On Tuesday, the Supreme Court will consider whether federal trademark law applies to trademark infringement that takes place outside the United States. In Abitron Austria GmbH v. Hetronic International, Inc. the justices will have to apply a modern two-step test – and a 70-year-old case – to determine whether a federal law applies extraterritorially to the Lanham Act, the federal trademark law that was passed in 1946 – a point at which the global economy was far less interconnected than it is today.
Predictably, the party that owns the trademarks in question, Hetronic International, advocates for a maximalist position that would allow it to recover for conduct that took place abroad. On the other hand, Abitron – the alleged infringer – argues that Congress had no intent to extend the Lanham Act beyond the boundaries of this country. The Biden administration takes a middle ground, arguing that the Lanham Act applies only to extraterritorial conduct that results in consumer confusion or mistake in the United States.
Hetronic, based in Oklahoma, manufactures and sells radio remote controls that operate heavy-duty construction equipment. It owns U.S. trademarks for the distinguishing features of its remote controls. Abitron agreed to serve as Hetronic’s distributor in Europe. It was authorized to assemble and sell Hetronic’s remote controls under Hetronic’s brand, but was contractually required to purchase parts from Hetronic.
Hetronic alleges that Abitron secretly used confidential information to which it had access under the licensing agreement to reverse-engineer Hetronic’s products; Abitron then sold those products to Hetronic’s customers as if they were genuine Hetronic devices. Hetronic further alleges that Abitron continued selling Hetronic-brand products even after the parties’ licensing agreements were terminated.
Even though the misconduct took place in Europe, Hetronic sued Abitron in the United States for trademark infringement pursuant to the Lanham Act. A jury in Oklahoma City awarded Hetronic more than $90 million. Of that amount, only $240,000 was for products that Abitron had sold directly from abroad into the United States. About $2 million was for products that had been sold abroad to foreign buyers who listed the United States as the ultimate destination where the products were intended to be used. The balance ($87 million, or almost 97% of the jury award) was for products that Abitron had sold abroad to foreign buyers for use outside the United States. In other words, an American jury found against Abitron, a foreign company, principally for infringement that occurred outside the United States.
The presumption against extraterritoriality
The Lanham Act imposes civil liability upon a person who “uses in commerce” a trademark that he or she does not own in a manner that is likely to cause consumer confusion. The question for the court is whether the law reaches infringing conduct outside the United States. Over the last few decades, the court has honed a two-step test to determine whether Congress intends for a law to apply outside the United States. The test starts from the premise that Congress is presumed to legislate only with domestic concerns in mind, and federal law ordinarily does not cover conduct abroad. The court asks if there is a “clear, affirmative indication” from the face of the statute that Congress intended the law to apply extraterritorially. If there is no such clear indication, then the presumption is not rebutted. The court then proceeds to the second step, looking to the law’s “focus” to determine whether the case implicates a domestic application of the law. The court’s precedent states somewhat vaguely that a law’s focus “is the object of its solicitude which can include the conduct it seeks to regulate, as well the parties and interests it seeks to protect or vindicate.” In a recent case that provided more questions than answers, the court held that the “focus” of a provision of the Patent Act “is on the act of exporting components” from the U.S. and the plaintiff can recover for foreign lost profits. The court rejected the argument that the focus is on the award of damages which would not have reached the foreign conduct at issue in that case.
Therefore, a party claiming that a federal statute applies extraterritorially can have essentially two bites at the apple. It can first claim that the Congress intended to apply the law globally. Alternatively, it can argue that regardless of congressional intent, its lawsuit is about the domestic focus of the statute.
Has Congress directly spoken here?
The text of the Lanham Act does not say that it applies to conduct outside the United States. But Hetronic argues that the definitional section of the statute defines “commerce” broadly to mean “all commerce which may lawfully be regulated by Congress.” According to Hetronic, because Congress has the unquestioned constitutional authority to regulate foreign commerce, this broad definition (which it argues is unique among federal statutes) indicates a congressional intent to apply the Lanham Act extraterritorially.
Both Abitron and the Biden administration counter that the necessary congressional intent cannot be inferred this way. They say only an unmistakable affirmative indication in the statute that Congress desired extraterritorial application would count. Abitron also points out that Congress crafted the definition of commerce in the Lanham Act that way because the court had invalidated an earlier version of the law for impermissibly seeking to regulate intrastatecommerce. As a result, Abitron says that an attempt by legislators to cabin congressional authority over domesticcommerce within constitutional parameters cannot be read as an intent to apply a law outside the United States.
The parties also disagree on the significance of the court’s 1952 decision in Steele v. Bulova Watch Co. In that case, decided before the modern two-step test was developed, the court held that the Lanham Act applied to a U.S. citizen’s sales in Mexico of watches that infringed on a U.S.-registered trademark. In the process, the court observed that the Lanham Act applied abroad because of its “sweeping reach.” Abitron says that the case was based on the defendant’s U.S. nationality and that the case should not be extended further to foreign defendants, in particular because the court’s reasoning in Steele was articulated before the development of, and is not compatible with, the modern test for extraterritoriality. Citing an academic article by then-professor Amy Coney Barrett, Abitron further suggested that the Steele case should be overruled outright notwithstanding the principle of statutory stare decisis.
Hetronic counters that Steele should be determinative, relying on two modern cases in which the court, without meaningful analysis, alluded to Steele for the proposition that the Lanham Act provides “a broad jurisdictional grant” or that Lanham Act has an “extraterritorial effect.”
What is the Lanham Act’s “focus”?
Moving on to step two of the extraterritoriality test, the Biden administration proposes that the “focus” of the Lanham Act is consumer confusion or mistake. The government argues that as long as such effects on consumers occur in the United States, foreign infringement of a U.S. trademark would be covered by the Lanham Act, despite the lack of textual evidence of Congress’s intent to apply the law extraterritorially. According to the Biden administration, such an invocation of the Lanham Act would be a “permissible domestic application” of the law and does not raise extraterritorial concerns. The government further argues that its construction of the Lanham Act is consistent with Steele: In that case, the court stated that when watches bearing false trademarks were brought back from Mexico to this country, the reputation in the United States of the trademark owner was impaired. The Biden administration therefore suggests that the case be sent back to the lower courts to determine whether Hetronic can demonstrate the required consumer confusion. The administration’s approach may prove attractive to the court because it avoids the need to overrule Steele and thereby safeguards stare decisis.
Abitron argues on the other hand that the “focus” is on the unauthorized use of a trademark in commerce. According to this reading, Abitron would be at most liable only for the goods that it had sold directly to customers in the United States – just $240,000 of the $90 million award. The government rejects this position, emphasizing that the unauthorized use of a trademark by itself is not actionable under the Lanham Act. To obtain damages, a plaintiff must demonstrate adverse effects on consumers. Abitron points out that the government’s reading would require subjective judgments about consumer perception. The government counters that such judgments are routinely made in domestic litigation under the Lanham Act.
Hetronic does not deny that consumer confusion is a focus, but it claims that a second focus of the Lanham Act is the protection of the trademark owners’ goodwill. Therefore, it concludes, consumer confusion in the United States is sufficient, but not necessary to obtain relief. Hetronic asks the court to focus on a plaintiff’s place of business. Under this theory, when a U.S. business loses revenues and goodwill to foreign infringement conduct it suffers an injury at home, and allowing it to sue the infringer under the Lanham Act for damages would be a permissible domestic application of the statute.
It is not uncommon for an American business to have its highly valuable trademarks infringed outside the United States. Those companies tend to prefer to seek legal relief under U.S. law in front of a U.S. jury. The Lanham Act probably cannot pass the first step of the two-part extraterritoriality test. Therefore, the justices will likely spend Tuesday’s argument wrestling with what the “focus” of the federal law is to determine the extent to which a U.S. trademark owner can sue a foreign infringer under U.S. law. However the justices interpret the extraterritorial application of the Lanham Act, this case could have major consequences for American trademark holders.
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