Litigation Alert: The Ninth Circuit Leaves Pirate Joe’s Saying “Shiver Me Timbers!”

Late last week, the U.S. Court of Appeals for the Ninth Circuit determined a court had jurisdiction to decide a trademark lawsuit filed by a U.S. grocery store against a Canadian reseller where the products at issue were only sold in Canada. Trader Joe’s Co. v. Hallatt, No. 14-35035, 2016 WL 4488009 (9th Cir. Aug. 26, 2016). The ruling has implications for U.S. companies and their ability to go after foreign infringers in the U.S. even when foreign infringers do not sell products in the U.S.

Aaargh! That’s My Treasure: Background and District Court Decision

Trader Joe’s operates grocery stores throughout the U.S. and owns several trademarks associated with its stores. Trader Joe’s does not, however, have any stores in Canada or sell products directly into Canada.

Defendant Michael Hallatt purchased Trader Joe’s products in Washington State, transported them to Canada, and resold them at a store he designed to mimic Trader Joe’s stores called Pirate Joe’s. In 2013, Trader Joe’s sued Hallatt in the U.S. District Court for the Western District of Washington for trademark infringement and unfair competition under the Lanham Act. Trader Joe’s alleged that Hallatt was misleading customers into thinking Pirate Joe’s was an authorized retailer by displaying Trader Joe’s trademarks and mimicking its trade dress. Hallatt denied that his activities were wrongful, and claimed he alerted customers that he was not an authorized Trader Joe’s retailer.

In the district court, Hallatt argued that the case should be dismissed because the Lanham Act did not apply to his alleged trademark violations occurring in Canada. The district court agreed, finding that Trader Joe’s did not explain how Hallatt’s activity impacted American commerce sufficiently to support a Lanham Act claim—the alleged infringement was in Canada after all. Without a Lanham Act hook, the court dismissed Trader Joe’s claims for lack of subject-matter jurisdiction.

The Ninth Circuit Revokes Pirate Joe’s Letters of Marque

On appeal, the Ninth Circuit reversed the district court’s findings on the federal trademark claims, finding instead that the alleged conduct “could harm the reputation of Trader Joe’s American-held marks.”

The court considered two questions to determine whether the Lanham Act reached the allegedly infringing conduct. First, is extraterritorial application of the Lanham Act an issue that implicates the federal courts’ subject-matter jurisdiction? Second, did Trader Joe’s sufficiently allege that Hallatt’s infringing activities impacted American commerce, invoking the Lanham Act’s protections? The court answered “no” to the former, and “yes” to the latter.

Answering the first question, the court explained that the extraterritorial reach of the Lanham Act is not an issue of subject-matter jurisdiction; rather, it is a non-jurisdictional merits issue. As the court recently explained in La Quinta Worldwide LLC v. Q.R.T.M., S.A. de C.V., the Lanham Act’s “use in commerce” requirement—which gives the Act its extraterritorial reach—is not jurisdictional, and the broad definition of “commerce” indicates that the Act should apply extraterritorially. 762 F.3d 867 (9th Cir. 2014). This means a defendant’s activities abroad, even if not substantial or significant, could fall within the purview of the Lanham Act.

The court next considered the second question, which involves the limits on the Lanham Act’s extraterritorial application. The Ninth Circuit applied the three-part Timberlane test, finding that the Lanham Act applies extraterritorially if: “(1) the alleged violations create… some effect on American foreign commerce; (2) the effect [is] sufficiently great to present a cognizable injury to the plaintiffs under the Lanham Act; and (3) 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.” Trader Joe’s Co., 2016 WL 4488009 at *6.

Under prongs one and two, plaintiffs typically allege that infringing goods, while initially sold outside the U.S., flow into American domestic markets. Trader Joe’s satisfied its burden under prongs one and two by alleging a nexus between Hallatt’s foreign conduct and American commerce based on alleged harm to Trader Joe’s domestic reputation, which could decrease the value of its American trademarks. Trader Joe’s claimed that Hallatt’s poor quality controls could lead consumers who purchased Trader Joe’s brand products at Pirate Joe’s to get ill, and the news of such illness could make international news. Further, if Hallatt sold products at inflated prices, customers at Pirate Joe’s might “mistakenly associate Trader Joe’s with overpriced goods.” Id. at *7.

Under the third prong, the court considered issues of international comity by balancing seven factors:

“[1] the degree of conflict with foreign law or policy, [2] the nationality or allegiance of the parties and the locations or principal places of business of corporations, [3] the extent to which enforcement by either state can be expected to achieve compliance, [4] the relative significance of effects on the United States as compared with those elsewhere, [5] the extent to which there is explicit purpose to harm or affect American commerce, [6] the foreseeability of such effect, and [7] the relative importance to the violations charged of conduct within the United States as compared with conduct abroad.”

Id. at *8. Taken together, these factors weighed in favor of extraterritorial application. As the court explained, there were no pending proceedings between the parties in Canada; there would be no difficulty in enforcing a damages award against Hallatt; Trader Joe’s pled facts indicating a purpose to harm American commerce; and an essential part of Hallatt’s business took place in the U.S.—even if the ultimate sale, and most of the marketing, occurred outside of the U.S.

Because the three Timberlane prongs favored extraterritorial application of the Lanham Act, the Court concluded that the Lanham Act reached Hallatt’s infringing activity, and reversed the district court’s dismissal of the Lanham Act claims.

Foreign Infringers: Prepare to be Boarded

The Ninth Circuit’s opinion suggests that infringement that occurs abroad, even when the products at issue do not flow into the U.S., can serve as the basis for a trademark claim so long as the infringement otherwise impacts a mark in the U.S. This has implications for international companies or brands in international cities with U.S. marks since U.S. mark holders may only need to show the right amount of harm (actual or foreseeable) to broaden their ability to sue foreign companies for trademark claims.

The opinion also comes at a time when the scope of protection for foreign activities and foreign marks under the Lanham Act is already evolving. For example, in Belmora LLC v. Bayer Consumer Care AG, the U.S. Court of Appeals for the Fourth Circuit recently held that Bayer could assert its foreign trademark in the U.S. against Belmora, even though Bayer had never used the mark in the U.S. 819 F.3d 697 (4th Cir. 2016). Belmora has until late September to appeal the decision to the U.S. Supreme Court. The U.S. and its partner nations are similarly considering whether to make foreign marks more easily enforceable through proposals like the Trans-Pacific Partnership Agreement (TPP).

Proposals like the TPP (even if it doesn’t pass) and recent case developments across the country reinforce the fact that foreign marks and foreign conduct are more important than ever. U.S. companies should consider foreign markets when selecting a mark and should evaluate their policing of foreign infringers to see whether they should file trademark claims in the U.S. against these foreign infringers.