Trader Woes: Lanham Act Applies Extraterritorially to Canadian Resale of US Grocery Chain’s Products
A recent case from the US Court of Appeals for the Ninth Circuit illustrates how the Lanham Act may be applied extraterritorially to foreign activities that affect US commerce. Trader Joe’s v. Michael Norman Hallatt, Case No. 14-35035 (9th Cir., Aug. 26, 2016) (Christen, J).
The California-based specialty grocery store chain Trader Joe’s (TJ) operates more than a dozen stores in the state of Washington, including near the Canadian border. TJ has no store in Canada, but Canadian customers regularly travel across the border to shop at TJ’s northern-Washington stores. Canadian resident Michael Hallatt bought large quantities of TJ-branded products from one of the TJ stores near the border and resold them at inflated prices at his own store in Canada, which he named “Pirate Joe’s.” Hallatt advertised his store using TJ trademarks, decorated his store to look like TJ stores and used TJ-like signs at his store. TJ demanded that Hallatt stop reselling TJ products, and Hallatt refused. After Hallatt was refused service at TJ stores near the border, he traveled to more distant TJ stores to continue buying TJ products, and he even paid third parties to buy TJ products for him.
TJ sued Hallatt for trademark infringement under the Lanham Act and for Washington state trademark law violations, but the Washington district court granted Hallatt’s motion to dismiss TJ’s federal and state trademark claims for lack of subject-matter jurisdiction, concluding that the Lanham Act did not apply to Hallatt’s conduct in Canada. TJ appealed.
It is well settled that the Lanham Act applies extraterritorially to foreign conduct that affects US commerce. However, the Ninth Circuit faced two specific issues in resolving this appeal: (1) whether the extraterritorial application of the Lanham Act implicates federal courts’ subject-matter jurisdiction, and (2) whether the alleged conduct by Hallatt affected US commerce in a manner sufficient to warrant extraterritorial application of the Lanham Act.
On the first issue, the Ninth Circuit agreed with TJ’s contention that the extraterritorial reach of the Lanham Act is a non-jurisdictional merits question. The Ninth Circuit noted that it is the Lanham Act’s “use in commerce” element and its broad definition of “commerce” that gives the statute extraterritorial reach, and that the “use in commerce” element goes to the merits of a federal trademark claim and is not a jurisdictional element. As such, the Court concluded the extraterritorial application of the Lanham Act does not implicate federal courts’ subject-matter jurisdiction.
As to the second issue, the Ninth Circuit noted that TJ was not alleging that TJ products Hallatt resold from his Canadian store flowed back into the United States in a manner likely to confuse US consumers, but rather that Hallatt’s activities harmed TJ’s reputation and trademark goodwill because Hallatt transported and resold TJ products without proper quality control measures. The Court recognized that Hallatt’s alleged attempt to pass his store off as an authorized TJ reseller could similarly harm TJ’s reputation and diminish the value of TJ’s marks, because Hallatt resold TJ goods at inflated prices and with inferior customer service, all of which may reflect poorly on the TJ brand.
The Court also considered other facts that favored extraterritorial application of the Lanham Act to Hallatt’s conduct, including that (1) Hallatt sourced his inventory entirely from the United States; (2) Hallatt hired others in Washington to purchase TJ products on his behalf; and (3) Hallatt, albeit a Canadian citizen, held permanent resident status in the United States and regularly traveled between Canada and the United States for business. The Ninth Circuit concluded the alleged nexus between Hallatt’s foreign conduct and US commerce to be sufficient to state a Lanham Act claim—namely, that Hallatt’s conduct may cause TJ reputational harm that could decrease the value of TJ’s US trademarks, and that Hallatt operated in US commerce streams when he bought TJ goods in the United States and hired locals to assist him.
The Ninth Circuit affirmed the dismissal of TJ’s state law claims, however, finding that TJ failed to present sufficient facts pertaining to state trademark dilution or harm to a state resident or business.