Supreme court to decide fate of extraterritorial damages in U.S. Trademark cases

On March 21, the Supreme Court heard oral argument in Abitron Austria GmbH v. Hetronic International, Inc., a trademark infringement case addressing the scope of extraterritorial damages under the Lanham Act. The Supreme Court considered an issue that few lower courts have taken up to date: whether the Lanham Act can extend to purely foreign sales that never reach the United States.

In the district court action, the plaintiff Hetronic International, Inc., a U.S. company, brought suit against Abitron Austria GmbH and a number of other German companies that formerly distributed Hetronic's products in Europe. Hetronic terminated their contractual agreement after discovering that Abitron was selling identical-looking third-party products under the Hetronic brand without permission. Hetronic brought suit for trademark infringement. But, over 97% of Abitron's sales of the infringing products were made abroad.

An Oklahoma District Court found in favor of Hetronic and awarded over $100 million in damages. Only $240,000 of this award represented products sold directly into the U.S. market, while another $2 million of the award came from products sold abroad that ultimately made their way into the U.S. The remaining damages reflected purely foreign sales that never reached the U.S. market. On appeal, the Tenth Circuit affirmed the award. The Supreme Court is now tasked with deciding if the Tenth Circuit erred affirming the extraterritorial damage award.

There is a general presumption against the extraterritorial application of U.S. law. To determine the applicability of U.S. law to foreign conduct, courts apply a two-part test assessing 1) whether there is a clear, affirmative indication from Congress that the law is meant to apply extraterritorially; and 2) if not, whether the "focus" of the statute warrants domestic application.

At its core, the Lanham Act is a U.S. consumer protection statute - it imposes liability on persons who use in commerce any infringing mark, if such use causes a likelihood of confusion. The Lanham Act contains no express provision endorsing its extraterritorial application. The Abitron case turns on how to assess the "focus" prong of the analysis in Lanham Act cases.

At oral argument, the Justices grappled with the purpose of the Lanham Act and the application of trademark law to a modern, Internet Age economy. The Justices were also particularly concerned with whether reversing the Tenth Circuit would require them to overrule their Steele v. Bulova Watch Co., a 1952 case where the Court held that the Lanham Act applied to a U.S. citizen's sale of infringing watches in Mexico, where these sales ultimately resulted in U.S. consumer confusion.

Hetronic argued that Steele and its progeny support the extraterritorial application of the Lanham Act, emphasizing the need for a test that looks at the "effects" of foreign conduct in the U.S. Hetronic argued that Abitron's conduct diverted sales from the U.S. based company and opined that these diverted sales constitute commerce properly within the scope of Congressional regulation and, by extension, the Lanham Act.

Counsel for Abitron, on the other hand, argued that Steele was inapposite because it involved a U.S. citizen defendant. In light of this, the Tenth Circuit's application of the Lanham Act to a foreign defendant's purely foreign conduct could give rise to a conflict of laws and risk international friction. Instead, Abitron suggested a "use" based approach to extraterritoriality to account for the Lanham Act's emphasis on domestic use as a prerequisite for trademark rights. Exclusively foreign sales by a foreign defendant, then, would not properly fall within the scope of the Lanham Act.

The Solicitor General put forth a middle ground approach on behalf of the Government, proposing an alternative standard whereby foreign sales would be considered only if they led to U.S. consumer confusion, the touchstone of trademark infringement. A proximate cause requirement would serve as the outer limit to liability under this examination.

Despite sharp disagreement over the proper focus of the Lanham Act from the parties, the Justices were somewhat aligned in their skepticism for both petitioner's narrow use-based approach and the Respondent's broad "substantial effects" test. With this in mind, the Government's middle ground position could carry the day. Regardless of the outcome, the Court's expected June opinion will shed much-needed light on the recoverability of extraterritorial damages in modern Lanham Act disputes.

Sarah S. Brooks is a partner, and Alexandra L. Kolsky is an associate at Venable LLP.