy construction equipment, won approximately $90 million in damages for trademark infringement against the petitioners, a group of German and Austrian companies that made and sold similar products in Europe. The district court based damages on the petitioners’ worldwide sales, even though only 3% of its sales were ultimately destined for the United States.
Normally, one would expect the Supreme Court to apply its two-step presumption against extraterritoriality to determine the geographic scope of a federal statute. But in Steele v. Bulova Watch Co. (1952), the Supreme Court held that the Lanham Act applied to the use of a trademark in Mexico notwithstanding the presumption against extraterritoriality. Some of the questioning asked what to do about Steele. In addition, the presumption against extraterritoriality has changed significantly since the Lanham Act was enacted in 1946 and since Steele was decided in 1952. The Justices referred several times to the Court’s “modern extraterritoriality jurisprudence” (11, 47) and “modern regime” (15).
Notwithstanding these complications, the most likely result based on oral arguments seems to be adoption of the Solicitor General’s (SG) position: that the Lanham Act applies to foreign uses of trademarks that are likely to cause consumer confusion in the United States.
The Positions of the Parties
Arguing for the petitioners, Lucas Walker asked the Supreme Court to apply its current, two-step presumption against extraterritoriality to the Lanham Act and hold that that it applies only to the domestic use of a trademark in commerce within the United States. He argued that Steele applies only to U.S. citizens using trademarks abroad and that extending the Lanham Act to foreign countries would create international friction.
Representing the United States as amicus curiae, Masha Hansford agreed that the Court should apply its current two-step framework and that the provisions at issue contain no clear indication of extraterritoriality. But she argued that the focus of these provisions was consumer confusion rather than use of a trademark in commerce. This interpretation makes the best sense of Steele, she said, and leads to the common-sense result that a defendant is not liable for uses that confuse only foreign customers but is liable for uses that confuse U.S. customers.
On behalf of respondent, Matthew Hellman noted that U.S. courts have applied the Lanham Act extraterritorially for 70 years following Steele and argued that the Supreme Court should maintain the status quo. Applying the Lanham Act to uses of trademarks abroad protects U.S. mark-holders from trademark pirates, he said, and has not created friction with other countries.
Determining the Focus
Petitioners and the United States agreed that there is no clear indication of geographic scope at step one of the presumption’s two-step framework, but they disagreed about the focus of the Lanham Act provisions at step two. Walker argued for the petitioners that the focus is use of a trademark in commerce, whereas Hansford argued for the United States that the focus is consumer confusion.
Several Justices seemed unpersuaded by petitioners’ argument. Justice Jackson got Walker to agree “that there’s no trademark violation if the use of the mark in commerce doesn’t cause consumer confusion.” (17). “So then how can it be,” she next asked, “that you say that the focus of this statute is only on the use of the mark?” (18). Justice Kagan returned to the same point a few minutes later. “So you’re saying that, well, the focus of the statute is uses of the trademark. That doesn’t seem right. The focus of the statute is uses of the trademark that confuse. And if the uses of the trademark … confuse in the domestic market, that seems as though it should be enough under Morrison.” (21-22).
Kagan earlier made the important point that Morrison’s focus approach is flexible. “[I]n our modern regime, there’s a good deal of flexibility in how we go about picking what the focus is” she observed. (15). “And you might say, well, that’s a downside of our modern regime because it’s a little bit amorphous …. But it’s also a virtue of our modern law, which is we get to sort of look at a particular statutory regime and say, you know what makes sense with respect to … conduct occurring abroad.” (15-16). (I am biased on this point, having argued in print that one of the virtues of the current presumption is its flexibility.)
The Justices seemed more persuaded by the U.S. position that the focus of the Lanham Act provisions is consumer confusion. In addition to Justices Jackson and Kagan, Justice Sotomayor said explicitly that she agreed with the SG (25).
In response to questioning from Justice Thomas, Hansford clarified that in the United States’ view, it does not matter where the petitioners’ conduct occurred. “[T]he Petitioners’ conduct is not the focus,” she said. “It’s … the effect.” (33).
Justice Gorsuch referred to the search for a focus as “asking a kind of a metaphysical question” that might require “a legislative séance,” eliciting some laughter from the spectators (55). He suggested that the Court might alternatively ask what was necessary for a cause of action to accrue. But neither Gorsuch nor any of the other Justices pushed back against the argument that consumer confusion is the critical factor.
Some Justices seemed concerned about the limits of the parties’ positions. Justice Sotomayor told Walker that petitioners’ “position in this world of the internet makes very little sense,” noting that foreign manufacturers “advertise their goods on the internet, and they purposely target American consumers in America. The fact that they choose to deliver those goods at the border … should make no difference. They are competing with the trademark owner in the U.S. to secure U.S. customers.” (25).
Chief Justice Roberts expressed a different concern about the internet, asking Hansford whether “listing the product … on the internet anywhere [would] always constitute causing confusion.” (34). She answered no in general, but “where it is foreseeable and sufficiently direct that consumers in the United States will be confused, we do think that would be actionable.” (36).
When Hellman argued for the respondent that the Lanham Act should reach all commerce that Congress can lawfully regulate, Justice Thomas asked, “What are the limits of your argument?” (64). Hellman responded that “[t]he effect needs to be substantial” in order for Congress to be able to regulate (65), to which Thomas rejoined, “we see how extensive and how broadly that test is used in domestic commerce clause cases.” (66).
Conflicts with Other Countries
Of the dozen amicus briefs (other than the United States’) filed in this case, the only one mentioned at oral argument was the European Union’s, which emphasize the principle that trademark law is territorial and explained how trademark rights are protected in Germany and in the EU more generally. (For discussion of the other briefs, see here.)
Justice Alito asked Hansford, “What is the reaction of the United States to that strong protest from the European Union?” (40). But Hansford disagreed with this reading of the EU’s brief. “We view the European Union’s brief as aligned with us,” she responded. (40). Justice Sotomayor later supported her point by quoting the portion of the EU’s brief stating that its law similarly focuses on consumer confusion (51-52).
When Justice Kavanaugh later asked Hellman for his response to the EU brief, Hellman correctly observed that the EU had not suggested “that we’ve been violating our treaties for 70 years.” (68). “Do you agree that the world takes a territorial approach to trademark law?” Justice Alito pursued (69). “I do agree with that,” Hellman replied, “but I don’t agree with what that means for this case.” (70). Hellman explained that the territorial approach “simply means that each nation is the ultimate arbiter of its own trademark laws” but that “the U.S. is allowed to decide that where foreign conduct has a substantial effect on U.S. commerce …that is actionable under the Lanham Act.” (70). This, Hellman emphasized, is the status quo. “We’re not trying to predict how the Act would work extraterritorially,” he said. “It has been working extraterritorially for 70 years.” (70).
The possibility of a direct conflict with foreign law received relatively little attention. Justice Alito asked the United States, “does it matter whether the mark is validly registered in the country where it’s used?” (38). Hansford responded that “international comity would come in and take care of it” because “international comity would be a reason for the Court to abstain from hearing an action.” (39). In this case, however, petitioners have no superior rights, so no conflict with U.S. law exists. As I have previously noted, this might be reason for the Court to avoid opining on what should happen in the case of such a conflict, since it also received little briefing from the parties.
What to Do About Steele
Several Justices asked about overruling Steele. Justice Sotomayor began early in the argument by asking petitioners’ counsel, “Doesn’t your view overrule Steele?” (8). Walker responded that it did not because Steele “addressed how the Act applies to United States citizens.” (8). But when Justice Barrett asked if Steele would “come out the same way today” (10), Walker said that it probably would not (11).
Justice Gorsuch asked the United States what to about Steele, to which Hansford replied that the Court could apply its “modern [extraterritoriality] jurisprudence” and could “do that without overruling Steele.” (47). Justice Alito objected that citizenship was irrelevant under the United States’ approach, whereas “in Steele, it seems to have been quite relevant.” (48). After some back and forth about what the holding of that case really was, Hansford cleverly replied that if citizenship was central to Steele then its holding simply did not apply here since the defendant is not a citizen (51). Justice Kagan, in contrast with Justice Alito, seemed to think that Steele’s emphasis on effects was quite consistent with the second step of the Court’s modern framework (53-54).
Dogs That Didn’t Bark
It is also worth noting a few things that did not happen at oral argument. None of the Justices suggested that the Court should not apply the presumption against extraterritoriality to determine the scope of the Lanham Act. This is perhaps most surprising with Justice Barrett who, as an academic, questioned the validity of substantive canons of statutory interpretation like the presumption against extraterritoriality.
None of the Justices suggested that the Court should apply anything other than the current presumption against extraterritoriality, which dates from Morrison v. National Australia Bank (2010), to a statute enacted in 1946 when a different version of the presumption prevailed. The Justices repeated references to the Court’s “modern extraterritoriality jurisprudence” (11, 47) and its “modern regime” (15) show that they are aware of the issue. Some textualists, like Dean John Manning, would limit courts to applying the rules of interpretation that were in place when a statute was passed. But the Justice showed little inclination to do that here.
I have argued here and in an amicus brief, that applying the current presumption against extraterritoriality retroactively is appropriate. I will be happy if the Court agrees, but I also find the Justices’ complete silence on these questions odd.
The $88 Million Question
As interesting as the questions discussed at oral argument are, and as significant as they will be for future cases, the question that makes the most different to the parties received little attention. The district court awarded approximately $90 million in damages, although only 3% of the petitioners’ sales were destined for the United States. Under the United States’ consumer confusion test, which many of the Justices seemed poised to adopt, respondent would be entitled only to about $2 million.
The remaining $88 million in damages were upheld by the Tenth Circuit in part on a diversion of sales theory—that the petitioners’ purely foreign sales replaced export sales that respondent would otherwise have made. None of the Justice raised the diversion of sales theory with petitioners’ counsel or with the United States, leaving respondent’s counsel to raise it late in the argument (on page 76 of a 95-page transcript).
When Hellman raised the issue, the hearing he received was not particularly sympathetic, with Justice Alito asking, “why didn’t you sue in Germany?” (78) and Justice Jackson expressing skepticism that a trade show in Germany could create the kind of consumer confusion that would be actionable in the United States (86-88). If the theory had come up earlier during the argument, both petitioners and the United States would have argued against it (as they did in their briefs), and there is no guaranty that the theory would have persuaded the Justices. But by the end of the argument, the Justices’ attention seemed to be spent. That is a shame given the stakes for the parties.
The Abitron case gives the Supreme Court another opportunity to apply its new presumption against extraterritoriality, and perhaps to refine that presumption still further. The SG’s position has shown the Court a way to apply its current approach, without overruling its prior decision in Steele and without extending the Lanham Act to the limits of Congress’s authority. At oral argument, this path appeared more attractive to the Justices than any other. An opinion is expected by the end of June.