White & Case Tech Newsflash

On March 21, 2023, the Supreme Court heard oral arguments on whether federal trademark law applies to trademark infringement occurring outside the United States. The case that has brought this issue to the court is Abitron Austria GmbH v. Hetronic International, Inc.

What is at issue in Abitron?

Hetronic International is the owner of the trademark and advocates for the extraterritorial reach of the Lanham Act to recover for conduct occurring outside the United States. Abitron, the alleged infringer, takes the position that Congress did not intend for the Lanham Act to extend beyond the US and therefore only applies to conduct inside the country. Regarding this, the Biden administration has taken the middle ground and they argue that the Lanham Act applies only to extraterritorial conduct that results in consumer confusion or mistakes in the US.¹

Facts

Hetronic is an Oklahoma-based manufacturer and seller of radio remote controls that operate heavy-duty construction equipment. They own US trademarks for the distinguishing features of the remote controls. Abitron served as Hetronic's distributor in Europe and was authorized to assemble and sell Hetronic's remote controls under Hetronic's brand, but was contractually bound to purchase the parts from Hetronic.

Hetronic alleges that Abitron used the confidential information they accessed through the licensing agreement to reverse-engineer Hetronic's products. They claim that Abitron then sold these products to Hetronic's customers as if they were, in fact, Hetronic products. Hetronic also claims that this unauthorized selling continued even after the parties' licensing agreements were terminated.²

The extraterritorial nature of the claim

Hetronic sued Abitron in the US for trademark infringement under the Lanham Act. A jury in the US District Court for the Western District of Oklahoma awarded Hetronic more than "US$90 million and, of this amount, only US$240,000 was for products that Abitron had sold directly from abroad into the US. Approximately US$2 million was for products that had been sold abroad to foreign buyers who listed the United States as the ultimate destination where the products were intended to be used. The balance (US$87 million, or almost 97 percent of the jury award) was for products that Abitron had sold abroad to foreign buyers for use outside the United States."³

The Lanham Act and extraterritoriality

Under the Lanham Act, liability occurs if "uses in commerce" of a trademark is likely to cause consumer confusion.

To decide whether US law applies to conduct abroad, the court has to apply a two-step test to determine whether Congress intended for that law to apply outside of the US. The underlying premise is that Congress is supposed to legislate only domestic conduct and therefore does not concern itself with conduct abroad. Under the first step, the court asks if there is a "clear, affirmative indication" from the face of the statute that Congress intended the law to apply extraterritorially. If no indication is found, courts proceed to the next step. Under the second step, the court looks at the law's "focus" to determine whether the case warrants a domestic application of the law.

Direct indication from Congress?

Hetronic argues that the Lanham Act defines "commerce" as "all commerce which may lawfully be regulated by Congress." Hetronic uses this argument to claim that since Congress has the power to regulate foreign commerce, the definition shows Congressional intent to apply the Lanham Act extraterritorially.

This is countered by arguments from Abitron and the Biden administration, who claim that this is not enough to show intent. According to them, there needs to be an affirmative indication in the statute that Congress wanted such extraterritorial application.

Both parties discuss the 1952 Steele v. Bulova Watch Co. case where the court held that the Lanham Act applies to a US citizen's sales in Mexico of watches that infringed on a US trademark. There, the court observed that the Lanham Act applied abroad because of its "sweeping reach." Abitron disagrees as to its applicability here and argues that Steele should not be extended to foreign defendants.

What is the "focus" of the Lanham Act?

The Biden administration proposed that the "focus" of the Lanham Act is consumer confusion or mistakes. According to the government, "as long as such effects on consumers occur in the United States, foreign infringement of a US trademark would be covered by the Lanham Act, despite the lack of textual evidence of Congress's intent to apply the law extraterritorially."⁴ The government relies on Steele to bolster its argument because there the Court stated that when watches bearing the infringing trademarks were brought back from Mexico to the US, the trademark owner's reputation in the US was impaired.

Abitron argues that the "focus" of the Act is on the unauthorized use of a trademark in commerce. According to Abitron, the liability thus extends only to the goods it sold directly to customers in the US (US$240,000 of the US$90 million lower court award).

However, Hetronic claims that both consumer confusion and protection of the trademark owner's goodwill are the "focus[es]" of the Lanham Act. Hetronic urges the Court to consider the plaintiff's place of business, the US, and asks that court to apply the Act because a US business lost revenue and goodwill due to foreign infringement and thus suffered injury at home.^{5 6}

Supreme Court argument – March 21, 2023

The question presented to the court was "[w]hether 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."

The core argument advanced by Abitron rested on the fact that the Lanham Act does not apply here to the use of trademarks in foreign countries because nothing in the Act provides the clear, affirmative and unmistakable indication needed to overcome the presumption against extraterritoriality, especially as to foreign defendants.

In response, Hetronic points to precedent that allowed the Lanham Act's application in a foreign action as long as there was an effect on US commerce. Over the past 70 years, Hetronic argues, Congress has amended the Act 36 times and it has never pulled back on the extraterritoriality element of the Act. Hetronic argues that the Lanham Act has been the Court's go-to example of a statute whose "sweeping language reaches to the limits of Congress's powers" and differentiates it from other "boilerplate statutes." Its argument rests on the siphoning of goodwill and sales of US trademark holders by "foreign trademark pirates," with injury to both US trademark holders and consumers.

Justices Thomas and Sotomayor began by asking Abitron about circumstances where a sale involving an international transaction could also involve conduct in the US that would violate the Lanham Act. Abitron conceded that direct sales to US customers would be covered. Justice Sotomayor argued that this would be no different from sales to customers abroad who designated the US as their mailing address.

Regarding Steele, Justice Sotomayor explained that Steele is no different from the situation here because there the US citizen defendant was not handing the watches to the buyers—the sales were handled by retailers and it was individual consumers who then took the watches from Mexico to the US. Justice Sotomayor pointed out that Abitron was glossing over the confusion point of Steele, which was a result of American consumers bringing the watches to be fixed in the US.

Justice Kagan raised the question of where the confusion took place. She explained that Steele is more focused on the effects of the trademark use than the citizenship of the defendant. This was brought up again by Justice Thomas, who also expressed interest in the substantial effects of the conduct.

Justice Kagan disagreed with Abitron in one of their arguments, and noted that "the statute's focus is the object of its solicitude, which can include the conduct that seeks to regulate, as well as the parties in interests it seeks to protect or vindicate."

The Justices focused on the territorial nature of the trademark laws and suggested that Congress' authority to regulate US commerce is not exactly as Abitron paints it to be. Abitron argues that the authority is strictly domestic, which the Justices find does not square with the digital, Internet-connected world of today. Justice Sotomayor reasoned that foreign parties advertise on the internet and target American customers in the US. According to her, in such a scenario, the fact that they chose to deliver those goods at the border, outside the US or into the US, should make no difference as they are competing with an trademark owner in the US to secure US customers.

Finally, Justice Jackson posed a hypothetical to Arbitron. She asked Abitron's counsel about a scenario where students studying abroad buy knock-off Coach handbags when in Germany. Abitron responded that in this scenario, if the students bought the bags directly from the German manufacturers and sold them in the US, then it is only the students that should be liable and not the manufacturers.⁷

What's next?

While we wait for the Supreme Court's decision, there are a few takeaways:

• Generally, a party claiming that a federal statute applies extraterritorially may argue that:
  • Congress intended to apply the law globally; or, in the alternative
  • Regardless of Congressional intent, the lawsuit is about the domestic focus of the statute (e.g., confusion or harm occurring in the US).⁸
• The precise contours of how the above test is applied are changing with the expansion of e-commerce and technologies that know no borders, including the metaverse.
• The Court's ultimate decision will likely go one of two ways: It will either be narrowly tailored to the specific facts of the case (with no major shift in how the Lanham Act is applied); or it may fundamentally alter the scope and reach of the Lanham Act. Based on the Justices' questions, at the very least, the Court seems to be grappling with the need to modernize the test for an era where the majority of sales and interactions occur online .

1 https://www.scotusblog.com/2023/03/justices-to-consider-international-reach-of-u-s-trademark-law/
2 Ibid
3 Ibid.
4 Ibid.
5 Ibid.
6 https://www.bloomberglaw.com/bloomberglawnews/ip-law/XASMJTLG000000?bna_news_filter=ip-law#jcite
7 SCOTUS Transcript https://www.supremecourt.gov/oral_arguments/argument_transcripts/2022/21-1043_7648.pdf
8 https://www.scotusblog.com/2023/03/justices-to-consider-international-reach-of-u-s-trademark-law