In late August of this year the 9th Circuit Court of Appeals reversed a dismissal of a trademark case between the food retailer Trader Joes, and the grey-market reseller of Trader Joe’s goods in Canada, Pirate Joes. The crux of this case involved Trader Joes trying to find a way to keep Pirate Joes from reselling their products at marked up prices in Canada. The unique, and potentially precedent setting, feature of this case however is how Trader Joes may finally achieve this goal; Trademark law under the Lanham Act.
Since 2011, Canadian resident Michael Norman Hallatt has run a business that consists of buying popular Trader Joes products in the Washington city of Bellingham, and then transporting said products back to Canada to resell them at a marked-up price at his store named “Pirate Joes.” Trader Joes began to take notice of this practice in late 2011 and filed a lawsuit against Hallatt that same year for trademark infringement. Specifically, Trader Joes alleged that Hallatt mislead customers in believing the products he sold were authorized by Trader Joes, that his store used a confusingly similar trade dress to Trader Joes locations, and that Hallatt did not sell products in adherence to Trader Joes food safety practices. All of this resulted in damage and dilution to the Trader Joes trademark, as alleged by Trader Joes. This case was dismissed by the district court however. The reasoning given was the court lacked subject matter jurisdiction, and the Lanham Act did not apply to the extraterritorial conduct of Hallatt in Canada.
This August however, the 9th Circuit reversed this dismissal. First, the 9th Circuit ruled the extraterritorial reach of the Lanham Act was a question of merit of the trademark claim, not whether the federal courts had proper subject matter jurisdiction. The Lanham Act’s element of “use in commerce” give evidence of its extraterritorial reach because of the broad definition of the word “commerce” and the fact this element is derived from Congress’s power to regulate all foreign and domestic commerce as it is laid out on the Commerce Clause. Further, the “use in commerce” element is something that is contained in the Lanham Act and is not connected to the general jurisdictional grant in 15 U.S.C. 1121(a).
Next, Court stated the Lanham Act can apply extraterritorially if: (1) the alleged violations create some effect on American foreign commerce; (2) the effect is sufficiently great to present a cognizable injury under the Lanham Act; and (3) the interests of and links to American foreign commerce are sufficiently strong in relation to those of the foreign jurisdiction to justify the assertion of extraterritorial authority. Trader Joes claimed Hallatt’s activities, while taking place in Canada, still impacted them by damaging their reputation and diluting the America-held trademark.
A major issue with this line of reasoning is the “first-sale doctrine”, which states that the resale of a legitimate product by a lawful purchaser of that product does not result in trademark infringement or unfair competition. Trader Joes creatively avoided this doctrine with the argument Hallatt’s transport and sale of their goods without proper health and quality control measures could result in tainted or contaminated food. Because the sale of contaminated food could result in the devaluation of Trader Joes’s mark, this is becomes a cognizable injury under the Lanham Act. Therefore there was sufficient connection between Hallatt’s foreign conduct and American commerce, and the injury is cognizable under the Lanham Act. The third element of the extraterritoriality test was satisfied by the fact that Hallatt willingly subjected himself to the laws of the US by virtue of him being a permanent resident, and that the damage to Trader Joes was foreseeable.
The important take-away from this case is first, the affirmation the Lanham Act can be applied extraterritorially. Second, the fact that the Lanham Act can reach into areas where other doctrines had previously barred relief, such as the “first-sale doctrine”. For extraterritorial application of the Lanham Act a trademark holder must show a nexus between the foreign commerce and domestic American commerce. As in this case, this can be shown through reputational harm that decreases the value of American-held trademarks. What is crucial about this case is the fact that infringing goods need not ever make it back to American soil in order for a plaintiff to show a claim cognizable under the Lanham Act. The showing of potential tarnishment and devaluing of a brand is enough. Rights-holders must sometimes get creative in their arguments in order to find avenues to relief.