High Court Case on US Trademark Law’s Limits Stretches Beyond IP

The Supreme Court’s recent oral argument examining the propriety of a $90 million trademark award for almost entirely foreign sales carries implications that extend beyond both US borders and trademark law.

Hetronic International Inc. convinced the district and appeals courts that the sliver of Abitron Germany GmbH’s infringing radio remote control sales that reached US markets opened the door to liability here—and that Abitron’s foreign infringing sales injured the US company just as sales into the US did. The success of that argument before the US Court of Appeals for the Tenth Circuit raised concerns from the US Justice Department and European Union governments, and to at least some extent, the high court’s justices.

At issue is the extraterritorial reach of the Lanham Act, the federal trademark statute, and when conduct outside the US can result in trademark liability and damages. How the justices apply flexibility on enforcing that law overseas will profoundly affect trademark litigation, including US courts’ reach against foreign counterfeiters whose goods make their way into the countery. The effects of their decision, however, won’t end there.

Trademark rights typically stop at the border, but the impact of—including injuries from—increasingly global commerce does not. Trademark law adds complications because the question that triggers liability, likelihood of consumer confusion, can be difficult to pin down and can differ across different locations and product categories.

But the current legal framework for examining extraterritoriality isn’t confined to trademark law, so the justices’ ruling likely won’t be either, trademark attorney Theodore H. Davis of Kilpatrick Townsend & Stockton LLP said.

“I don’t see the Supreme Court or lower courts saying trademark law is so unique that it requires its own body of law governing the extraterritoriality inquiry,” Davis said. “So I don’t think the court will issue a holding that limits itself to applications of the Lanham Act.”

Recent high court precedent instructs courts to consider whether the focus of a law’s concern overcomes a presumption against extraterritoriality. Justice Elena Kagan touched on the breadth of the “modern regime,” saying during arguments that it contains a “good deal of flexibility” in determining the focus of a law. While “amorphous,” she said, it’s “also a virtue.”

Foreign Concerns

The notion of a long reach encourages enforcement-minded brands. But the US government, which argued the Lanham Act turns on confusion of, specifically, US consumers, worried the Tenth Circuit’s logic would result in US trademark law effectively being exported abroad. And the European Union stressed that Hetronic can—and has—enforced its trademark rights through litigation in Europe.

IP attorney Jeff Van Hoosear of Knobbe Martens, who said he was “shocked” that the Tenth Circuit affirmed damages on sales that didn’t affect US consumers, said the US is not the “ruler of the world.”

“Trademark law has always been very territorial,” Van Hoosear said.

But others say that mechanisms exist to address concerns about US courts becoming the overlords of world trademark law. IP attorney Brian Landry of Saul Ewing LLP echoed the argument of Hetronic’s counsel that the doctrine of comity—recognition of foreign laws and judicial decisions—“would prevent a court from acting in situations” where rights and laws conflict.

Landry also pointed to a benefit to allowing a plaintiff to claim lost profits on foreign sales by a single infringer.

“There’s efficiency to be gained by filing a suit that covers conduct that spans multiple countries,” Landry said, though he also said he wouldn’t be surprised to see the award reversed.

Van Hoosear said affirming the award would “open up US courts to hundreds of these types of disputes.

“This dispute is pretty common” among former licensees like Abitron as well as competitors, manufacturers and retailers, he said.

‘This Is About Damages’

The policy questions still leave open whether US law can reach foreign activity. Recent Supreme Court extraterritoriality guidance, Morrison v. National Australia Bank in 2010 and RJR Nabisco Inc. v. European Communities in 2016, involve securities and racketeering law, respectively.

During the Hetronic argument, the justices spent significant time on a hypothetical from Justice Ketanji Brown Jackson involving students buying fake Coach handbags in Germany as she prodded at the focus of the Lanham Act. She asked whether someone who sold the faux designer bags knowing they’d be resold in the US could be held liable by US courts.

Abitron’s counsel argued the conduct of the defendant—using the mark—is the focus of the Lanham Act, so Abitron’s foreign use was out of bounds. But Jackson asked how the focus is only the defendant’s use of the mark when the market effect itself, consumer confusion, is a required element to prove liability.

The US government agreed with Abitron that the award was wrong, but said consumer confusion was the correct focus. Only conduct specifically affecting US consumers could result in damages, so purely foreign sales didn’t apply, US Solicitor General Elizabeth Barchas Prelogar argued. Hetronic, meanwhile, said Abitron’s foreign infringement is fair game under the Lanham Act because it substantially affected US commerce by diverting money from Hetronic.

IP attorney Mark Sommers of Finnegan, Henderson, Farabow, Garrett & Dunner LLP suggested the apparent tension between foreign conduct and domestic trademark rights stems from conflating two issues: jurisdiction and damages.

As Hetronic noted at oral arguments, to get Abitron’s conduct into a US courtroom required jurisdiction—in this case the roughly €200,000 of direct sales into the US, if not the roughly €2 million in sales that later found their way into the country.

But establishing jurisdiction, and ultimately liability for goods placed in US commerce, opens a wider door to damages, Sommers said.

“In order to prove confusion you have to have a liability hook. Then you get to damages,” he said. “This case is about damages.”

Hetronic convinced a jury that it would have secured the foreign sales if not for Abitron’s infringement. Injury caused by foreign infringement proven to cause injury within US commerce should be reachable by US law, Sommers said. Such injury could include sales diverted from a US entity or improper profits from goods that a counterfeiter—even a foreign one who sold to a middle man abroad—knew would be put into US commerce, he said.

“The diverted sales are a part of the damage that was felt by the US company who owned the rights to that trademark in the US, even though there is no confusion for those sales which occurred outside of the US.”

Bending Steele

Multiple attorneys said after the argument that they expect the justices to clarify the high court’s 1952 holding in Steele v. Bulova Watch Co. without overruling it. That opinion allowed a US court to hear a watchmaker’s case about knock-offs made and sold in Mexico by a US citizen, many of them entering the US.

“I didn’t hear any questions saying Steele is wrong,” Davis said. “It seems the court is more likely to reconcile Steele with its modern cases.”

Justice Samuel Alito said Steele “from its very first sentence” focused on the fact that the defendant was a citizen, though multiple justices suggested that shouldn’t be a major factor.

Kagan said, despite putting that issue up front in the opinion, the rationale of Steele “is much more about effects than it is citizenship of the defendant,” which fits the court’s modern guidance.

As to the standard for extraterritoriality, Kagan asked, “Why can’t it also be the effects of the use of the mark and where the effects took place, for example, where the confusion took place?”

IP attorney Marsha G. Gentner of Dykema Gossett PLLC said she expects the court to affirm the extraterritorial effect of the award. The global nature of commerce will play a role in the opinion, and the court will focus on causation and the effect on US commerce while distancing itself from the emphasis on the citizenship of the defendant in Steele.

But she also expressed uncertainty about how the court would do it.

“I think they’re going to craft something, but I’m perplexed as to what it could be,” Gentner said.