Can a United States court really award tens of millions of dollars in damages for violation of US trademark law under the Lanham Act where the conduct at issue did not even take place in the United States? According to a federal appeals court, oh yes it can. In a controversial decision, a 10th Circuit panel affirmed a trial court ruling, awarding $96 million in damages to Hetronic International, Inc., a United States company, based on the actions of a German based company that largely took place outside of the United States.
The 10th Circuit is not the only appellate court to consider this issue, and a contentious circuit split has developed over the years. Now the Supreme Court has agreed to hear Hetronic to resolve an issue that has plagued American jurisprudence for almost 70 years, since the Supreme Court last addressed the foreign application of the Lanham Act.
The case boils down to a relatively simple set of facts. Hetronic granted licenses and distribution agreements to a collection of related German entities, which we will collectively call Abitron. After several years of a fruitful relationship, Hetronic learned that Abitron was selling copycat products using Hetronic’s distinctive black and yellow color scheme and ten of its federally registered trademarks. Abitron sold these products under the Hetronic brand mostly in Europe. Hetronic promptly sued Abitron in federal court, in keeping with the parties’ forum selection agreement, for breach of contract and violations of the Lanham Act.
While there is consensus that the Lanham Act applies extraterritorially, the question is how far that extends. In 1954, the Supreme Court held that an American citizen who had relocated to Mexico had violated the Lanham Act by manufacturing and selling copycat Bulova watches, noting that “the spurious Bulovas filtered through the Mexican border into the United States.” This decision set the precedent that the Lanham Act could be applied abroad, at least in some circumstances. Courts were left to determine those various circumstances but could not seem to reach the same conclusion.
The Lanham Act provisions at issue here provide a remedy against any person who “use[s] in commerce” someone else’s trademark where such use “is likely to cause confusion, or to cause mistake, or to deceive.” 15 U.S.C. 1114(1)(a), 1125(a)(1). In Hetronic, the foreign defendant sold its products primarily in foreign countries while using Hetronic’s family of marks. This certainly feels wrong, but is application of a United States statute the proper avenue of recovery? The 10th Circuit said yesbecause of the effect of Abitron’s actions on commerce in the United States. Specifically, the court looked at (1) Abitron’s direct sales into the United States; (2)its sales of products abroad that ended up in the United States; and (3) diverted foreign sales that Hetronic would have made but for Abitron’s infringing conduct.
At first blush, this reasoning seems sound. Consumer’s buying the defendant’s product in the United States, thinking it was actually Hetronic’s, is the hallmark of consumer confusion, and certainly has an effect on United States commerce. Nevertheless, in this instance, only 3% of all of Abitron’s sales were made in the United States, and it has since stopped selling here. In this context, foreign sales diverted from a United States company do have an effect on United States commerce—but do they create consumer confusion in the United States?
The circuit split is directed to that issue: Does the standard of extraterritorial application of the Lanham Act depend on a significant or merely effect on United States commerce? Or is the focus more narrow, on whether the effect on commerce results in consumer confusion? Depending on which side of the fence the Supreme Court lands, its decision could have major ramifications for foreign defendants and the sanctity of the Paris Convention, an international treaty which states that marks registered in one signatory country shall be regarded as independent of marks registered in other signatory countries.
In the words of the Solicitor General, in her amicus brief: “That decision risks globalizing U.S. trademark law, al-lowing U.S. trademark protection to serve as a spring-board for regulating foreign conduct that has no likeli-hood of affecting consumer perceptions in the United States.” The Supreme Court will tell us how far the long arm of the law really extends.
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