The United States Supreme Court has agreed to hear a trademark infringement case arising under the Lanham Act that has huge implications for manufacturers and sellers of products based outside the U.S. The case is Hetronic International, Inc. v. Hetronic Germany GMBH, et al. The case arises from a $114 million judgment for an industrial remote-control maker in a trademark dispute with its former European distributor. The question before the court is when a U.S. company may recover damages for trademark infringement based on foreign sales. This ramifications for international business are massive if the court allows U.S. companies to see trademark damages for the sales of products outside its borders.

U.S. company enters distribution and licensing agreements with European companies

The plaintiff, Hetronic, is a U.S. Company that manufactures radio remote controls used to operate heavy-duty construction equipment (e.g. cranes). Hetronic sells its products and services in over forty-five countries. The company markets and distributes its products through a worldwide network of wholly-owned subsidiaries and distributors. In 2006, Hetronic entered distribution and licensing agreements with an Austrian corporation, Hydronic, which came to distribute Hetronic’s products in over twenty European countries. In 2007, Hetronic entered a similar agreement with a German corporation, Hetronic Germany GmbH.

The agreements authorized Hydronic and Hetronic Germany to assemble and sell Hetronic’s remote controls under Hetronic’s brand. The agreements also required the two companies to act in Hetronic’s best interest and they agreed not to compete with Hetronic.

The European companies reverse engineer and begin selling Hetronic products

In 2011, a Hetronic Germany employee discovered a prior research-and-development agreement entered between Hetronic and Hetronic Germany’s predecessor. After consulting with legal counsel, Hetronic Germany took the position that it owned all the technology developed under that agreement.

Hetronic Germany than began reverse engineering Hetronic’s products. And once they developed these new, copycat parts, Hetronic Germany and Hydronic sought out new suppliers to source them. Eventually, both Hetronic Germany and Hydronic began selling Hetronic-branded products that incorporated parts sourced from third-parties (i.e. not Hetronic).

The founder of Hetronic Germany incorporated two new companies and began competing directly with Hetronic. Before litigation began these companies sold several hundred thousand dollars’ worth of products in the United States.

Jury awards Hetronic $114 million even though nearly all of the sales occurred in Europe

The Lanham Act governs federal trademark and unfair competition disputes. It subjects to liability “[a]ny person who shall . . . use in commerce any . . . colorable imitation of a registered mark,” 15 U.S.C. § 1114(1) (Section 32), or “[a]ny person who . . . uses in commerce any” word, false description, or false designation of origin that “is likely to cause confusion . . . or to deceive as to the affiliation,” origin, or sponsorship of any goods, id. § 1125(a)(1) (Section 43).

Plaintiff filed a federal trademark infringement lawsuit in the United States. A jury awarded plaintiff over $100 million and the trial court entered a worldwide injunction barring defendants from selling the infringing products. Defendants ignored the injunction and continued selling the infringing products. The defendants appealed the jury and trial court’s rulings to the Tenth Circuit Court of Appeals and argued that the Lanham Act does not extend to their conduct – which generally involves foreign defendants making sales to foreign consumers.

The Tenth Circuit Court of Appeals concluded the district court properly applied U.S. trademark law – and kept the $114 million damages award in place – but narrowed the scope of the worldwide injunction.

Here, 97% of Defendants sales—approximately $87 million—occurred outside the United States, primarily in Europe, Nonetheless the Tenth Circuit concluded that Defendants’ foreign conduct had a substantial effect on U.S. commerce – which was a key element that Hetronic had to prove. Hetronic pointed to three factors to establish a “substantial effect” on U.S. Commerce: (1) Defendants’ direct sales into 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.  As for the evidence that 97% of sales occurred outside of the United States, the Tenth Circuit found that irrelevant: “We ask only whether the effects of Defendants’ foreign conduct produce substantial impacts on U.S. commerce; it’s irrelevant what proportion of Defendants’ global sales entered the United States. Otherwise, billion-dollar-revenue companies could escape Lanham Act liability by claiming that millions of dollars of their infringing products entering the United States represented only a fraction of their sales.”

As for the district court’s worldwide injunction, the Tenth Circuit found it too broad in extending to every country in the world. The court narrowed the injunction to countries in which Hetronic currently marketed or sold its products (some 45 countries) and remanded for the district court to identify those countries.

What might this case mean for companies doing business internationally?

The Supreme Court’s decision, to be sure, is necessary to fully understand the potential implications. If the Supreme Court affirms the Tenth Circuit’s ruling, this case will establish a powerful tool for U.S. companies that believe a foreign company is infringing on their U.S. trademark. Although the U.S. company would have to prove the infringement had a substantial effect on U.S. commerce, the fact that practically all of the infringing sales occurred in other countries might not prohibit a jury from awarding the U.S. company damages.

This would fly in the face of what nearly everyone believed to be established law by essentially saying that a U.S. Trademark extends worldwide. My law firm actually dealt with this exact issue many years ago. Back then we had an American client (“Our Client)) that was involved in a brutal lawsit against a company (“Other Company”) with which it had initally partnered in China. Our Comopany hated Other Company and it very much wanted to stick it to Other Company and it knew that Other Company had not yet secured its newest (and most important) brand name as a China trademark, even though it was making products under that brand name in China. Our Client knew this because our China trademark lawyers conducted a search on this (not via any confidential information revealed to Our Client by Other Company.

To make a long story short, Our Client wanted to register Other Company’s brand name in China as Our Client’s China own trademark, with plans to use that trademark filing as settlement leverage in the litigation. Our lawyers spent countless hours researching this issue and we concluded that if Our Client were to do this, it would not be violating Chinese law and we could argue that U.S. court jurisdiction would not extend to China, though we suggested that Our Client register the Chinese trademark with one of its own Chinese subsidiary companies as the owner of that trademark, to further distance Our Client from legal risk. We also told our client that we did not think it would be a good strategy as it would more likely stiffle settlement than lead to it and so our client never did it. This Supreme Court case would change our analysis. See also, China Trademark Law: Simple and Effective 13 Years Later.

Notably, the U.S. Solicitor General has filed a brief asking the Supreme Court to limit the extraterritorial reach of the Lanham Act and permit damages only when the alleged infringement has a likelihood of causing confusion among U.S. consumers.  The Solicitor General argued the Tenth Circuit’s broad-based approach may undermine intellectual property treaties such as the Paris Convention.

Stay tuned for updates on this case as we will post them here.