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Closing trademark’s borders
No recovery for infringer’s purely foreign sales
One year after the U.S. Supreme Court limited the reach of the federal trademark law beyond American borders, the trademark owner in the underlying case has learned how the ruling will affect its claims. It probably isn’t too happy with the result.
Long litigation road
Hetronic International is a U.S.-based manufacturer of radio remote controls that operate heavy-duty construction equipment. It owns U.S. trademarks for the distinctive features of the remote controls.
The foreign defendants distributed Hetronic’s products, mostly in Europe. Eventually, they decided that an earlier research-and-development agreement gave them ownership of Hetronic’s trademarks.
So, they began manufacturing products that were identical to Hetronic’s and selling them under the Hetronic brand, again mostly in Europe. Some of these products reached the United States through “downstream sales” by original equipment manufacturers who purchased the remotes, installed them in their own machinery and then sold that machinery to end users in other countries.
Hetronic sued the defendants for, among other things, trademark infringement under the Lanham Act. A jury awarded Hetronic $96 million in damages as disgorgement of profits attributable to the trademark violations.
On appeal, the defendants argued that, while the Lanham Act can sometimes extend outside of the United States, it didn’t apply to their conduct because the conduct generally involved foreign defendants making sales to foreign consumers. The U.S. Court of Appeals for the Tenth Circuit affirmed the trial court’s ruling, finding the conduct had a substantial effect on U.S. commerce by diverting sales from Hetronic.
The Supreme Court, however, ruled that the relevant provisions of the Lanham Act don’t apply outside of the United States. Rather, they apply only to domestic uses of trademarks that are likely to cause consumer confusion. The court then sent the case back to the Tenth Circuit to re-assess the case in light of its ruling.
The latest turn
The appeals court found that the relevant Lanham Act provisions — which generally prohibit the use in commerce of protected trademarks in a way likely to cause confusion about the true origin of a product — are intended to punish unauthorized commercial uses of U.S.-registered trademarks that harm U.S. businesses and consumers. Penalties therefore don’t apply unless a defendant has committed an infringing use domestically.
That meant that all of the defendants’ direct U.S. sales were actionable under the Lanham Act. These sales clearly used Hetronic trademarks in domestic commerce in a way that threatened confusion among U.S. consumers. The defendants’ “purely foreign” sales to foreign customers, however, didn’t trigger liability under U.S. trademark law.
The appeals court noted, though, that the direct U.S. sales were “only one slice of the domestic-conduct pie.” It also had to consider any marketing, advertising and distributing activities that the defendants undertook in the United States — these constituted uses in commerce, too. It found that such activities used the trademarks without authorization and caused a likelihood of confusion, so they fell squarely within the Lanham Act.
The court also weighed whether downstream sales represented domestic uses in commerce. It concluded that products bound for the United States but sold abroad can’t support a Lanham Act claim without some domestic conduct that connects the sales to an infringing use of the mark in domestic commerce. Allegedly infringing uses in the United States by U.S. end-users didn’t cut it.
Nor did the defendants’ obtaining Federal Communications Commission licenses and hiring a U.S.-based distributor create liability. Neither action used the trademarks in commerce. On the other hand, any activities the defendants engaged in through the distributor to sell, market, advertise or distribute infringing goods to U.S. consumers (for example, advertising at U.S. tradeshows or marketing the infringing products online to U.S. customers) did violate the Lanham Act.
Restricted remedy
With purely foreign sales eliminated from the equation, Hetronic’s damages are likely to be trimmed significantly. The result highlights how the Supreme Court’s ruling limits a trademark owner’s U.S. remedies for foreign infringement.
Sidebar: Determining the disgorgement damages
The U.S. Court of Appeals for the Tenth Circuit in Hetronic Int’l, Inc. v. Hetronic Germany GmbH held that any portion of the jury’s $96 million disgorgement award based on the defendants’ foreign sales was improper if those sales were unconnected to any domestic infringing use of Hetronic trademarks in commerce. To disgorge foreign-sale profits, Hetronic must show a connection between the defendants’ domestic infringing conduct and their foreign sales.
As the court explained, a plaintiff seeking disgorgement must identify the “total sales” that resulted from the infringing activity with reasonable certainty. Although a showing of just the defendant’s gross revenues isn’t enough to satisfy the reasonable certainty requirement, an estimate of infringed profits based on gross revenues suffices.
The plaintiff also must show a connection between the defendant’s sales and the infringement. Hetronic, therefore, must show a “causal nexus” between the damages sought and domestic conduct that used its trademarks in commerce.
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