ARGUMENT ANALYSIS

Justices mull the “focus” of federal trademark statute in extraterritorial case

The issue presented in Abitron Austria GmbH v. Hetronic International, Inc., is whether and to what extent the federal trademark statute, known as the Lanham Act, applies to infringing conduct that takes place outside the United States. At oral argument on March 21, the justices showed no inclination to accept either Hetronic’s position that Lanham Act extends to virtually all uses of trademarks abroad or Abitron’s position that the law can be invoked only if the defendant shipped infringing products directly into this country. Instead, it seemed most likely to adopt the Biden administration’s middle tack: The Lanham Act only applies to foreign uses of trademarks that are likely to cause consumer confusion in the United States.

Hetronic, a U.S. company, won a jury verdict of $90 million against Abitron, a group of German and Austrian companies, for infringement that occurred almost exclusively in Europe.

In 1952, the court held in Steele v. Bulova Watch Co. that the Lanham Act covered a U.S. citizen’s sale of infringing watches in Mexico. The court emphasized both the prerogative of the United States to govern the worldwide conduct of its citizens and the language in the Lanham Act stating that it is intended to reach all commerce that Congress can regulate.

Since Steele was decided, the court has refined the presumption that Congress generally does not intend to apply a federal law outside the United States. It now employs a two-part test to determine whether that presumption has been overcome. Last week’s argument mainly revolved around how to apply this modern test to the trademark statute, enacted in 1946, and what precedential weight, if any, to attach to Steele.

The first step: Congress’s presumed domestic concern

The first step of the modern test asks whether there is an unmistakable indication in the statute that Congress intended to apply it to conduct abroad. Nothing in the Lanham Act expressly states that it covers conduct abroad. But Hetronic argues that the court decided the issue in Steele in favor of extraterritoriality, that lower courts have generally interpreted the Lanham Act in favor of extraterritoriality, and that the 70-year-old precedent should stand. Hetronic draws support from the fact that Congress has amended the Lanham Act 36 times without disturbing the holding in Steele. As Hetronic notes, the definition for “commerce” in the Lanham Act is coextensive with congressional authority to regulate commerce under the Constitution. While Abitron correctly notes that the court has more recently held that the definitional scope for commerce in a statute does not indicate that Congress intended to apply a law outside the United States, the definitions at issue in those cases were not as sweeping as that in the Lanham Act.

But Hetronic’s position based on a “uniquely broad” definition of commerce did not elicit serious interest from the justices. Justice Clarence Thomas asked if Hetronic was importing a certain test from the domestic commerce clause caselaw. Justice Samuel Alito appeared to suggest that there is no principled way to impose a practical limit of the Lanham Act if it were read to reach the full scope of the congressional commerce power. And Justice Ketanji Brown Jackson even suggested that Congress lacked the constitutional authority to regulate commerce that occurs purely within a foreign country or between foreign countries. In short, the lack of serious engagement from the court on the broad definition of commerce suggests that the court will likely find that there is no clear language in the Lanham Act that overcomes the presumption against extraterritoriality. Interestingly, no justice questioned whether the court should even apply this presumption to a law passed in 1946 – that is, before the modern presumption against extraterritoriality was even developed. A good case could have been made (as it has been in academic literature) that a less demanding standard should have controlled here because Congress had not been aware of that presumption at the time.

The status of Steele

What was clear from the argument was the considerable uncertainty as to whether Steele was based on a defendant’s U.S. citizenship or instead on the effect of his conduct on domestic commerce. Abitron at first proceeded cautiously. It argued that the court should read Steele as limiting the application of the Lanham Act only to defendants who are U.S. citizens (which would be enough for Abitron to reverse the jury verdict because it is a foreign corporation) and that it is unnecessary to overrule Steele. But when pressed by Justice Amy Coney Barrett, Abitron agreed that Steele would have come out differently under the modern jurisprudence and that the cleanest way to resolve the current case would be to overrule it.

The Biden administration took the opposite approach. It argued that the defendant’s citizenship was irrelevant, and that Steele was solely about whether the foreign infringement had adversely affected U.S. consumers. Therefore, the government urged the court not to overturn Steele.

Justice Sonia Sotomayor was troubled by the unfairness of treating U.S. citizens and foreign nationals differently for the exact same conduct. She saw Steele “as more consistent with the [administration’s] view.” Justice Elena Kagan seemed to fully embrace the administration’s position. She said that the spill-over effect on American consumers reflected in Steele is fully consistent with step two of the modern test and that the parties may be “underselling” the case by tiptoeing around it.

On the other hand, Alito argued that citizenship was central to Steele. He said that the first sentence of that opinion framed U.S. citizenship as the main issue and suggested that at least a partial overruling of Steele would be necessary reach the government’s preferred result.

The second step: The “focus”

The second step of the two-step test looks at the law’s “focus” to determine whether the case requires a domestic application of the law. The opinion in this case will likely center on the question of what the focus of the Lanham Act actually is. While the government argues that the focus is whether there is domestic consumer confusion, Abitron urges a focus based on how a trademark is used in commerce. Hetronic, on the other hand, says the focus is on a trademark owner’s loss of goodwill. Its strongest point on this is that only a trademark holder can sue for damages under the Lanham Act. A confused consumer may not.  

The parties’ different positions were illustrated by Jackson’s hypotheticals involving U.S. college students buying knockoff Coach handbags while doing a study abroad semester in Germany. Abitron said the German manufactuer would not be liable even if the students resell the bags back home. The Biden administration argued that liability could attach against the manufactuer if (i) because of the inferior infringing bags, U.S. consumers were less inclined to buy genuine Coach products; or (ii) the manufactuer “had any reason to know” that the students were planning to sell in the U.S.

Practitioners and scholars alike have said that it is difficult to apply the focus test. Kagan acknowledged that the court’s case law on how to determine the focus under step two “is not clear.” This lack of clarity gives the court “flexibility,” she said, in how to apply the test on a case-by-case basis. Justice Neil Gorsuch agreed that the search for a focus could be confusing, saying that it is “asking a kind of a metaphysical question” that might require “a legislative seance.” Instead, he wondered if it might be better to ask when a cause of action would accrue.

A decision is expected by June. American companies that operate worldwide will use that decision to structure the protection of their trademarks outside this country. And the broader transnational litigation bar will hopefully receive additional guidance from the court on how the “focus” test is employed.