What is a “Domestic Application” of the Lanham Act? The Supreme Court Creates More Questions than It Answers

In Abitron Austria Gmbh v. Hetronic International, Inc., the Supreme Court appears to have returned to its recent preference for bright-line rules in cases assessing the extraterritoriality of federal statutes.  Abitron involved the extraterritorial reach of two provisions of the Lanham Act that prohibit trademark infringement.  The Supreme Court had addressed the extraterritoriality of the Lanham Act in an earlier decision, Steele v. Bulova Watch Co. (1952), holding there that the Act could be applied to the unauthorized use by a U.S. citizen of the Bulova mark on goods that were manufactured and sold in Mexico, but where some of the infringing watches had “filtered” into the United States with adverse effects on the Bulova brand. The rationale for Steele was something of a hodge-podge. The Supreme Court relied on language in the statute referring to the jurisdictional provision of the statute, which provided for Congress’s intent “to regulate commerce within the control of Congress.”  It also pointed to essential U.S. conduct that the defendant engaged in and to customer confusion in the United States.

Since Steele, however, the Court’s extraterritoriality jurisprudence has substantially changed as a result of cases such as Morrison v. National Australia Bank (2010) and RJR Nabisco, Inc. v. European Community (2016).  The Court developed a two-step test that began with a presumption against extraterritorial application of federal statutes (in the absence of language or context that indicated a different result) and then looked further to see whether the case could be said to involve a “domestic application” based on the focus of the provisions.  In addition, the Court has consistently rejected arguments that “in commerce” language in federal statutes carries a sufficient statement of extraterritorial application.

The Facts

Hetronic, a U.S. company, manufactures radio remote controls and had a U.S. trademark on its product.  Abitron, a German company (once a licensed distributor for Hetronic) began to sell Hetronic branded products primarily in Europe, but with some direct sales into the United States.  Hetronic sued Abitron in the district court of Oklahoma under the Lanham Act for the unauthorized use of Hetronic’s trademark, alleging that Abitron’s use had caused a likelihood of confusion, and sought damages for Abitron’s infringing acts worldwide.  A jury awarded Hetronic almost $96 million in damages, which included not only direct sales to consumers in the United States, but also foreign sales where foreign buyers designated the United States as the ultimate destination, and even its foreign sales that did not end up in the United States. The Tenth Circuit upheld the full damage award and affirmed a narrowed injunction against Abitron’s alleged infringing conduct, stating that Abitron’s foreign conduct created “impacts” within the United States that gave the United States “a reasonably strong interest” in the litigation.

To resolve a split in the circuits over the extraterritorial reach of the Lanham Act, the Supreme Court granted certiorari. Petitioner Abitron argued that the Lanham Act protected the “use” of the mark “in commerce” and accordingly did not reach infringing products sold abroad.  For its part, Hetronic contended that the Lanham Act protected the reputational harm of the trademark owner, which in this case was in the United States and thus a domestic application of the statute.  The United States as amicus took the position that the focus of the statute was “the likelihood of consumer confusion” and that if such effects occur in the United States, there would be a domestic application of the Act, even if the defendant’s conduct occurred elsewhere.

In the Supreme Court

Justice Alito authored the majority opinion, joined by Justices Thomas, Gorsuch, Kavanaugh, and Jackson, with Justice Jackson also writing a concurrence.  Justice Sotomayor wrote a concurrence that sounded more like a dissent (she joined only in the judgment), and her opinion was joined by Chief Justice Roberts and Justices Kagan and Barrett.

Justice Alito began by reciting the Supreme Court’s prior extraterritoriality jurisprudence.  He first emphasized that there was no express statement of extraterritorial application in the Lanham Act or any clear indication that it was to apply abroad.  He rejected the argument that the particular variant in the statute referring to “all commerce” could rebut the presumption against extraterritoriality.  He then turned to “step two” of the analysis to consider whether the claims involved a “domestic application” of the statute.  He found the Court’s prior decision in Steele unhelpful in that it implicated both some domestic conduct as well as a likelihood of domestic confusion and did not aid in resolving the debate over the “focus” of the statute.  Moreover, he argued that for statutes (like the Lanham Act) that regulate conduct, the “focus” test could not be separated from the conduct itself.  He further explained that “if the conduct relevant to the focus occurred in a foreign country, then the case involved an impermissible extraterritorial application of the statute.”  Noting the territorial nature of trademarks, Justice Alito stated that it is the infringing use of the trademark “in commerce” that provides the dividing line between foreign and domestic applications of these provisions of the Lanham Act.

Justice Jackson, who joined to create the majority, also wrote separately, to underscore the uncertainty about what “use in commerce” would mean in future cases.

Justice Sotomayor (along with Roberts, Barrett, and Kagan), although concurring in the judgment, took a different view of the “focus” issue.  Those Justices accepted the U.S. Government’s position that the statute’s focus is protection against the likelihood of consumer confusion and would cover foreign activities if they are likely to confuse consumers in the United States.

More Questions

Justice Alito’s view seems to us better attuned to the territorial nature of trademark rights in that it avoids allowing U.S. law to apply to a use anywhere in the world that has a probability of confusing U.S. consumers and harming the reputation of a U.S. trademark holder.  Justice Alito has also seemingly vindicated the interest he recently expressed in his dissent in Yegiazaryan v. Smagin for bright line rules on extraterritorial application of U.S. law.  In this case, the focus on commerce within the United States clearly rules out recovery for Abitron sales in Europe.

However, the brightness of this rule will dim as other fact patterns are considered.  Justice Jackson’s concurrence hints at the challenging problems ahead.  She posed a hypothetical about American students who buy “Coache” bags in Germany and resell them in the United States, where they could be confused with the bags of the holder of the U.S. trademark “Coach.”  It is an odd hypothetical because it is difficult to believe that Coach would have recourse against Coache on either a primary or secondary liability theory, given that the German company had no knowledge of the students’ intent or any control over their activities.  Moreover, it is unlikely that Coach would sue an individual student for selling a single bag.

But what about sales by Abitron?  What, for example, if it were selling to commercial intermediaries?   Certainly, Hetronic could sue the intermediary.  But intermediaries are often thinly capitalized and can easily be changed.  Could Hetronic instead pierce the formality and sue Abitron directly, either for primary or secondary liability?  Would that require Hetronic to show Abitron knew where the intermediary was selling?  Would it be enough to show that the intermediary was buying so much stock that Abitron had to know that some of it was destined to leave Germany?  Must it also show that shipments arrived in the United States?

And what if Abitron sold to U.S. customers on-line?  Would it make a difference if the website stated that it was willing to ship to the United States (what if the statement were merely “we ship worldwide”)?  Would it help Hetronic’s case if Abitron quoted prices in U.S. dollars?  If the website were in English?  If the internet address ended in .com rather than .de?  What if Abitron sold only through a German website, but advertised in the United States?  Students of trademark law will recognize some of these questions from the case law.

Justice Alito suggests that Hetronic could have protected itself by acquiring foreign trademarks.  In this particular case, the U.S. trademark holder had business with the defendant and so knew where it might need trademark protection (and may even have had some marks in the EU and Germany).  But that will not always be the case.  Will U.S. trademark holders be required to obtain marks all over the world in anticipation of sales from abroad?  Even with the aid of the international conventions Justice Alito cites, that can be extremely expensive.  Moreover, it may not always be possible.  It may be that some countries are like the United States and require local use of the mark to obtain or maintain protection.  Trademark holders will not be able to make purely protective applications in such countries.  Furthermore, it would be risky to wait for the potential infringer to act because it might then be the alleged infringer who has the priority needed to acquire the trademark.  Or the mark may already be owned by an entity unrelated to either of the disputants.  Finally, even if the U.S. trademark holder acquires the right, there is the question whether the foreign government would regard sales destined for the United States as actionable under its law.

In Abitron, the parties were separated by the Atlantic Ocean.  However, many case arise at the border with Mexico, as in Grupo Gigante v. Dallo & Co. (9^th Cir. 2004) or Canada, as in Trader Joe’s Co. v Hallat (9^th Cir. 2016), and the facts often involve complex interchanges among the two countries which do not neatly fit a territorial definition of commerce.  Nuanced decisionmaking will be required in such disputes even under Justice Alito’s test.

Conclusion

At the end of the day, this case is reminiscent of Pfaff v. Wells Electronics (1998), the first major substantive patent case the Supreme Court decided after the Federal Circuit was created. Certiorari was apparently granted because members of the Court were concerned with the multi-factor test that the Federal Circuit had developed to determine when an invention was “on sale.”  The Court substituted a two-pronged inquiry.  But since that case was decided, both prongs have sprouted numerous complications.  As right holders work with a decision, and as technology changes the ways in which commerce is conducted, bright line rules inevitably blur.

Our 2018 article, Misappropriation on a Global Scale: Extraterritoriality and Applicable Law in Transborder Trade Secrecy Cases, discusses the extraterritoriality issue in-cross border intellectual property disputes, primarily in the context of trade secrets.