Have you carefully cultivated your brand and obtained trademark protection only to have someone steal your investment and start using your trademarks abroad? If so, you may have the ability to bring a lawsuit in U.S. Federal Court rather than attempting to navigate the laws and courts of a foreign country.
The Lanham Act is the federal trademark and unfair competition statute that creates a civil cause of action for trademark infringement. To establish a Lanham Act violation for either a registered mark (15 U.S.C. § 1114) or an unregistered mark (15 U.S.C. § 1125(a)), a plaintiff must demonstrate that: (1) it has a valid and legally protectable mark; (2) it owns the mark; and (3) the defendant’s use of the mark to identify goods or services causes a likelihood of confusion.[1]
A recent decision from the United States Ninth Circuit Court of Appeals serves as a reminder that the Lanham Act may extend to infringing activity that occurs outside the United States. In Trader Joe’s v. Hallatt, a dispute arose when staff members at a Washington State Trader Joe’s store located close to the Canadian border noticed that Canadian resident Michael Norman Hallatt was visiting their store several times per week and purchasing large quantities of their products. Hallatt admitted that he was transporting the Trader Joe branded goods across the border in order to resell them in Canada from his store, Pirate Joe’s, at significantly inflated prices. After refusing requests to cease this activity, Trader Joe’s sued Hallatt for trademark infringement in the Western District of Washington.
Extraterritorial Reach of the Lanham Act
In determining whether the Lanham Act reaches foreign conduct, the Ninth Circuit set forth and applied a two-step framework used by the U.S. Supreme Court in RJR Nabisco, Inc. v. European Cmty.[2] At step one, courts must determine “whether the statute gives a clear, affirmative indication that it applies extraterritorially.” The Supreme Court previously settled this question with regard to the Lanham Act in Steele v. Bulova Watch Co., holding that Congress clearly intended that the Lanham Act should apply extraterritorially.[3]
At step two, courts must determine “the limits Congress has (or has not) imposed on the statute’s foreign application.”[4] In Trader Joe’s, the Ninth Circuit addressed this second step through application of the “Timberlane Test.”
Timberlane Test
The Timberlane Test is a three-part test first articulated in Timberlane Lumber Co. v. Bank of America National Trust & Savings Ass’n.[5] Under Timberlane, the Lanham Act applies extraterritorially if:
- The alleged violations create some effect on American foreign commerce;
- The effect is sufficiently great to present a cognizable injury to the plaintiffs under the Lanham Act; and
- The interests of and links to American foreign commerce are sufficiently strong in relation to those of other nations to justify an assertion of extraterritorial authority.
Timberlane Prongs One and Two
Plaintiffs can satisfy the first two prongs of the Timberlane test by showing that foreign infringing goods ultimately flow into the United States.[6] However, in Trader Joe’s, the infringing goods were taken to Canada, sold in Canada, and did not flow back into the United States. Trader Joe’s successfully argued that, although the infringing products did not flow back into the United States, Hallat’s activities affected United States commerce by harming Trader Joe’s reputation and decreasing the value of its trademarks because its “quality controls” [7] were not present thereby devaluing Trader Joe’s image, devaluing its marks, and causing lost sales. For example, if Hallatt’s Canadian consumers became ill from spoiled Trader Joe’s goods and news of their illnesses reached the United States, Trader Joe’s reputation would be harmed. This risk was found to be especially pronounced because Hallatt displayed Trader Joe’s marks in his own store.
Furthermore, Trader Joe’s successfully argued reputational harm under a false endorsement theory: Canadian consumers may mistakenly associate Hallatt’s inflated prices and poor customer service with Trader Joe’s own business practices. Because Trader Joe’s United States stores draw international shoppers, including Canadian shoppers who might have patronized Hallatt’s store, Trader Joe’s stood to lose value in its marks in the United States.
Lastly, the Ninth Circuit placed weight on the fact that Hallat sourced all of his inventory in the United States. The Court distinguished Hallatt’s conduct and sourcing in the United States from other cases in which the alleged conduct occurred entirely abroad.
Timberlane Prong Three
The third Timberlane prong considers international comity and weighs seven factors in order to determine whether extraterritorial application of the Lanham Act is justified:
- The degree of conflict with foreign law or policy;
- The nationality or allegiance of the parties and the locations or principal places of business of corporations;
- The extent to which enforcement by either state can be expected to achieve compliance;
- The relative significance of effects on the United States as compared with those elsewhere;
- The extent to which there is explicit purpose to harm or affect American commerce;
- The foreseeability of such effect; and
- The relative importance to the violations charged of conduct within the United States as compared with conduct abroad.
In considering the degree of conflict with foreign laws, the Court noted that Trader Joe’s had been granted Canadian trademarks, but that there were no pending or ongoing adversarial proceedings between Trader Joe’s and Hallatt in Canada. Thus, the Court weighed this factor in favor of extraterritorial application of the Lanham Act.
In terms of the nationality of the parties and the locations of their businesses, the Court weighed this factor in favor of extraterritorial application because Hallatt was a Lawful Permanent Resident of the U.S. and therefore subjected himself to United States laws.
The Court also held that the third factor favored extraterritorial enforcement because of Hallatt’s permanent resident status and because he held assets in the U.S. Furthermore, a domestic injunction would effectively halt Hallatt’s operation because he sourced his goods from United States Trade Joe’s stores.
The fourth factor was also found to favor extraterritorial application. Hallatt’s conduct primarily affected the value of Trader Joe’s marks in the United States because Trader Joe’s holds most of its intellectual property in the United States. Furthermore, Trader Joe’s alleged that its trademarks were well-known in Canada and that many of the transactions at its stores proximate the U.S.-Canadian border were with foreign consumers.
The Court also weighed the fifth and sixth factors for extraterritorial application, finding from his conduct that Hallatt intended to harm Trader Joe’s, or, at a minimum, that such harm was foreseeable.
The Court held that only the seventh factor weighed against extraterritorial application. Although Hallatt obtained Trader Joe’s goods domestically, most of Hallatt’s infringing activity, such as displaying Trader Joe’s marks and reselling the goods, occurred in Canada.
Conclusion
The Ninth Circuit’s decision in Trader Joe’s has reaffirmed and solidified the Lanham Act’s extraterritorial application so long as the plaintiff can demonstrate a sufficient nexus with the United States. The attorneys of Maschoff Brennan have experience with extraterritorial enforcement of the Lanham Act. If you have questions about whether you can pursue a foreign infringer through the courts in the United States, please contact the authors of this article.
[1] See A&H Sportswear, Inc. v. Victoria’s Secret Stores, Inc., 237 F.3d 198 (3rd Cir. 2000).
[2] 136 S.Ct. 2090, 2101 (2016).
[3] 344 U.S. 280, 286 (1952).
[4] RJR Nabisco, 136 S.Ct. at 2101.
[5] 549 F.2d 597 (9th Cir. 1976).
[6] See Reebok Int’l, Ltd. v. Marnatech Enters., Inc., 970 F.2d 552, 556 (9th Cir. 1992); McBee v. Delica Co., Ltd., 417 F.3d 107, 125 (1st Cir. 2005).
[7] See Enesco Corp. v. Price/Costco Inc., 146 F.3d 1083, 1085 (9th Cir. 1998).