Tenth Circuit Partially Affirms Decision Enforcing Lanham Act on Foreign Defendants Based on Extraterritorial Conduct

Tenth Circuit courtroom

On August 24, the U.S. Court of Appeals for the Tenth Circuit affirmed in part, reversed in part and remanded a decision of the district court for the Western District of Oklahoma, holding that the Lanham Act applied to the defendants’ extraterritorial conduct.

Hetronic International, Inc. (Hetronic), is a U.S. company that manufactures radio remote controls used to operate heavy-duty construction equipment such as cranes. Hetronic Germany, Hydronic Steuersysteme GmbH (Hydronic), ABI Holding GmbH (ABI), Albert Fuchs, Abitron Germany GmbH (Abitron Germany) and Abitron Austria GmbH (Abitron Austria) (collectively, Defendants), none of whom are U.S. citizens, distributed Hetronic’s equipment in Europe.

In 2006, Hetronic entered distribution and licensing agreements with Hydronic, an Austrian corporation managed by Fuchs. Hetronic entered a second distribution and licensing agreement with a German company that was eventually purchased by Fuchs. This continued without issue for nearly a decade, until one of Defendants’ employees reevaluated an old research-and-development agreement between the parties and concluded that they—not Hetronic—owned the rights to Hetronic’s trademarks and other intellectual property. Eventually, Defendants began manufacturing their own products—identical to Hetronic’s—and selling them under the Hetronic brand, primarily in Europe, even retaining the same product names used by Hetronic.

Hetronic became aware of this and terminated the parties’ distribution agreements. But the defendants continued to sell the copycat products and even attempted to expand sales to the U.S. market before Hetronic sued them. Around this time, Fuchs used an Austrian company he owned, ABI, to incorporate two new companies, Abitron Germany and Abitron Austria. Abitron Austria purchased Hydronic in August 2014; Abitron Germany purchased Hetronic Germany the following month. They soon continued selling the copycat products. Among other claims, Hetronic asserted trademark claims under the Lanham Act on appeal.

District Court Proceedings

In June 2014, Hetronic sued Hetronic Germany and Hydronic in the Western District of Oklahoma, alleging breach of contract, later adding as defendants Fuchs, ABI, Abitron Austria, and Abitron Germany. The amended complaint also added claims under the Lanham Act and state tort law. The proceedings ended in a jury trial, which returned a verdict for Hetronic on all counts, finding that Defendants willfully infringed Hetronic’s trademarks. The jury then awarded Hetronic over $115 million in damages, $96 million of which related to the Lanham Act violation. The court also granted Hetronic a permanent injunction order, enjoining Defendants’ infringing activities worldwide. Defendants appealed.

Appeal

On appeal, defendants argued that the district court erroneously exercised personal jurisdiction over four of the six defendants; that the district court erred in concluding the Lanham Act applied extraterritorially to reach their foreign activities; and that the district court erred when it ruled that issue preclusion barred them from asserting at trial that they owned the disputed intellectual property.

Personal Jurisdiction

The Defendants challenged the district court’s exercise of personal jurisdiction over the Abitron entities, ABI, and Fuchs. The Tenth Circuit agreed with the district court that Abitron Germany and Abitron Austria were subject to the forum selection clause as successors-in-interest to Hydronic and Hetronic Germany..

Additionally, the Tenth Circuit concluded the district court properly found that they had personal jurisdiction over Fuchs and ABI pursuant to Federal Rule of Civil Procedure (FRCP) 4(k)(2). Citing CGC Holding Co., the Tenth circuit recognized that FRCP 4(k)(2) acts as a kind of federal long arm statute, granting a court personal jurisdiction over a foreign defendant if (1) the “plaintiff’s claims arise under federal law”; (2) “the defendant is not subject to the jurisdiction of any state court of general jurisdiction”; and (3) “the plaintiff shows that the exercise of jurisdiction comports with due process.” CGC Holding Co. v. Hutchens, 974 F.3d 1201, 1208 (10^th Cir. 2020).

Defendants did not dispute that Hetronic’s claims arise under federal law. On the second element, Defendants argued that the district court failed to properly consider whether they were subject to the jurisdiction of the other states’ courts besides Oklahoma. Defendants implied that the district court was required to conduct a sua sponte analysis of all 50 states—or at least Nevada and Massachusetts—to assess whether FRCP 4(k)(2) had been satisfied. However, quoting ISI Int’l, Inc., the Tenth Circuit rejected this interpretation, noting that “[a} defendant who wants to preclude use of [FRCP} 4(k)(2) has only to name some other state in which the suit could proceed. If, however, the defendant contends that he cannot be sued in the forum state and refuses to identify any other where suit is possible, then the federal court is entitled to use [FRCP] 4(k)(2).” ISI Int’l, Inc. v. Borden Ladner Gervais LLP, 256 F.3d 548, 552 (7^th Cir. 2001). Further, the Tenth Circuit concluded that Hetronic had satisfied their burden of showing Defendants had sufficient minimum contacts to satisfy due process, noting several visits by Fuchs, and U.S. trademark filings by ABI.

Permanent Injunction

Defendants attacked the permanent injunction prohibiting their worldwide sales of lookalike remote controls on three grounds. They argued (1) that the district court erroneously concluded that the Lanham Act applied extraterritorially here; (2) that the injunction lacks the specificity required by FRCP 65; (3) and that the injunction sweeps too broad. Though the Tenth Circuit agreed that the district court’s worldwide injunction was overbroad, they otherwise rejected Defendants’ challenges and upheld the injunction.

1. Lanham Act Applies Extraterritorially

The Tenth Circuit rejected Defendants’ first argument that the Lanham act cannot be applied extraterritorially. Citing Steele, the Tenth Circuit acknowledged that there is a general presumption against extraterritoriality, but that it may be applied abroad at least in some circumstances. Steele v. Bulova Watch Co., 344 U.S. 280, 282-285 (1952). In Steele, the Court reasoned that “the United States is not debarred . . . from governing the conduct of i[t]s own citizens upon the high seas or even in foreign countries when the rights of other nations or nationals are not infringed.” Id. at 285-86. Key to the Court’s decision was that the defendant’s “operations and effects were not confined within the territorial limits of a foreign nation,” but rather filtered through to the United States. Id.

Since Steele, three competing frameworks have developed for determining the Lanham Act governs a defendant’s foreign conduct. The Vanity Fair test, which considers three factors: “(1) whether the defendant’s conduct had a substantial effect on U.S. commerce; (2) whether the defendant was a U.S. citizen; and (3) whether there was a conflict with trademark rights established under the relevant foreign law.” Vanity Fair Mills, Inc. v. T. Eaton Co., 234 F.2d 633, 642 (2d Cir. 1956). For this test, no factor is dispositive, but the absence of one may be and the absence of both almost certainly is. Id. at 643. Another test that developed is the Timberlane test. Citing Trader Joe’s, the Tenth circuit recognized that under this test, “the Lanham act applies extraterritorially if: (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.” Trader Joe’s Co. v. Hallatt, 835 F.3d 960 at 972 (9^th Cir. 2016).

Last is the McBee test, which the Tenth Circuit essentially adopted. The Tenth Circuit concluded that the proper test involves three factors: (1) courts should determine whether the defendant is a U.S. citizen; (2) when the defendant is not a U.S. citizen, courts should assess whether the defendant’s conduct had a substantial effect on U.S. commerce; (3) lastly, only if the plaintiff has satisfied the substantial-effect test, should courts consider whether the extraterritorial application of the Lanham Act would create a conflict with trademark rights established under foreign law.

With the proper test in mind, the Tenth Circuit evaluated the extent of the extraterritorial reach of the Lanham Act. Defendants argued that the district court erred in two ways. First, Defendants insist that the district court should have resolved the extraterritoriality issue as a matter of subject-matter jurisdiction before trial. Second, because the court did not do so, Defendants maintained that the court erred by precluding them from arguing the issue at trial.

The Tenth Circuit agreed with the Defendants that the district court should have resolved the extraterritoriality issue as a matter of law before trial but disagreed that the issue presents a question of subject matter jurisdiction. However, the Tenth Circuit was sympathetic to Defendants’ confusion, noting that prior to 2010, every court—including the U.S. Supreme Court—considered the Lanham Act’s extraterritoriality a matter of subject matter jurisdiction. But in 2010, the Court clarified in Morrison that questions about the extraterritorial reach of a federal stature go to the merits, not jurisdiction. Morrison v. Nat’l Austl. Bank Ltd., 561 U.S. 247 at 254 (2010). The Tenth Circuit reasoned, however, that “to hold that the extraterritorial reach of the Lanham Act presents a merits question isn’t to say that the question can’t be decided as a matter of law.” Based on this determination, the Tenth Circuit reviewed the issue de novo using the three-pronged approach outlined above.

The Tenth Circuit recognized that none of the Defendants are American citizens. Thus, to prevail, Hetronic must show that Defendants’ foreign infringing conduct had a substantial effect on U.S. commerce. The extraterritoriality issue turns solely on this question because Defendants nowhere argued the third element—that applying the Lanham Act extraterritorially would conflict with trademark rights under another country’s laws.

To meet their burden of proving the second element, Hetronic pointed to three effects on U.S. commerce: (1) Defendants’ direct sales to the United States; (2) Defendants’ sales of products abroad that ended up in the United States; and (3) diverted foreign sales that Hetronic would have made but for Defendants’ infringing conduct. Viewing the evidence as a whole, the Tenth Circuit concluded that Hetronic presented more than enough evidence to show that Defendants’ foreign infringing conduct had a substantial effect on U.S. commerce. In so holding, the Tenth Circuit noted that, besides the millions of euros worth of infringing products sold that made their way to the United States after initially being sold abroad, Defendants also diverted tens of millions of dollars of foreign sales from Hetronic that otherwise would have ultimately flowed into the United States. Furthermore, though much of Hetronic’s evidence focused on consumer confusion abroad, it also documented numerous incidents of confusion among U.S. consumers. Therefore, the Tenth Circuit concluded that the United States had a reasonably strong interest in the litigation. Accordingly, the Lanham Act was applied extraterritorially to reach all of the Defendants’ foreign infringing conduct.

2. Injunction Specificity

The Tenth Circuit found Defendants’ argument that the injunction lacked specificity required by FRCP 65 unpersuasive. Citing CF & I Steel Corp., the court noted that injunctions violate FRCP 65 “when the delineation of the proscribed activity lacks particularity, or when containing only an abstract conclusion of law, not an operative command capable of enforcement.” CF & I Steel Corp. v. United Mine Workers of Am., 507 F.2d 170, 173 (10th Cir. 1974). Here, the district court’s injunction “goes far beyond an abstract conclusion of law and easily satisfies Rule 65.”

3. Injunction Scope

Despite the above, the Tenth Circuit concluded that the injunction was improperly broad. The injunction issued by the district court extended not only to the countries in which Hetronic currently sells its products, but to every country in the world. Citing Emergency One, the Tenth Circuit reasoned that “even the owner of a federally registered mark—who enjoys nationwide priority—is not entitled to injunctive relief except in the area actually penetrated through use of the mark.” Emergency One, Inc. v. Am. Fire Eagle Engine Co., 332 F.3d 264, 269 (4th Cir. 2003). Therefore, Hetronic is not entitled to injunctive relief in markets it hasn’t actually penetrated, said the court. Accordingly, the injunction was narrowed to countries in which Hetronic currently markets or sells its products. Since the relevant countries may have changed since the injunction, the Tenth Circuit remanded the case to the district court to modify the injunction in accordance with the opinion.

Ownership of IP

The district court did not allow Defendants to argue their ownership claim of Hetronic’s IP based on issue preclusion. Defendants argued that they should not have been precluded by the district court of arguing the IP ownership issue, but the Tenth Circuit determined each element of the issue preclusion test was met and affirmed the district court’s summary-judgment ruling on the ownership defense.

According to a press release by Jenner & Block, which represented Hetronic, the opinion upholds a $113 million verdict for Hetronic and marks “the first time the Tenth Circuit addressed the question of whether the Lanham Act extends to conduct involving foreign defendants making sales to foreign consumers.”