Circuit courts have struggled for decades to adopt a uniform approach for when to apply the Lanham Act extraterritorially. That struggle may end soon. In the Abitron Austria case, the Supreme Court is set to clarify the scope of the Lanham Act’s extraterritorial application. Abitron Austria GmbH et al. v. Hetronic Int’l Inc., Case No. 21-1043 (Supr. Ct. Nov. 4, 2022) (certiorari granted). With its review, the Supreme Court may determine a plaintiff’s ability to recover damages for foreign trademark infringement by foreign defendants, and it could finally resolve the ongoing circuit split on the applicability of the Lanham Act to this foreign conduct.
Case Background: How 3% US Sales Created a 100% Liability
Under review is the Tenth Circuit’s decision in Hetronic Int’l, Inc. v. Hetronic Germany GmbH, 10 F.4th 1016 (10th Cir. 2021). In that case, the Tenth Circuit concluded that the Lanham Act applied to foreign defendants’ foreign sales of infringing products because it had a “substantial effect” on U.S. commerce. Although the Tenth Circuit settled on application of a “substantial effect” test, this test is just one of many competing tests that circuit courts have developed.
The parties that petitioned the Supreme Court for review are five Austrian and German companies and their Austrian owner. These Austrian and German companies entered into agreements with an American company, Hetronic International, Inc., to distribute Hetronic’s products in Europe and other parts of the world. This partnership began in 2006 and continued without issue until 2011. But in 2011, a distributor’s employee discovered a research-and-development agreement between Hetronic and the distributor’s predecessor, which led the distributors to believe that they owned the intellectual property developed under that agreement. Based on that interpretation, the distributors began reverse-engineering, manufacturing and selling their own Hetronic-branded products. Hetronic learned about the unauthorized sales in 2014, and then ended the partnership and sued the distributors and their owner in the Western District of Oklahoma for claims under the Lanham Act and state law.
After hearing the case, an Oklahoma jury awarded Hetronic $115 million in damages, $96 million of which were tied to the distributors’ Lanham Act violations. These damages mostly reflected the foreign distributors’ total worldwide sales. The district court further ordered a permanent injunction prohibiting these Australian and German companies from using Hetronic’s marks and trade dress anywhere in the world. The distributors appealed.
On appeal, the Tenth Circuit upheld the jury award and narrowed the injunction—rather than a global injunction, the Tenth Circuit ordered a prohibition on distributors’ foreign activities in the countries in which Hetronic competes. Although only 3% of the distributors’ total sales ended up in the United States, the Tenth Circuit concluded that the Lanham Act reached “all of [the distributors’] foreign infringing conduct.” Hetronic Int'l, Inc. v. Hetronic Germany GmbH, 10 F.4th 1016, 1045–46 (10th Cir. 2021). This is because (1) the 3% still represented “millions of euros worth of infringing products that made their way into the United States after initially being sold abroad”; (2) the distributors diverted from Hetronic “tens of millions of dollars of foreign sales” that “otherwise would have ultimately flowed into the United States”; and (3) at least some sales confused U.S. consumers. Id.
The distributors appealed again—this time to the Supreme Court. And the Supreme Court granted certiorari on the distributor-petitioners’ question of “whether the court of appeals erred in applying the Lanham Act extraterritorially to petitioners’ foreign sales, including purely foreign sales that never reached the United States or confused U.S. consumers.”
The Circuit Splits: Competing Tests and Standards Abound
Although U.S. intellectual property laws are generally not applied extraterritorially, the Supreme Court has recognized the potential extraterritorial application of the Lanham Act since 1952. Steele v. Bulova Watch Co., 344 U.S. 280 (1952). In Steele, the Supreme Court acknowledged the “broad jurisdictional grant” of the Lanham Act and its “sweeping reach into ‘all commerce which may lawfully be regulated by Congress.’” Id. at 286-287. Thus, the Supreme Court determined that the Act applied to the allegedly unlawful conduct of a United States citizen abroad when its foreign conduct affected U.S. commerce. Id. Yet the court did not establish a uniform approach for when the Lanham Act governs foreign infringing activity, nor did it determine its applicability to foreign defendants. So, without guidance, courts of appeals have been left to devise their own approaches. As a result, they have adopted one of these three tests, or a variation of them, when confronted with these issues: the Vanity Fair test, the Timberlane test and the McBee test.
The Vanity Fair test, derived from Vanity Fair Mills, Inc. v. T. Eaton Co., 234 F.2d 633 (2d Cir. 1956), considers three factors: (1) whether the defendant is a United States citizen; (2) whether there was a conflict with trademark rights established under the relevant law of the foreign jurisdiction; and (3) whether the defendant’s conduct has a “substantial effect on United States commerce.” Vanity Fair, 234 F.2d at 642. This test is followed by the Second, Fourth, Fifth, Eleventh and Federal circuits, but the Fourth and Fifth circuits have each tweaked the last prong of the test. The Fourth Circuit requires the conduct to have a “significant effect” rather than a “substantial effect” on U.S. commerce, see Nintendo of Am., Inc. v. Aeropower Co., 34 F.3d 246, 250 (4th Cir. 1994), and the Fifth Circuit requires only “some effect” on U.S. commerce. Am. Rice, Inc. v. Ark. Rice Growers Coop. Ass’n, 701 F.2d 408, 414 n.8 (5th Cir. 1983).
The next test is the Timberlane test, and it is borrowed from the antitrust case Timberlane Lumber Co. v. Bank of Am., N.T. & S.A., 549 F.2d 597 (9th Cir. 1976). Rather than requiring “substantial effect,” it allows extraterritorial application of the Lanham Act 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”; 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. v. Hallatt, 835 F.3d 960, 969 (9th Cir. 2016). The Ninth Circuit follows this approach.
Last, the McBee test was devised in McBee v. Delica Co., 417 F.3d 107 (1st Cir. 2005), and it introduced a bifurcated approach to the extraterritoriality of the Lanham Act. This approach requires foreign activities to have a “substantial effect” on U.S. commerce only if the defendant is not a U.S. citizen. But when the defendant is a U.S. citizen, McBee found there to be “a separate constitutional basis for jurisdiction … for control of activities, even foreign activities.” McBee, 417 F.3d at 111. The First and Tenth Circuits apply this test, although the Tenth Circuit relied on a modified version in Hetronic. This modified approach included an added consideration about “whether extraterritorial application of the Lanham Act would create a conflict with trademark rights established under foreign law.” Id. at 1037-1038.
Not only are there varying tests and modifications applied across circuits, but the circuits have also differed in how they apply the standards. For example, the “substantial effect” standard that the Tenth Circuit applies is in theory more stringent than the “significant effect” standard that the Fourth Circuit uses. But the Tenth Circuit in Hetronic considered foreign defendants’ exclusively foreign sales to have a “substantial effect” on U.S. commerce because they could divert “sales that would have otherwise flowed to a U.S. company.” And yet the Fourth Circuit limited the application of this “diversion-of-sales theory” to only domestic defendants. See Tire Eng’g & Distribution, LLC v. Shandong Linglong Rubber Co., 682 F.3d 292, 311 (4th Cir. 2012).
A Potential New Era for Extraterritoriality of the Lanham Act
Because of conflicts in standards across circuits and their increasing modifications, these disparate approaches can cause increasingly disparate outcomes across the country without guidance from the Supreme Court. And so, Abitron Austria presents an opportunity for the Supreme Court to resolve the circuit split and articulate a precise and uniform standard across the country—although it is unknown whether the court will chart such a clear path or rather offer up a malleable standard.
Besides providing uniformity and clarity, the Supreme Court may also use this opportunity to define the geographic scope of the Lanham Act—especially as it relates to foreign defendants with purely foreign conduct. As U.S. Solicitor General Elizabeth Prelogar pointed out in the U.S. government’s amicus brief, the Tenth Circuit’s decision to uphold “a $90 million monetary award without analyzing whether 97% of petitioners’ sales were likely to cause U.S. consumer confusion … risks globalizing U.S. trademark law.” Brief for the United States as Amicus Curiae at 19, Hetronic, No. 21‑1043 (2022). This is because it could lead to regulation of foreign conduct unlikely to affect U.S. consumer perceptions. Solicitor General Prelogar suggests limiting the Lanham Act’s extraterritorial application to only foreign conduct “likely to have the ultimate effect of confusing or deceiving consumers in the United States.” Id. at 18-19. This approach is one way the court might seek to narrow the geographic scope of the Lanham Act while protecting the enforcement of U.S. trademark law on conduct with U.S. impacts.
Given the ever-increasing nature of international commerce and the conflict among the circuits, this case promises to be noteworthy for the future of Lanham Act jurisprudence—particularly for those that use trademarks abroad. How the extraterritorial scope of the Lanham Act will change remains to be seen, and the Fenwick team continues to monitor developments in this case.
Please reach out to your Fenwick contact or the authors of this alert if you have any questions.