Lanham Act: will SCOTUS review of $114m TM win bring further scrutiny of US law?

Under what circumstances can a US company claim damages for trademark infringement based purely on foreign sales of offending products?

That is the question that will be addressed by the  US Supreme Court (SCOTUS) in its upcoming review of a dispute between  Hetronic International—a US industrial radio remote control company—and its former European distributor  Abitron Germany.

The case centres upon ‘copycat’ industrial remote control products made and sold outside of the US by Abitron, and therefore concerns the extraterritorial application of the Lanham Act, which provides civil remedies for infringement of US trademarks.

The Supreme Court announced last week, November 3, that it will reconsider a federal court’s decision to award $114 million in damages to Oklahoma-based Hetronic.

The majority ($96 million) of those damages, decided in March 2020 by a jury in the US District Court for the Western District of Oklahoma, related to violations of US trademark law. Abitron was also hit with a permanent injunction against further overseas infringement.

Abitron appealed, arguing that it was a foreign entity and that the Lanham Act was irrelevant because almost all of its allegedly infringing sales took place outside of the US.

But the  Tenth Circuit affirmed the lower court’s decision in August 2021, which signalled the first time that this court had examined whether the Lanham Act applies to foreign defendants selling its products to foreign customers.

The appeals court maintained that Abitron’s sales had still impacted US commerce and “diverted tens of millions of dollars of foreign sales from Hetronic that otherwise would have ultimately flowed into the United States”.

Prior agreement

Hetronic, a subsidiary of  Methode Electronics, sued its European distributors in 2015 on the grounds of breach of contract, by manufacturing and selling identical products with unauthorised parts under the Hetronic brand.

The allegedly infringing sales activity had commenced after one of the distributor’s employees claimed that an old research and development agreement meant that the distributors, rather than Hetronic, owned the rights to Hetronic’s trademarks and other IP.

During the course of the dispute, Abitron bought distribution firm Hetronic Germany, which had previously sold Hetronic International’s products in Europe.

In their petition for a writ of certiorari, Abitron and its co-petitioners stated: “The Tenth Circuit upheld a $90 million damages judgment against petitioners—all foreign nationals—based on its holding that the Lanham Act applies extraterritorially to all their sales worldwide, including purely foreign sales that involved only foreign parties and never reached the United States. In doing so, the Tenth Circuit exacerbated an acknowledged circuit conflict.”

In this statement, Abitron was referring to a conflict in the application of the Lanham Act, largely between the Tenth and Fourth Circuit, arguing that the circuit courts are “badly splintered” over the issue, with at least six different standards adopted by different circuits.

Abitron, therefore, questioned 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 US consumers”.

Harm to US markets a “significant question”

So how significant could this case become to the reach of US trademark law and the potential application of the Lanham Act to foreign sales?

Jess Collen, partner at Rothwell Figg, believes the case “presents an important issue”, although he suggests that its impact on trademark infringement claims may be limited.

“Had the court not believed there to be a meaningful split in the circuits (despite what the respondent says), the court may not have weighed in on the issue of extraterritoriality, under these facts,” he says.

Collen points out that when patent and copyright cases have dealt with the issue of territorial impact, and particularly copyright, they have focused heavily on statutory language.

“There, the focus arguably has been on competing provisions of the copyright statute, which made it difficult to discern the impact of extraterritorial conduct (such as first sale under the Copyright Act).”

In this case, however, Collen argues that the “significant question relates to the harm to US markets and to the US consumer based upon overseas acts, which facilitate consumer confusion—or even where allegedly, as this court found, there were deceptive acts by the defendant”.

Cynthia Johnson Walden, principal at Fish & Richardson and also the firm’s trademark and copyright practice group leader, finds the federal court’s original ruling “surprising”.

“This decision goes much further than other decisions on the issue of the extraterritorial reach of the Lanham Act,” she says.

“This case involves a complicated background of contractual issues between the parties going back many years, as well as disputes related to the ownership of the underlying intellectual property in the EU and in the US courts.

“But in many respects, the ruling seemed to be based on the failure of the defendants to best position the case and defend their position as viewed through the lens of US law and procedure.”

Challenges to extraterritoriality

Collen aligns with this view, observing that there does not appear to be substantial disagreement about the total amount of sales covered by the judgment.

“The plaintiff in the case suggests that the petitioner could have reduced the impact of worldwide sales figures by presenting more or better evidence of its own costs and expenses, which it could have deducted from the gross sales to arrive at a much lower damage number,” he says.

“This would seem to have little to no impact on the court’s consideration of the extraterritorial issue, however.”

He adds that the broader issues relate to whether this “truly represents a result, which is necessary to avoid unfair infringement upon the plaintiff’s marks”.

“To me, it appears that the challenges to extraterritoriality are reasonably strong for three reasons. First is the very broad application of this doctrine by the Circuit Court, as opposed to the more rigid consideration of factors in other jurisdictions, such as the Second Circuit.

“Secondly, there are the issues of international comity, which causes courts in this country to consider whether a US court should be assessing damages for actions in sales which occur wholly outside of the US, and in turn, whether we would want US parties to be adversely impacted by foreign court judgments based on acts occurring exclusively in the US.”

Customer ‘confusion’

In addition to this, continues Collen, the plaintiff “may have a difficult time arguing that it was left without a remedy had the US courts not assessed damages on foreign sales”.

“The action of circulating infringing, or spurious, goods overseas can result in those goods finding their way into the US market and confusing US consumers. A party is entitled to prove its damage, in any way that is relevant to the harm caused by these activities, and the cases hold that other damages, not strictly related to lost sales or defendant’s profits, might be appropriate.”

But, he says, activities which have taken place entirely outside the US can “presumably be addressed by litigation in other jurisdictions, where those infringements are taking place”.

“These factors may make it less attractive and perhaps less economically feasible to bring overseas litigation. But traditionally factors such as convenience alone, as opposed to actual or practical impossibility, do not empower the US court to extend its reach.”

For Johnson Walden, the findings related to the impact on US commerce as well as the broad scope of the worldwide injunction were also unexpected.

“The conclusion that the actions of the defendants had a substantial effect on US commerce was surprising, as was the substantial damages award that was based primarily on sales outside of the US,” she said.

Commerce concerns

In terms of the case’s potential impact and the possible outcome, Collen has his reservations. “It is often, to state the obvious, almost impossible to guess what the Supreme Court will have in mind,” he says.

“To me, the fact that it is agreeing to hear this case suggests that it wishes to address the splits of the circuits, but it does not suggest to me that the court feels strongly, one way or the other, regarding the underlying extraterritorial issue or any particular outcome.

“The court may have other matters in mind on the question of ‘substantial effect on US commerce’; whether the Lanham Act prohibits foreign sales which have such an effect is the basis for the Cert petition.”

He notes that the dispute seems to be driven by varying linguistic nuances applied by the circuit courts. “There appears to be little disagreement over the operative language in the statute nor the history of that language,” he explains. “The core of the disagreement is about how courts should apply the language itself.

“Having said that, I think the court, when dealing with the broader issue of territorial scope of the US court to deal with infringement occurring overseas, is unlikely to be impressed with arguments which state that the overseas activities have facilitated infringement in the United States.

“There might be some measure of damages attributable to that, but it would not seem [that] such damages should include the entire amount of foreign sales.”

Johnson Walden believes that the case could influence similar cases. “It will be interesting to see if the US Supreme Court agrees with the arguments about the infringer’s activities having ‘substantial effects’ on US commerce,” she says.

“If it does so, this case will likely have a substantial effect on future trademark infringement proceedings between US company plaintiffs and foreign company defendants, resulting in an uptick in these types of actions against infringers based overseas being brought in the US courts.

“Companies may look to design their contracts to anticipate these issues more than in the past, and foreign company defendants will likely think twice about signing distribution or other agreements that waive personal jurisdiction provisions,”

Counsel for Hetronic and Abitron did not immediately respond to requests for comment.