The Extraterritorial Reach of the Lanham Act

The Extraterritorial Reach of the Lanham Act

The cross-border appeal of Trader Joe’s products has highlighted the broad extraterritorial reach of American trademark law. In a recent decision by the Ninth Circuit Court of Appeals,^[1] the court held that the Trader Joe’s grocery chain may pursue trademark infringement claims under the Lanham Act for conduct occurring in Canada.

 

Trader Joe’s sells a variety of Trader Joe’s-branded products available only through its stores.^[2] This case centered on an unauthorized Canadian reseller of Trader Joe’s products. The reseller, Michael Hallat, had purchased large quantities of Trader Joe’s products and transported them to Canada where he resold them at a substantial markup at his retail store, Pirate Joe’s.^[3] Trader Joe’s alleged that Hallat violated federal and state trademark and unfair competition laws by misleading consumers into falsely believing that Pirate Joe’s had been authorized by Trader Joe’s, displaying Trader Joe’s trademarks, mimicking Trader Joe’s trade dress, and reselling Trader Joe’s products without approval and without adhering to Trader Joe’s strict quality control practices.^[4] Trader Joe’s asserted that this conduct diluted its trademarks, confused consumers, and damaged its reputation with high cost and reduced quality goods.^[5]

 

Under the Lanham Act a cause of action for trademark infringement or dilution must arise from the “use in commerce” of a mark, word, false description, or false designation of origin.^[6] The Act defines commerce as “all commerce which may lawfully be regulated by Congress.”^[7] The courts have interpreted this language as providing clear Congressional intent that the Act apply extraterritorially.^[8] Thus, the Trader Joe’s decision centered on the exact scope of the statute’s foreign application.

 

The Ninth Circuit applies a three-part test in determining whether foreign activities fall within the scope of the Lanham Act: “(1) the alleged violations … create some effect on American foreign commerce; (2) the effect [is] sufficiently great to present a cognizable injury to the plaintiffs under the Lanham Act; and (3) the interests of and links to American foreign commerce [are] sufficiently strong in relation to those of other nations to justify an assertion of extraterritorial authority.”^[9]

 

Trader Joe’s satisfied the first and second prongs of the test by demonstrating that Hallat’s foreign conduct harmed its reputation and the value of its American-held trademarks.^[10] Trader Joe’s argued that Hallat distributed their goods without using proper quality control measures.^[11] While the first sale doctrine typically holds that the resale of a product under the producer’s trademark does not constitute trademark infringement or unfair competition, the court held that the distribution of a product that does not meet the trademark holder’s quality control standards may tarnish and devalue the mark.^[12] Such reputational harm would occur if consumers of Trader Joe’s-branded products in Canada were to become ill and such news spread across the border to American consumers.^[13]

 

Trader Joe’s established further devaluation of its American-held mark as a result of the inflated prices at which Hallat sold Trader Joe’s products and the inferior customer service his store provided.^[14] As Trader Joe’s draws international shoppers to its Northern-Washington stores, the court found that such conduct is liable to harm the value of its marks in the United States.^[15]

 

This effect on American commerce was further supported by Hallat’s commercial activity in the United States.^[16] Hallat sourced all of his inventory from the United States.^[17] The court found this domestic economic activity to further weigh in favor of the application of the Lanham Act.^[18]

 

Lastly, with regard to the third prong, the court held that there was not sufficient “interference with other nations’ sovereign authority” to prevent the application of the Lanham Act.^[19]

 

The Ninth Circuit’s opinion demonstrates how in today’s increasingly global marketplace, reputational harm need not originate within the territorial confines of a single state. If foreign conduct leads to domestic reputational harm and devaluation of an American-held mark, there may be a sufficient nexus with American commerce to pursue an infringement claim under the Lanham Act.