Limiting the Reach of the Lanham Act: Supreme Court Vacates Substantial Monetary Damages Award Based On Foreign Conduct
Monday, July 10, 2023

Trademark owners take note: In Abitron Austria GmbH et al. v. Hetronic International, Inc. the Supreme Court definitively ruled that Sections 1114(1)(a) and 1125(a)(1) of the Lanham Act are not extraterritorial and extend only to claims where the infringing use in commerce is domestic. Applying the general principle against the extraterritoriality of U.S. laws, it vacated a $96 million damages award against a foreign defendant because the conduct relating to the damages was not a “use in commerce” under the Lanham Act. The Court held that a “use in commerce” is a “bona fide use of a mark in the ordinary course of trade,” and that the infringing “use in commerce” of a trademark must be domestic and “provides the dividing line between foreign and domestic applications” of the Lanham Act. In other words, “United States law governs domestically but does not rule the world.”  

Case Background

The plaintiff below manufactured remote controls for construction equipment. The defendant below originally operated as a licensed distributor for these products, but later concluded that it held the rights to much of the plaintiff’s intellectual property, including the black and yellow marks on the products at issue. Defendant began to sell these products mostly in Europe, but also directly into the United States. At the District Court level, the jury found that defendant violated the Lanham Act and awarded $96 million in damages based on defendant’s global employment of plaintiff’s marks, including direct sales to the U.S., foreign sales of products for which foreign buyers designated the U.S. as the ultimate destination, and foreign sales of products that did not end up in the United States. The court also entered a permanent injunction preventing defendant from using plaintiff’s marks anywhere in the world.

On appeal, the Tenth Circuit narrowed the injunction, but otherwise affirmed the judgment, concluding that the Lanham Act extended to “all of [defendant’s] foreign infringing conduct.” The Supreme Court granted certiorari to determine the reach of the two relevant provisions of the Lanham Act here—namely, Sections 1114(1)(a) and 1125(a)(1).

Applying A Two-Part Test, The Majority Held The Lanham Act Is Not Extraterritorial

The majority began by reiterating the long-standing principle called the “presumption against extraterritoriality” which refers to a “presumption against application to conduct in the territory of another sovereign.” Relying on its 2016 decision in RJR Nabisco Inc. v. European Community, 579 U.S. 325 (2016), the Court explained that the policy reason behind this presumption is to avoid the “international discord” that could result if U.S. law were to apply in foreign countries. As the Court highlighted in its decision, the European Commission echoed this concern in its amicus brief, noting that the “system only works if all participating states respect their obligations, including the limits on their power.” In the trademark context, nearly all countries recognize that trademark law is necessarily territorial at its core.  

The RJR Nabisco decision formalized a two-step analysis for determining whether a statute can apply extraterritorially to foreign conduct. The first step considers whether Congress “affirmatively and unmistakably” instructed that the provision at issue applies to foreign conduct. If the answer is in the affirmative, then the provision is extraterritorial. Here, the parties agreed that neither provision of the Lanham Act at issue signaled extraterritorial application on its own. The plaintiff argued that the Lanham Act’s definition of commerce refers to “foreign commerce” “because Congress can lawfully regulate foreign conduct under the Foreign Commerce Clause.” It further argued that “commerce” in the Lanham Act embraced foreign commerce because its definition is unique “and thus differs from what it describes as ‘boilerplate’ definitions of ‘commerce’ in other statutes.”

The Court rejected this line of reasoning. It reinforced that it has “repeatedly held” that even where statutes explicitly refer to “foreign commerce” when defining “commerce,” they do not have extraterritorial application. See, e.g., RJR Nabisco, 579 U.S. at 344. As the Court explains, “[i]f an express statutory reference to ‘foreign commerce’ is not enough to rebut the presumption, the same must be true of a definition of ‘commerce’ that refers to Congress’s authority to regulate foreign commerce.” Thus, the Court concluded that there was a lack of clear congressional intent for the Lanham Act to apply extraterritorially.

Where there is an absence of a clear congressional intent, step two of the analysis requires an identification of the “focus of congressional concern” and asks “whether the conduct relevant to that focus occurred in United States territory.” If the relevant conduct did occur in the United States, the claim involves domestic application and may proceed, whereas if it does not involve domestic conduct, it is an impermissible extraterritorial application. The Court determined that defendant’s “use[ of the allegedly infringing mark or marks] in commerce” is the focus of Sections 1114(1)(a) and 1125(a)(1). Accordingly, on remand, the lower court will have to determine whether the defendant’s “use in commerce” occurred domestically or abroad.

The Concurrences Raise Questions About How The Court Will Address “Use In Commerce” Down The Road

Justices Jackson and Sotomayor penned concurrences that anticipate some of the issues that may arise in the wake of Abitron.  In a footnote, the majority acknowledged Justice Jackson’s concurrence elaborating on the meaning of “use in commerce,” but stated that it did not have “occasion to address the precise contours of that phrase here.” Justice Jackson made clear that she joined the majority opinion with the understanding that a “‘use in commerce’ does not cease at the place the mark is first affixed, or where the item to which it is affixed is first sold” and “can occur wherever the mark serves its source-identifying function.” She illustrated this point by describing a hypothetical sale by a German company of a potentially infringing handbag in Germany to an American student who returns to the United States with the bag. While simply using the bag in the United States would not be considered a use in commerce, if the student were to resell the bag, this could cause consumer confusion and, in that case, liability against the German company could ensue as the marks on the bag are serving their source-identifying function in commerce.

The majority opinion did not express any disagreement with Justice Jackson’s concurrence, and confirmed that under Section 1127 of the Lanham Act, the “term ‘use in commerce means the bona fide use of a mark in the ordinary course of trade,’ where the mark serves to ‘identify and distinguish [the mark user’s] goods. . . and to indicate the source of the goods.’” Until we have further proceedings, however, we will have to live with the lack of “contours” on the meaning of “use in commerce” from a foreign commerce perspective.

Justice Sotomayor, joined by Justices Roberts, Kagan and Barrett, also concurred with the decision to vacate the judgment below, but took issue with the Court’s reasoning under step two of the presumption against extraterritoriality analysis. Indeed, the concurrence’s approach would require the trier of fact to consider whether there was a likelihood of consumer confusion in the United States. In the words of the majority, “JUSTICE SOTOMAYOR concludes that step two of our extraterritoriality framework turns solely on whether ‘the object of the statute’s focus is found in, or occurs in, the United States” and whether confusion with the senior mark holder occurs – a result the majority contends “would give the Lanham Act an untenably broad reach that undermines our extraterritoriality framework.”

The concurring opinion downplayed the majority’s concerns about international discord resulting from application of the Lanham Act to conduct outside the U.S. For one, Justice Sotomayor reasoned that the 1952 Supreme Court decision styled Steele v. Bulova Watch Co., 344 U.S. 280 (1952) has not caused any tensions and that foreign sales with no connection to the United States are unlikely to confuse consumers domestically. (In Steele, a Lanham Act case was permitted to proceed based on a defendant’s infringing activity in the U.S. and Mexico. Unlike in Abitron, the “essential steps” in the infringing conduct occurred in the United States and such conduct ultimately caused consumer confusion in this country, meaning that the extraterritoriality tests were satisfied, the Lanham Act applied, and there was liability.)

Justice Sotomayor’s concurrence also noted that foreign companies have added protections against lawsuits based on non-U.S. conduct, namely the ability to dismiss a case for lack of personal jurisdiction or on forum non conveniens grounds. (In this case, the district court found personal jurisdiction appropriate based on a forum selection clause in the parties’ distribution agreement and because defendant purposely directed activities at the United States.)

The Implications of Abitron v. Hetronic

While the ultimate holding of the Court fails to provide precise contours, it does provide valuable lessons for Trademark owners.  

First, Abitron holds that foreign uses in commerce are not subject to the protections of the Lanham Act. Thus, to ensure robust protection of their trademarks, trademark holders should, if they have not already done so, consider registration under the Madrid Protocol and/or through applicable national trademark laws. This would allow for enforcement of trademarks in national courts even when the Lanham Act is not applicable. Also, when doing business overseas, parties should consider negotiating contracts with strong intellectual property protections and forum selection clauses prescribing a U.S. court forum.

Second, it bears repeating that the Court did not reverse its 1952 Steele decision; thus, a trademark holder continues to have a remedy under the Lanham Act where a defendant commits “essential steps” in the course of its infringing conduct in the United States, even where the infringing products are made overseas and end up in the United States.                        

Third, the concurrence raised the prospect of U.S. trademark holders being disadvantaged in the future and stated, in a footnote, that it is “now up to Congress to correct the Court’s limited reading of the Act.” As of this writing, it is unclear whether Congress will heed this call to amend the Lanham Act to explicitly extend its applicability to foreign conduct or to foreign conduct that has effects in the United States. Even if it were to do so, such a law could still potentially be challenged based on the presumption against extraterritoriality.

Finally, it remains to be seen how lower courts will apply Abitron in practice, particularly in cases where sales are made directly to the United States or, as discussed in Judge Jackson’s hypothetical, where products are initially sold overseas and are resold in the United States. The majority opinion did not provide clear guidance on these scenarios as it simply remanded for further proceedings in accordance with its opinion. Notably though, the majority did not express disagreement with Judge Jackson’s understanding of “use in commerce” in the context of infringing products being sold in the United States, and its failure to elaborate on the definition suggests that it was not prepared to set any hard-and-fast rules on when a use in commerce is considered domestic versus foreign. We will endeavor to report on any developments in this case on remand and on any other cases applying Abitron in the future. The case is Abitron Austria GmbH et al. v. Hetronic International, Inc., 600 U.S. __ (2023), No. 21-1043, (June 29, 2023)

 

The authors wish to thank Summer Associate Will Baker (Cleveland) for his work on this timely blog. 

 

NLR Logo

We collaborate with the world's leading lawyers to deliver news tailored for you. Sign Up to receive our free e-Newsbulletins

 

Sign Up for e-NewsBulletins