Supreme Court To Decide Geographical Reach of Lanham Act’s Protections Against Off-Shore Trademark Infringement

On Nov. 4, the U.S. Supreme Court granted a Petition for a Writ of Certiorari requesting that it overturn the 10^th Circuit Court of Appeals’ decision that upheld a judgment based on a $115 million jury verdict and a worldwide injunction against German and Austrian defendants based primarily on violation of the Lanham Act.

The Act protects trademark owners or licensees of valid U.S. trademarks to seek damages and injunctive relief against an infringing use “in commerce,” which is defined in section 15 U.S.C. §1127 as “all commerce which may be lawfully regulated by Congress.” Where the infringement affects goods and services sold solely in the United States, the protections afforded by the Lanham Act, including a right to sue for damages and injunctive relief, clearly apply. Where the infringement is perpetrated by a US citizen while outside the country, and such infringement causes significant harm, the Lanham Act also applies. But, what about the situation in which the infringer is a non-U.S. citizen located outside the country, and the infringement affects only (or predominantly) foreign commerce? Does a U.S. trademark owner still have a remedy under the Lanham Act?

Last year, the 10^th Circuit answered “yes,” affirming a judgment based on a $115 million federal court jury verdict, $96 million of which was based on the Lanham Act, in favor of an Oklahoma-based manufacturer of heavy-duty construction equipment radio remote controls against its former European distributors and corporate successors. The district court denied the Defendants’ Motion for Summary Judgment, finding that the Lanham Act did not apply. The case proceeded to a jury trial in 2014, beginning with a German employee/whistleblower’s testimony that the German distributors copied the American company’s radio controls’ trade dress, reversed-engineered the products so that “no difference could be seen,” created copycat parts, secured third-party suppliers to source the sales and diverted sales that, absent the infringement, would have gone to American customers.

Both the trial and appellate courts acknowledged that while generally, U.S. law does not apply extraterritorially, there are exceptions as to federal statutes generally and within the Lanham Act specifically. They concluded that: (1) Plaintiff Hetronic International had made a sufficient showing to establish that the foreign defendants’ conduct outside the U.S. demonstrated the requisite “substantial effect on commerce”, in the U.S. and (2) extraterritorial application of the Lanham Act would not create a conflict with trademark rights established under the relevant foreign law. On the latter point, the Court of Appeals noted that the European Union Intellectual Property Office Cancellation Division had refused the German Defendants’ request for cancellation of Hetronic International’s EU trademarks, a finding that was affirmed by the EUIPO Board of Appeal. This was sufficient to convince the trial judge (and ultimately the appellate court) that the Plaintiff was entitled to an order barring the Defendants from relitigating the issue of ownership. In sum, the Court of Appeals agreed that Hetronic International had established a diversion of sales and customer confusion in the U.S. as a result of infringing conduct by the foreign Defendants in Europe, which entitled it to both damages and injunctive relief under the Lanham Act.

“We thus conclude that Hetronic has presented evidence of impacts within the United States of a sufficient character and magnitude as would give the United States a reasonably strong interest in the litigation. Accordingly, the Lanham Act applies extraterritorially here to reach all of Defendants’ foreign infringing conduct.”

The 10^th Circuit upheld but modified the District Court’s issuance of an injunction against the Defendant’s sale of infringing radio control products, holding that the worldwide geographical scope of the injunction was too broad and instructing the lower court to narrow it to apply to the countries in which the Plaintiff currently markets or sells its products.

Significantly, after the petition for Writ of Certiorari was filed, the Supreme Court requested the opinion of the U.S. Solicitor General. The Solicitor General requested that the Court grant Certiorari, and criticized the Court of Appeals’ “all or nothing” approach to the “diversion of sales” issue, stating:

“Under the proper analysis, the court of appeals should have considered whether particular uses of respondent’s marks created a likelihood of consumer confusion in the United States (whether at the point of sale or subsequently), giving appropriate deference to any jury finding on that issue. The court should have permitted monetary damages only for those uses.”

While the Supreme Court is expected to give clarity to the question of the geographical reach of the Lanham Act, the Court of Appeals’ decision reinforces the value of properly drafted distribution agreements and the significance of protecting trademarks in all appropriate jurisdictions. Companies that distribute their products and services abroad must be vigilant with their distributors in negotiating consent to jurisdiction and forum selection clauses, in order to lock in favorable jurisdiction and venue in case of a future lawsuit. Additionally, companies must be proactive in tracking all markets in which products and services are marketed and sold, and consistent in their branding and trademark protection programs. Proper identification of key markets and protection of brands in those markets provide a mechanism for enforcement not only in the U.S. with extraterritorial reach, but also a means of local enforcement.

For assistance with sales distribution agreements, and domestic and foreign trademark protection and enforcement programs, please do not hesitate to contact the authors.