Trademark law - extraterritorial application of the Lanham Act saves an American brand from a Canadian retail pirate.

Author:Johnston, William C.
 
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TRADEMARK LAW--EXTRATERRITORIAL APPLICATION OF THE LANHAM ACT SAVES AN AMERICAN BRAND FROM A CANADIAN RETAIL PIRATE--Trader Joe's Co. v. Hallatt, 835 F.3d 960 (9th Cir. 2016).

The Lanham Act sets out the fundamental requirements that must be met by an individual or business to determine whether a trademark is infringed. (1) A foreign business that infringes on an American company's trademarks raises the question of international trademark protection. (2) In Trader Joe's Co. v. Hallatt, (3) the United States Court of Appeals for the Ninth Circuit was confronted with whether a competitor, selling Trader Joe's products in Canada under the name Pirate Joe's, generated a connection to American commerce strong enough to warrant extraterritorial application of the Lanham Act. (4) The Court held that Pirate Joe's economic activity does create a necessary connection to American commerce sufficient to permit extraterritorial application of the Lanham Act. (5)

In October 2011, employees at the Bellingham, Washington, Trader Joe's store noticed Canadian resident, Michael Norman Hallatt, visiting the store three to five times per week to buy large amounts of Trader Joe's products. (6) When questioned by Trader Joe's employees, Hallatt admitted that he drove the goods he purchased across the Canadian border where he sold them to Canadian customers at Pirate Joe's. (7) Hallatt owns and operates Pirate Joe's, a Trader Joe's themed store in Canada, where he resells Trader Joe's goods purchased in Washington State at substantially inflated prices. (8) Hallatt displays an exterior sign at Pirate Joe's that uses a font similar to the trademarked "Trader Joe's" sign. (9) Trader Joe's informed Hallatt that it does not tolerate his activity and demanded that he stop reselling Trader Joe's products at Pirate Joe's, nonetheless, Hallatt refused. (10) "Trader Joe's declined to serve Hallatt as a customer," however, he "began donning disguises to shop at Trader Joe's without detection and driving to Seattle, Portland, and even California to purchase Trader Joe's branded products." (11)

Trader Joe's sued Hallatt, the owner of Pirate Joe's, for trademark infringement in the Western District of Washington State. (12) Trader Joe's alleged that Hallatt violated the Lanham Act by misleading consumers into believing Pirate Joe's is authorized to sell Trader Joe's-branded products. (13) Trader Joe's asked the court to award it damages and permanently enjoin Hallatt from reselling its goods using its trademarks in Canada based "on (1) federal trademark infringement, (2) unfair competition, false endorsement, and false designation of origin, (3) false advertising, and (4) federal trademark dilution." (14) The district court granted Hallatt's motion to dismiss for lack of subject-matter jurisdiction, holding that the Lanham Act did not apply to Hallatt's reselling of Trader Joe's products in Canada, consequently, Trader Joe's appealed. (15) On appeal, the Ninth Circuit reversed, concluding that Hallatt's conduct does create a connection to American commerce sufficient to warrant extraterritorial application of the Lanham Act. (16)

The Lanham Act is the primary federal trademark act in the United States which prohibits a number of activities, including trademark infringement, trademark dilution, and false advertising. (17) To determine whether the Lanham Act reaches foreign conduct, a two part test must be applied. (18) Step one considers whether the statute applies extraterritorially on its face, and step two considers the limits Congress has imposed on the statute's foreign application. (19) With regard to the first step, the Supreme Court of the United States held that the Act's broad language with respect to commerce clearly indicates Congress' intent that it apply extraterritorially. (20) Furthermore, the Lanham Act only applies to foreign conduct that impacts American commerce. (21) In considering the second step, note that Congress has not imposed many limits on the Lanham Act's extraterritorial application and therefore the limits of the Act must be analyzed through precedent that has previously been applied to the Sherman Antitrust Act. (22)

The Sherman Antitrust Act prohibits certain business activities that restrict fair competition. (23) It specifically targets businesses who combine as a trust or cartel to gain a monopoly on a market. (24) It also prevents corporations from raising prices by restricting trade or supply. (25) Expanding on the Sherman Act, in 1914 Congress enacted the Clayton Antitrust Act, which regulates anti-competitive activities including price discrimination, exclusive dealings, and mergers and acquisitions which significantly decrease competition. (26) The Sherman Antitrust Act has been widely interpreted by U.S. courts, including its extraterritorial application. (27) The three part test originally applied to the Sherman Act in Timberlane Lumber Co. v. Bank of America National Trust & Savings Association determines which foreign activities are within reach of a statute. (28)

In Timberlane, the court established that a statute applies extraterritorially when the violations (1) create some effect on American commerce; (2) the effect presents an injury specific only to the plaintiffs; and (3) enforcing the statute does not interfere with other nations' sovereign rights. (29) Timberlane's first and second prongs are generally satisfied by proving that the infringing goods flowed into American markets and that the defendant's foreign activities have had "some effect" on American commerce. (30) Courts have held that "some effect" on American commerce may be satisfied by "reputational harm to an American plaintiff." (31) Timberlane's third prong, considering international comity, involves weighing six factors: the degree of conflict with foreign laws, nationality of parties and location of businesses, remedy and enforcement, relative significance of effects, purpose to harm American commerce, and importance of domestic conduct compared to foreign conduct. (32) This prong illustrates the rule that statutes are interpreted so they do not interfere with other nations' sovereign rights to enforce their own laws. (33) The Ninth Circuit extended Timberlane to the Lanham Act in Wells Fargo & Co. v. Wells Fargo Express Co., which brings our analysis back to the extraterritoriality of the Lanham Act. (34)

In Trader Joe's, the Court followed the framework set forth in Timberlane to conclude that the Lanham Act applies in Canada. (35) In its discussion of prong one, the Court reasoned that Hallatt's attempt to pass as an authorized Trader Joe's retailer harms its reputation and diminishes the value of its trademarks. (36) Trader Joe's reputation is harmed because Hallatt sells Trader Joe's goods at inflated prices with inferior customer service, having a negative effect on Trader Joe's trademarks because of the close association to Trader Joe's Hallatt has created. (37) In its discussion of prong two, the Court reasoned that Hallatt's activity presents a cognizable injury to Trader Joe's because he sources his inventory entirely from the United States. (38) By way of his Lawful Permanent Resident (LPR) status, Hallatt, along with hired third parties, purchases thousands of dollars' worth of Trader Joe's goods to be resold by Pirate Joe's in Canada. (39)

Moreover, in its discussion of prong three, the Court reasoned that the factors used to evaluate interference with other nations' sovereign authority, as a whole, weigh in favor of application of the Lanham Act extraterritorially. (40) Trader Joe's trademarks are recognized by the Canadian government and no current litigation exists in Canada between the two parties. (41) Although Trader Joe's is an American corporation with its principal place of business in California and Hallatt is a Canadian citizen, his LPR status subjects himself to the laws of the United States. (42) While federal courts ordinarily do not have an interest in protecting foreign consumers from confusion, almost half of the credit card transactions at Trader Joe's Bellingham, WA store are with non-U.S. residents. (43) Though the actual selling of Trader Joe's products occurred in Canada, Hallatt intended to harm Trader Joe's by naming his store Pirate Joe's. (44) As a result, the Court held that all three prongs of Timberlane were satisfied; therefore, the Lanham Act was applied extraterritorially. (45)

The Court's decision in Trader Joe's correctly applies Timberlane to reach the most logical outcome. (46) Prong one was properly satisfied because Hallatt's U.S. sourced activities create a negative effect on American commerce. (47) A foreign business who sells another's products using inferior business practices under a similar trade name creates a negative effect on that business' reputation. (48) The harm imposed on Trader Joe's as a result of Hallatt's activity diminishes the value of its trademarks and its reputation because of Hallatt's substandard business practices. (49) Prong two was accurately met because Hallatt's purchases of thousands of dollars' worth of Trader Joe's goods in the United States specifically injures Trader Joe's. (50) The selling of Trader Joe's products by Hallatt under the name Pirate Joe's using mediocre business practices harms no other business but Trader Joe's. (51)

Prong three was appropriately weighed because the application of the Lanham Act in Canada does not interfere with Canada's sovereign authority. (52) Application of the Lanham Act in Canada does not conflict with Canadian law because Trader Joe's trademarks are recognized by the Canadian government. (53) Even though Hallatt is a Canadian citizen, he must be subject to American law because of his LPR status. (54) A federal court must protect foreign consumers from confusion where almost half of the credit-card transactions at Trader Joe's Bellingham, WA store are with foreign customers. (55) The Court...

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