On March 21, 2023, the Supreme Court heard oral argument in Abitron Austria GmbH v. Hetronic International, Inc., [1] an appeal of a Tenth Circuit decision affirming-in-part the award of damages and an injunction against a foreign company for its foreign infringement of U.S. trademark rights. Although there is a presumption against extraterritoriality of federal statutes, the Supreme Court in Steele v. Bulova Watch Co. [2] held that trademark laws under the Lanham Act can apply to foreign conduct in some circumstances. However, that case involved foreign infringement by a U.S. citizen. Federal appellate courts have since expanded the extraterritorial reach of the Lanham Act to foreign infringers, but under differing standards.  The Supreme Court may soon resolve these differences and clarify when the Lanham Act may be applied to foreign infringement.

Abitron involves a foreign distributor's appropriation of a U.S. manufacturer's trademark rights. The U.S. company, Hetronic International, manufactures radio remote controls for operating heavy construction equipment (e.g., cranes), which were distributed in Europe by Hetronic Germany GmbH. This arrangement lasted for many years, until Hetronic Germany discovered an old R&D agreement between its corporate predecessor and Hetronic International. Under a clever legal interpretation of the agreement, Hetronic Germany claimed ownership of the rights to Hetronic International's trademarks and intellectual property. Hetronic Germany then reverse-engineered Hetronic International's products and manufactured and sold them in Germany under the same Hetronic brand and product names.

When Hetronic Germany attempted to sell its products in the U.S., Hetronic International sued them in the District Court for the Western District of Oklahoma for trademark infringement under the Lanham Act and other claims. Hetronic International was found to be the owner of the trademark rights, damages of $100 million were awarded, and a worldwide injunction was entered against Hetronic Germany's sale of infringing products. Because Hetronic Germany's infringing U.S. sales only amounted to €1.7 million and 3% of total sales, the damages award was largely based on Hetronic Germany's foreign sales.

Hetronic Germany appealed to the Tenth Circuit, [3] arguing that the Lanham Act did not apply to a foreign defendant's sales to foreign customers. The Tenth Circuit affirmed the extraterritorial reach of the Lanham Act and set out a new three-part test to determine its application to foreign infringement. If the defendant is a U.S. citizen, then the defendant's conduct is subject to the Lanham Act under Steele. If the defendant is not a U.S. citizen, then courts must "assess whether the defendant's conduct had a substantial effect on U.S. commerce." Finally, if the substantial-effects test is satisfied, then courts must consider "whether extraterritorial application of the Lanham Act would create a conflict with trademark rights established [by the defendant] under foreign law." These questions are issues of statutory interpretation that should be decided by the courts as a matter of law. Any underlying factual disputes may be submitted to the jury (e.g., whether foreign products have entered the United States), while the court reserves the ultimate legal determination of extraterritoriality for itself.

The appeal turned on the second question -- whether Hetronic Germany's foreign infringing conduct had a substantial effect on U.S. commerce. The Tenth Circuit held that substantial effects "requires that there be evidence of impacts within the United States, and these impacts must be of a sufficient character and magnitude to give the United States a reasonably strong interest in the litigation." [4] As proof of substantial effects, Hetronic International relied on evidence of Hetronic Germany's direct sales into the United States; foreign sales of products that entered the United States; and diversion of foreign sales that would otherwise have been made by Hetronic International.

The evidence of direct sales in the United States was dismissed as irrelevant, as direct U.S. sales do not require the extraterritorial application of the Lanham Act. The appellate court then determined that €1.7 million in foreign sales of products which ended up in the United States were sufficient to create an inference of confusion and reputational harm, and establish a substantial effect on U.S. commerce. Moreover, there was evidence of actual confusion, including customers contacting Hetronic Germany to purchase the U.S. company's products, and sending the German products to Hetronic International for repair. U.S. distributors for Hetronic Germany's products were also confused about the relationship between the U.S. and German companies.

The appellate court rejected Hetronic Germany's arguments that €1.7 million of infringing products represented only three percent (3%) of total sales and should not be used as a "springboard to call the rest of the $90 million of purely foreign sales damages under the Lanham Act." The only issue is whether the foreign conduct had a substantial effect on U.S. commerce. The proportion of total sales was irrelevant, otherwise giant companies with billion-dollar revenues could always escape liability for millions of dollars of their infringing products entering the United States.

The Tenth Circuit also considered evidence that Hetronic International's foreign sales were diverted to Hetronic Germany. Although there is no United States interest in protecting foreign consumers from confusion, there is an interest in protecting the United States from economic harm caused by foreign infringement. The foreign sales diverted from Hetronic International amounted to tens of millions of dollars in lost income that would have flowed into the United States. The appellate court rejected Hetronic Germany's arguments that diversion of sales only applies where the defendant is a U.S. citizen, finding that there was no basis for those assertions.  To the contrary, the diversion of sales by a U.S. defendant would still benefit the U.S. economy.

Although the Tenth Circuit affirmed the extraterritorial reach of the Lanham Act, it held that the district court's worldwide injunction was overbroad and not supported by the statute. Trademark rights are "fundamentally geographical" and Hetronic International was not entitled to injunctive relief in those countries where it did not sell its products and there was no confusion in the market.

In developing its new standard for applying the Lanham Act to foreign infringement, the Tenth Circuit noted that other appellate courts have used different tests. The Second, Fourth, Fifth, Ninth, Eleventh, and Federal Circuits have adopted a similar three-factor test, but hold that no one factor is dispositive (e.g., whether the defendant is a U.S. or foreign citizen). The Fourth, Fifth, and Ninth Circuits also require a lower standard for the effect on U.S. commerce — either a "significant effect" (Fourth Circuit), or only "some effect" (Fifth and Ninth Circuits). The First Circuit requires a "substantial effect" on U.S. commerce but does not consider whether the extraterritorial application of the Lanham Act would conflict with the defendant's trademark rights established under foreign law.

The Supreme Court's decision in Abitron is likely to reconcile these different standards and clarify, and provide guidance for the extraterritorial application of the Lanham Act.

[1] Abitron Austria GmbH v. Hetronic International, Inc., No. 21-1043 (2022)
[2] Steele v. Bulova Watch Co., 73 S. Ct. 252 (1952).
[3] Hetronic Int'l, Inc. v. Hetronic Germany GmbH, 10 F.4th 1016 (10th Cir. 2021)
[4] Hetronic Int'l, 10 F.4th at 1042, quoting, McBee v. Delica Co., 417 F.3d 107, 120 (1st Cir. 2005) 

Brian Lum, Ph.D. is senior counsel in Ice Miller’s Intellectual Property Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.