White & Case Tech Newsflash

The Supreme Court ruled yesterday that the Lanham Act infringement and unfair competition provisions "are not extraterritorial and that they extend only to claims where the claimed infringing use in commerce is domestic." In so holding, the Supreme Court wiped out the majority of the of $90 million damages award under the Lanham Act for mostly foreign sales of products bearing a US trademark. Below, the Tenth Circuit held that U.S. trademark owner Hetronic's lost profits based to Abitron's foreign sales of infringing industrial remote controls constituted an effect on U.S. commerce that justified the award. The Supreme Court rejected this expansive view. That said, Hetronic kept the $20 million damages award for breach of contract.

The Supreme Court approached the decision with the "presumption against extraterritoriality, [which] reflects the longstanding principle that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States ." (Morrison v. National Australia Bank Ltd., 561 U. S. 247, 255 (2010).)

Relying on this presumption, the Supreme Court applied a two-step analysis. The first step asked whether the statute is extraterritorial (which is a high threshold to meet). The second step considered whether claims involve "domestic" application, which turns on the location of the conduct relevant to the focus of the statutory provisions.

Step One: the Lanham Act is Not Extraterritorial Despite its Broad Definition of “Commerce”

An extraterritorial provision requires a showing that Congress has "affirmatively and unmistakably instructed that the provision should "apply to foreign conduct." (RJR Nabisco, Inc. v. European Community, 579 U. S. 325, 336 (2016).) Courts should consider the "focus" of the congressional concern underlying the relevant provision. Id. . The Court cautioned that "even statutes … that expressly refer to 'foreign commerce' when defining 'commerce' are not extraterritorial." (Morrison, 561 U. S., at 262–263.) Nor are those statutes where the definition of "commerce" relies on congressional authority to regulate foreign commerce (or, for example, "all commerce Congress can regulate"), sufficient to warrant extraterritorial application. Accordingly, the Court concluded that § 1114(1)(a) and § 1125(a)(1) of the Lanham Act are not extraterritorial.

Step Two: “Permissible Domestic Application” and “Use in Commerce” Provides the “Dividing Line Between Foreign and Domestic Application”

Under the second step, the Court considered whether the claims involved "domestic" application under the Lanham Act. "[P]ermissible domestic application," the Court held, "turns on the location of the conduct," not the "focus" of the statutory provisions in the abstract. (Abitron Austria GmbH v. Hetronic Int'l Inc., 600 U.S.___ (2023).) Otherwise, the Court noted, any "foreign conduct could be repackaged as 'domestic application.'" Id. at 3. That would mean "thrust[ing]" U.S. courts into "the unappetizing task of 'navigating foreign policy disputes.'" (Jesner v. Arab Bank, PLC, 584 U. S. ___, ___ (2018) (GORSUCH, J., concurring in part and concurring in judgment) (slip op., at 1).) The Court cautioned that "[i]f enough countries took this approach, the trademark system would collapse." (Abitron Austria GmbH, 600 U.S. ¬¬¬¬___ at 14.)

Here, the Court concluded, "use in commerce" was the conduct relevant to the focus of §1114(1)(a) and §1125(a)(1) because Congress deemed a violation of either provision to occur each time a mark is used in commerce. "Use in commerce" thus provides the "dividing line" between foreign and domestic application of the Lanham Act. Because the Tenth Circuit holding was not in line with this understanding of extraterritoriality, the Court ultimately vacated the judgment and remanded the case for further proceedings.

Notably in its holding, the Court emphasized the importance of the location of the conduct. "The ultimate question regarding permissible domestic application turns on the location of the conduct relevant to the focus." (Abitron Austria GmbH U.S., 600 U.S. ¬¬¬¬___ at 3.) Courts do "not need to determine [a] statute's focus" when all conduct regarding the violations took place outside the United States. Id. at 5.

Steele v. Bulova Watch Co. “Narrow” and “Fact-Bound”

The Court disregarded both parties' reliance on Steele in their oral arguments because in that case the watches were made and sold in Mexico but the buyers and sellers were U.S. citizens. The infringing activity in Steele "implicated both domestic conduct and likelihood of domestic confusion." The infringer there took "'essential steps' in the course of infringing conduct in the United States." (Abitron Austria GmbH U.S., 600 U.S. ¬¬¬¬___ at 8.)

Justice Jackson Concurrence: the “COACHE Bag” Journey – “Use in Commerce” Application

Justice Jackson concurred with the judgment that §§1114(1)(a) and 1125(a)(1) do not apply extraterritorially. The concurrence addressed what it meant to use a trademark in commerce (§1127) and how that meaning guides the permissible-domestic-application question.

Use in commerce: Under the Lanham Act, "use in commerce" is "the bona fide use of a mark in the ordinary course of trade." "[U]se in commerce" occurs "wherever the mark serves its source-identifying function." This is because such use is by the "'person' who put that trademark on the goods 'to identify and distinguish' them in commerce and 'indicate thi[er] source.'" Brand owners may sue someone using the mark in commerce in a way "likely to cause confusion, or to cause mistake, or to deceive." (B&B Hardware, Inc. v. Hargis Industries, Inc., 575 U. S. 138, 144 (2015)).

Domestic-application inquiry: If the marked good is (1) in domestic commerce and (2) serving a source-identifying function, then §§1114(1)(a) and 1125(a)(1) may cover such conduct. (Jack Daniel's Properties, Inc. v. VIP Products LLC, 599 U. S. ___, ___ (2023) (slip op., at 14).) This is explained in the "Coache bag" example. If a German company sold "Coache" handbags in Germany and the bags were then brought to the U.S. by American students for personal use, then such conduct would not be actionable under the Lanham Act. The opinion explains that if Coach (the U.S. company) decides to sue the German company for infringement then such a claim may be an "impermissibly extraterritorial application of the Act" as the conduct is not a "use in commerce" in the U.S. But if the American students re-sell the bags in the U.S., that puts the bags in the stream of domestic commerce. In that scenario, liability may attach to the German company even though it never sold the bags directly into the U.S.