In a recent development testing the impact of globalism on U.S. trademark law, the U.S. Supreme Court earlier this year declined to review a ruling by the Fourth Circuit that Bayer AG, the German drug maker, had standing under the Lanham Act to sue for injury to its foreign brand, despite never having used or registered its mark in the United States. See Belmora LLC, et al. v. Bayer Consumer Care AG, et al., No. 16-548 (February 27, 2017). The case raises significant issues regarding the territorial limits of the Lanham Act, impacting brand enforcement programs of both U.S. and foreign companies.
In the case at issue, Bayer filed an action before the Trademark Trial and Appeal Board (the “TTAB”) against Belmora, a small pharmaceutical company, for selling pain reliever products in the U.S. under the brand name FLANAX® — a mark which Bayer used only in Mexico for its painkiller ALEVE®. Bayer claimed that Belmora’s use of the FLANAX mark was deliberately designed to deceive Mexican-American consumers into believing it was the same product that Bayer sold in Mexico. Belmora employed similar packaging and advertising directed at Mexican Americans stating its products were the same as the Flanax sold for many years in Mexico. Bayer asked the TTAB to cancel Belmora’s mark under §14(3) of the Lanham Act, which prohibits misrepresenting the source of goods. The TTAB agreed, and further found that Belmoral had misused the FLANAX mark in a manner “calculated to trade in the United States on the reputation and goodwill” of Bayer’s Mexican mark.
Belmora appealed the TTAB decision to a district court. Belmora argued that Bayer, having never registered or used the FLANAX mark in the United States, lacked standing to enforce its foreign rights under the Lanham Act. The District Court agreed, overruling the TTAB decision. The Court also rejected claims by Bayer under §43(a) of the Lanham Act for false association and false advertising.
In March 2016, the Court of Appeals for the Fourth Circuit reversed, ruling that Bayer could sue under the Lanham Act’s broad unfair competition provisions and seek to cancel Belmora’s trademark registration in the United States, even though Bayer never used the FLANAX mark domestically.
Prior to the Flanax decision, courts resolved the territoriality question by asking whether the plaintiff had any U.S. rights to assert. The Circuit Courts are split. The Ninth Circuit, in Grupo Gigante, allowed a foreign trademark owner to enforce rights in the Gigante trademark registered in Mexico for a large supermarket chain. The Ninth Circuit reasoned the mark was famous among Mexican immigrants in Southern California. The rationale for the holding was to avoid consumer confusion to Mexican American immigrants. The Ninth Circuit held:
An absolute territoriality rule without a famous-mark exception would promote consumer confusion and fraud. Commerce crosses borders. In this nation of immigrants, so do people. Trademark at its core is about protecting against consumer confusion and ‘palming off.’ There can be no justification for using trademark law to fool immigrants into thinking that they are buying from the store they liked back home.”
Grupo Gigante S.A. de C.V. v. Dallo & Co., Inc., 391 F.3d 1088, 1094 (9th Cir. 2004) (footnotes omitted). Establishing a foreign brand as famous required a significant evidentiary showing. This decision is consistent with U.S. policy under TRIPS to persuade foreign governments to enforce famous American marks.
The Second and Federal Circuits, in contrast, have rejected the famous mark exception. They reasoned that for a company to have rights under the Lanham Act, it has to meet the requirement of using the mark in the United States.
The Fourth Circuit deviated from the circuit split by disregarding the question of whether Bayer had any U.S. rights to assert. The Fourth Circuit, reacting to what it perceived as a brazen use of the mark by Belmora to deceive Mexican American consumers, predicated its ruling instead Bayer’s allegation that it lost sales in Mexico due to Belmora’s sale of FLANAX products in the United States.
The Fourth Circuit decision arguably moves the Lanham Act further away from a strict territoriality requirement by allowing foreign brand enforcement through the Act’s unfair competition provisions. The diversion of sales rationale finds precedent in line of cases in which U.S. brand owners are permitted to sue over foreign activity shown to have a “substantial effect’ on U.S. commerce. A substantial effect can be proved by showing consumer confusion, harm to the trademark owner’s reputation, or diversion of sales. In those cases, however, the U.S. brand owner demonstrably had U.S. rights to protect.
The Fourth Circuit’s Flanax decision reflects tension in the Lanham Act’s objectives. Enforcement by Bayer serves to protect consumers from confusion wrought by predatory branding. But the decision can also be viewed as an expansion of the rights of foreign companies to use U.S. courts to enforce foreign trademark rights at the expense of U.S. brand owners.
Belmora, in its brief in support of its petition for a writ of certiorari, put the issue bluntly: “It is difficult to overstate the practical impact of the Fourth Circuit’s decision’s invitation to foreign businesses to use the Lanham Act’s unfair competition provisions to circumvent the territorial limitations of U.S. trademark law and to undermine the rights of U.S. trademark registrants.” The Supreme Court’s denial of the writ petition leaves intact such a tactic.
The Flanax decision adds extra cost and indeterminacy to brand initiatives in the United States that should be taken into account by U.S. and foreign brand owners alike.
This article was originally published in the Orange County Business Journal.