“I don’t see why overturning Steele or making it depend on the citizenship of the defendant is important. I think the SG is right, the issue is whether or not these acts are intended to cause confusion in the U.S. and that internet sale to me is clearly intended to violate the Act.” – Justice Sotomayor
The U.S. Supreme Court today heard oral arguments in Abitron Austria GmbH v. Hetronic International, Inc., which asks the Court to consider whether the U.S. Court of Appeals for the Tenth Circuit erred in applying the Lanham Act extraterritorially to Abitron’s foreign sales, “including purely foreign sales that never reached the United States or confused U.S. consumers.” The Justices struggled with the appropriate reach of the Lanham Act and whether reversing the Tenth Circuit would require overruling Steele v. Bulova Watch Co., 344 U.S. 280, 282-285 (1952), but overall seemed to be considering the need for a new or narrowed test to account for the realities of modern commerce.
In Steele, the Court reasoned that “the United States is not debarred . . . from governing the conduct of i[t]s own citizens upon the high seas or even in foreign countries when the rights of other nations or nationals are not infringed.” Id. at 285-86. Key to the Court’s decision was that the defendant’s “operations and effects were not confined within the territorial limits of a foreign nation,” but rather filtered through to the United States. And in Morrison v. Nat’l Austl. Bank Ltd., 561 U.S. 247 at 254 (2010), the Court considered whether the Exchange Act applies extraterritorially, ultimately ruling it does not, and also holding that questions about the extraterritorial reach of a federal statute go to the merits, not subject matter jurisdiction.
The case involves Hetronic’s radio remote controls, which are used to operate heavy-duty construction equipment, such as cranes. Abitron et. al. began manufacturing and selling the products primarily in Europe under the Hetronic brand and continued to do so following the termination of their distribution agreements with Hetronic.
Reverse or Risk Disruption
Arguing for Abitron today, Lucas Walker of Mololamken, LLP said that the text of the Lanham Act simply does not apply to uses of trademarks outside the United States short of “especially compelling evidence.” He said there is no need for the Justices to overrule Steele to side with Abitron because that case involved how the Act applies to U.S. citizens acting abroad, while here, none of the defendants were U.S. citizens.
The Tenth Circuit, recognizing that none of the Abitron Defendants were American citizens, said to prevail, Hetronic must show that Defendants’ foreign infringing conduct had a substantial effect on U.S. commerce. The extraterritoriality issue turns solely on this question because Defendants nowhere argued the third element—that applying the Lanham Act extraterritorially would conflict with trademark rights under another country’s laws.
The Tenth Circuit concluded that Hetronic presented more than enough evidence to show that Defendants’ foreign infringing conduct had a substantial effect on U.S. commerce. In so holding, the Tenth Circuit noted that, besides the millions of euros worth of infringing products sold that made their way to the United States after initially being sold abroad, Defendants also diverted tens of millions of dollars of foreign sales from Hetronic that otherwise would have ultimately flowed into the United States.
However, Walker said this approach presents the risk of conflict with foreign laws. Pointing to the brief of the European Union to bolster this view, Walker asserted that the Tenth Circuit’s ruling will “disrupt the international trademark system and interfere with the administration of other countries’ trademark laws in their own territories.” He explained that this was the reason the Court in Morrison declined to apply the Exchange Act extraterritorially. “Here, [the] transaction is the use of the mark in commerce that needs to occur in the United States,” Walker said.
But Justice Sotomayor seemed unconvinced. “It seems to me that your position in this world of the internet makes very little sense,” Sotomayor said. She added:
“Foreign buyers today do what almost all buyers do which is advertise their goods on the internet and purposely target American customers in America – the fact that they choose to deliver those goods at the border outside the United States or into the U.S., to me, should make no difference. They are competing with the trademark owner in the U.S. to secure U.S. customers…. I don’t see why overturning Steele or making it depend on the citizenship of the defendant is important. I think the SG is right, the issue is whether or not these acts are intended to cause confusion in the U.S. and that internet sale to me is clearly intended to violate the Act.
In an attempt to understand the issue more fully, Justice Jackson presented three versions of the same hypothetical in which a German manufacturer of handbags makes knockoff Coach bags sold in Germany.
In the first example, the German manufacturer has no intent of ever selling the bags in the United States and they never reach the United States. In that case, Walker said, Coach could not sue the German manufacturer. In the second scenario, a group of college students who spend a semester abroad in Germany buy the knockoffs and come back to the United States with them, where people who see them become confused. There, even though the damage to Coach’s goodwill is in the United States, Walker said that Coach could still not sue the manufacturer. The remedy there would be to obtain EU trademark protection and enforce their rights there. And in the third version, the students buy $100,000 worth of the bags and put them into commerce in the United States, selling them in the street. In that case, Walker said Coach could sue the students, but still not the manufacturer.
Masha Hansford, Assistant to the U.S. Solicitor General, argued for the government, offering a middle ground approach that she claimed is more consistent than the petitioner’s. “A defendant is not liable for transactions that confuse only foreign customers but one who causes confusion in the United States, misappropriating U.S. goodwill, is liable,” Hansford said. She noted a small but “meaningful” difference between the Government’s argument and the petitioner’s, explaining, for example, that the “Petitioners would exclude from the Lanham Act’s coverage here $2 million worth of products they knew would be used in the United States, confusing U.S. consumers simply because the purchasers rather than petitioners arranged for shipment of those goods into this country.” Hansford told the Justices that the Government’s position
When asked about her interpretation of Justice Jackson’s Coach bags hypothetical, Hansford said it would depend on whether the maker had any reason to know of the students’ intentions. Jackson replied that she didn’t understand why foreseeability would matter as far as whether there’s proximate cause between the manufacturer and confusion in the United States and Hansford clarified that it’s not a subjective question of what the manufacturer thinks but said it has to be foreseeable that they’re going to end up on the streets of the United States. “The test is, is there confusion in the United States, and is it linked/ directly flowing from the use?” Hansford added.
As for overruling Steele, Hansford said the Government’s interpretation allows the court to “make sense of Steele,” and that, while the Government disagrees with Steele’s holding that the test turns on U.S. citizenship of the defendants, it’s possible to set that aside and retain the heart the ruling. Since Steele doesn’t set out a particular test, the Court can embrace its ultimate holding that consumer confusion should be the focus.
Let’s Avoid a ‘Legislative Séance’
For his part, Justice Gorsuch said he would ask “when does the illegal action accrue, and under the Lanham Act, you have to have consumer confusion. Instead of asking a metaphysical question about a statute’s focus, which seems to me to call for a legislative séance, we could just ask when the cause of action accrues.” Hansford said she generally agreed with this approach, though she hesitated to commit to it without thinking about all the implications.
The Lanham Act is Unique and Has Been Applied Extraterritorially for 70 Years
Finally, Matthew Hellman of Jenner & Block argued for Hetronic, explaining that “since 1952, this Court has held and repeatedly reaffirmed that the Lanham Act’s uniquely broad language reaches infringement of U.S. marks that is carried out overseas.” Hellman also noted that during those 70 years, Congress has amended the Act 36 times and never pulled back on that extraterritorial reach. He said that this rule is limited by personal jurisdiction, which will be an absolute bar to many cases, and by the need to show a “substantial effect” on U.S. commerce. The concerns raised by the petitioner should instead be addressed to Congress, Hellman said.
When challenged by Justice Alito as to how to square the inherently territorial nature of trademark rights with his arguments, Hellman said territoriality simply means that each nation is the arbiter of its own trademark laws, not that it isn’t allowed to decide when foreign conduct is harmful.
Justice Jackson asked how a case where use in commerce in a foreign country where the goods never reach the United States could involve “substantial effect” on U.S. commerce, and Hellman said that diverted sales can be considered, as they were in this case. “Even if the goods stay in Europe, where you have that confusion and diverted sales, that is an effect on U.S. commerce,” he said.
Hellman also noted that the International Trademark Association (INTA) and other IP associations all opined in amicus briefs that the Act should apply extraterritorially.
Here are some initial reactions from readers who listened in on the arguments:
JP Ciardullo, Foley
“What is apparent from the Justices’ questions at oral argument is that they are concerned about the broader implications of the modern global economy and the internet on the international limits of U.S. trademark law, and trying to gauge how far their ruling in the Abitron case should go to try to tackle those complex issues. The Justices challenged the parties with hypotheticals about social media influencers who promote foreign products in the U.S. that are never actually sold in the U.S., and about whether it is the job of the courts to assess whether a foreign company can foresee that a product sold abroad will inevitably wind up in the United States. Interestingly, the parties and the Government (the Solicitor General argued a “middle path” position for the United States) were not necessarily in disagreement about the desirable outcome in certain hypothetical cases, though they disagreed on the legal test to be applied, and the result it should yield in the Abitron case. The Justices were also clearly concerned with whether they would need to overrule in whole or in part their 1952 precedent in Steele v. Bulova Watch Co., including, for example, whether Steele’s consideration of the U.S. citizenship of the defendant made sense under the modern legal framework and the new global economy. It will be interesting to see whether the Supreme Court tries to use the Abitron case to create a more robust framework for deciding international trademark disputes going forward, or whether its ruling will ultimately be more confined to the particular facts of the case presented.”
Brian Landry, Saul Ewing
“Today’s oral argument in Abitron reminded me of the decision in Kimble v. Marvel Entertainment, LLC, 576 U.S. 446 (2015), which seemed less about the subject matter of the case (patent misuse in Kimble, extraterritorial trademark infringement in Abitron) than overarching judicial concerns (stare decisis in the pre-Dobbs Kimble Court, extraterritorial application of federal statutes in Abitron).
Interestingly, and although of the justices applied the Court’s “modern extraterritoriality framework” from RJR Nabisco, Inc. v. European Community, 579 U.S. 325 (2016) and Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), the quantity and focus of questions tracked the traditional ideological spectrum of the Court, with the liberal justices appearing more skeptical of Petitioner/Defendant Abitron’s position, the conservative justices more active in questioning the Appellee/Plaintiff Hetronic’s position, and the U.S. Government fielding questions from across the bench for its proposed middle-ground approach. Although always challenging to predict based on oral argument, it seems more likely that Abitron’s arguments based on the Court’s “modern extraterritoriality framework” carry the day.”
William Manske, Robins Kaplan LLP
“There was significant engagement with hypotheticals posed by Justice Jackson. One in particular stands out: would a foreign manufacturer be liable for acts of a downstream purchaser—entrepreneurial U.S. students in Justice Jackson’s hypothetical—that cause confusion in the U.S. and dilute a famous U.S. brand? There seemed to be a majority agreement that the Lanham Act applies to this scenario, which is telling. While there seemed to be some interest in revisiting the Court’s prior Lanham Act jurisprudence—namely, Steele—I think the likely outcome here is a decision that maintains Steele and embraces the Solicitor General’s position that the operative question for triggering Lanham Act trademark infringement liability is (and remains) a likelihood of confusion in the U.S. I expect any Court concerns about the extent of extraterritorial application of this test to manifest in an opinion that emphasizes causation principles as applied on a case-by-case basis.”
Howie Michael, Crowell & Moring
“The Justices were very engaged in the discussion, and many offered different hypotheticals to test each side’s position. While it’s sometimes difficult to tell who is speaking when listening to oral argument, I believe each of the Justices asked at least one question. Several, including Justices Sotomayor and Jackson, posed several hypotheticals and asked multiple questions. Much of the discussion focused on the Lanham Act’s uniquely broad commerce clause language, which has been interpreted as broadly as the Constitution permits when it comes to regulating commerce. The language has been interpreted to permit extraterritorial reach. As counsel for the Respondent stated multiple times, the Lanham Act has been extended extra-territorially more than 70 times.
In my view, based on the discussion during oral argument, I believe the Supreme Court is likely to affirm the 10th Circuit’s decision. While the Court has recently expressed its reluctance to read statutes to extend beyond U.S. borders, the Lanham Act’s unique commerce provision, together with Supreme Court precedent confirming the extraterritorial scope of the Lanham Act in the past, and Congress’ unwillingness to narrow the Lanham Act’s scope, will likely be the deciding factors favoring the Respondent.”