Considering Use in Commerce, Source-Identifying-Function, and Conduct vs. Confusion

On June 29, 2023, the Supreme Court vacated the 10thCircuit’s decision in Abitron Austria GmbH et al. v. Hetronic International Inc(“Hetronic”). The Supreme Court principally held that the Lanham Act does not have extraterritorial application. As Crowell previously discussed, the Supreme Court sought briefing on Hetronic from the U.S. Solicitor General, signaling an interest in addressing the Tenth Circuit’s decision, the extraterritoriality of the Lanham Act, and the complex circuit split that has at least three distinct tests. Although the Court agreed 9-0 that the lower court’s decision should be vacated, Justice Alito’s majority opinion and Justice Sotomayor’s concurring opinion disagreed on the second step of the extraterritoriality test, specifically regarding whether foreign conduct can have domestic implications. The majority disagreed with both the Tenth Circuit and the Solicitor General, concluding that the Lanham Act cannot apply to foreign defendants’ foreign conduct.

A Brief Background

Hetronic Int’l Inc. (“Hetronic”) is a United States manufacturer of radio remote controls for various types of heavy-duty construction equipment. Hetronic’s products utilized a distinctive black-and-yellow color scheme, allowing the company to distinguish its products from competitors in markets worldwide. Hetronic brought a Lanham Act trademark infringement claim against six foreign parties, acting as distributors of Hetronic’s products, collectively Abitron. Hetronic alleged that Abitron had reverse-engineered its products to sell knock offs in primarily foreign countries, although Abitron did have some direct U.S. sales.

Throughout the lower court proceedings, Abitron argued that the Lanham Act did not have extraterritorial application. The lower courts rejected these arguments and the Western District of Oklahoma, via a jury, awarded Hetronic approximately $90 million in Lanham Act damages and issued a worldwide injunction. The awarded amount included damages from foreign defendants’ foreign conduct, or wholly foreign sales with arguably no direct implication on the United States. In fact, the lower court evidence showed that only approximately 3% of offending sales occurred within the United States. Much of the case related to foreign defendants’ foreign conduct. Although the 10thCircuit narrowed the injunction, it found that the Lanham Act did have extraterritorial application and largely upheld the Western District of Oklahoma’s decision. The 10thCircuit concluded that the Lanham Act covered Abitron’s foreign infringing conduct because the “impacts within the United States [were] of a sufficient character and magnitude as would give the United States a reasonably strong interest in the litigation.” Hetronic, 10 F. 4th at 1046.

The Majority Opinion

In the five Justice majority, Justice Alito wrote the opinion for the Court. The Court held “[a]pplying the presumption against extraterritoriality, we hold that [§1114(1)(a) and §1125(a)(1)] of the Lanham Act are not extraterritorial and that they extend only to claims where the claimed infringing use in commerce is domestic.” Hetronic, 600 U.S. __, slip op. at 1. The opinion is limited to the two Lanham Act sections at issue in the case—the sections that Hetronic sought damages from Abitron. Section 1114(1)(a) prohibits the “use in commerce [of] any reproduction . . . of a registered mark in connection with the sale, offering for sale, distribution, or advertising of any goods or services” when “such use is likely to cause confusion.” Section 1125(a)(1) prohibits the “us[e] in commerce” of a protected mark that “is likely to cause confusion.”

Similar to Solicitor General Prelogar’s amicus brief, the Court focused on the presumption against extraterritorial application as opposed to the nuanced circuit split addressing extraterritorial application of the Lanham Act. The Court emphatically explained the presumption against extraterritoriality as a “longstanding principle of American law.” Hetronic, 600 U.S. __, slip op. at 3 (citing Morrison v. National Australia Bank Ltd., 561 U.S. 247, 255 (2010)). And, then the Court addressed the two-step framework for the presumption against extraterritoriality. The first step addresses whether congress gave a statute explicit extraterritorial application. Id., slip op. at 3-4. When a statute is not explicitly extraterritorial, step two asks “whether the suit seeks a (permissible) domestic or (impermissible) foreign application of the provision.” Id., slip op. at 4. To determine whether the suit seeks domestic or foreign application of the underlying statutory provision, courts consider 1) the “focus of congressional concern” and 2) “whether the conduct relevant to that focus occurred in the United States territory.” Id. (internal citations omitted). Justice Alito emphasized that the second step is designed with the presumption against extraterritoriality in mind.

The Court concluded that neither provision at issue of the Lanham Act was explicitly extraterritorial and quickly dismissed arguments that the language regarding “in commerce” implicates foreign commerce. Id., slip op. at 6-7. Moving to the second step, the Court stated “[t]he ultimate question regarding permissible domestic application turns on the location of the conduct relevant to the focus” and “the conduct relevant to any focus the parties have proffered is [the] infringing use in commerce[.]” Id., slip op. at 9. As discussed previously, 97% of offending sales, the conduct in question, were foreign. The majority concluded “[u]nder step two of our extraterritoriality standard, then, ‘use in commerce’ provides the dividing line between foreign and domestic application of these Lanham Act provisions.” Id., slip op. at 10. Given these principles, the foreign defendants’ foreign conduct would likely not implicate a permissible domestic application of the Lanham Act as the conduct, or infringing use in commerce, in question was almost wholly foreign.

Justice Jackson Concurrence

Justice Jackson’s brief concurring opinion is designed to specifically address 1) what it means to use a trademark in commerce, and 2) how such meaning guides the permissible-domestic-application question (although the Justice acknowledged these were unnecessary elaborations for the majority opinion). Justice Jackson’s key point was that “‘use in commerce’ does not cease at the place the mark is first affixed, or where the item to which it is affixed is first sold. Rather, it can occur wherever the mark serves its source-identifying function.” Id., slip op. at 2 (Jackson, J., concurring). Justice Jackson then employees a hypothetical to illustrate that a foreign company may be subject to liability for U.S. domestic conduct, namely the reselling of the product in domestic markets, even if the foreign company did not directly sell the product in the United States. Id., slip op. at 3-4 (Jackson, J., concurring).

Justice Sotomayor Concurrence

Justice Sotomayor wrote the concurrence for the Chief Justice, Justice Kagan, and Justice Barrett, which disagreed with Justice Alito’s majority opinion’s formulation of the second step of the presumption against extraterritoriality, specifically the permissible-domestic-application consideration. Justice Sotomayor concluded “the Lanham Act extends to activities abroad when there is a likelihood of consumer confusion in the United States.” Id., slip op. at 1 (Sotomayor, J., concurring). Although the decision was technically 9-0, Sotomayor and Alito’s disagreements regarding the application of the considerations in the second-step of the extraterritoriality test led to direct and contentious disagreements.

Justice Alito spent five pages directly addressing Justice Sotomayor’s concurrence and stated she “resist[ed the] straightforward application of our precedent[.]” Id., slip op. at 10-14. Justice Alito argues that an expansive view of the Lanham Act’s application would negate the presumption against extraterritoriality, citing “the presumption against extraterritorial application would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case.” Id., slip op. at 12 (citing Morrison, 561 U.S., at 266). He further asserts that Justice Sotomayor would allow for “merely a likelihood of an effect in this country” to trigger extraterritorial application of the Lanham Act. Id., slip op. at 12.

While the majority dismissed Steele v. Buvola Watch Co. because the decision was issued prior to the Court’s current two-step framework on the presumption against extraterritoriality, Justice Sotomayor uses Steele to inform the conclusion that “a domestic application of the statute can implicate foreign conduct at step two, so long as the plaintiff proves a likelihood of consumer confusion domestically.” Id., slip op. at 2-4 (Sotomayor, J., concurring) (citing Steele, 344 U.S. 280, 285-88 (1952)). Justice Sotomayor disagrees with the majority’s analysis under step two of the framework, because—agreeing with Solicitor General Prelogar’s argument—the Lanham Act’s focus is consumer confusion. Justice Sotomayor concludes “the statute’s focus is protection against consumer confusion, the statute covers foreign infringement activities if there is a likelihood of consumer confusion in the United States and all other conditions for liability are established.” Id., slip op. at 6 (Sotomayor, J., concurring).

Justice Sotomayor critiques the majority for transforming the extraterritoriality framework into a “conduct” test by describing the “use in commerce” as the dividing line, whereas the test was supposed to consider the focus of the statute—confusion, not conduct. She asserts that the majority opinion introduces “a third step: an assessment of whether the ‘conduct relevant to the focus’ occurred domestically, even when the focus of the statute is not conduct.” Id., slip op. at 8 (Sotomayor, J., concurring). Justice Sotomayor’s concern is the Lanham Act’s consumer confusion test and critiques the majority for wholly ignoring this foundational part of the Lanham Act.

What’s Next?

Most directly, the case will be remanded back to the Western District of Oklahoma for reconsideration based upon the Court’s articulation of the presumption against extraterritoriality as applied to the Lanham Act. However, the implications for brands and trademark owners are far more reaching. U.S. brands will find it more difficult to enforce trademarks and stop foreign counterfeiting, if the claimed infringing use in commerce is not domestic, or at least has not moved from foreign markets to the domestic marketplace. Although the circuits had varying tests to determine extraterritorial application of Lanham Act infringement (which presented its own issues, such as forum shopping), brands could bring claims to obtain injunctions and damages against foreign infringement. Presumptively, no longer.

Further, the majority opinion did not address what it means for a trademark to be used in commerce. Although Justice Jackson provided some guidance in her concurrence by identifying the “source-identifying function,” this decision will likely lead to more litigation over the phrase “use in commerce.” The most practical conclusion for brand owners—register your trademarks outside of the U.S. to ensure enforceability abroad.