United States: A Big Year For Trademarks: Part 1

A lot happened in 2016, including in the world of trademark jurisprudence. Last year brought several important decisions that will change the way companies and litigants approach trademark enforcement and protection—particularly as e-commerce and cross-border transactions bring ur world closer together. In this first installment of two articles, we discuss four cases that address foreign activities and the Lanham Act, the level of sales to establish "use in commerce," and the standard for awarding attorneys' fees.

Foreign Activities

Non-Use of a Mark in the U.S.
In Belmora LLC v. Bayer Consumer Care AG,1 the Fourth Circuit held that a foreign trademark owner who has not used its trademark in the U.S. may pursue false-association, false-advertising, and trademark-cancellation claims against the owner of the same mark in the U.S.

Bayer Consumer Care AG owns the trademark FLANAX in Mexico and has sold pain relievers there under that mark since the 1970s. Bayer's FLANAX brand is well known in Mexico, but Bayer never marketed or sold its FLANAX products in the U.S. Belmora LLC owns the FLANAX mark for pain relievers in the U.S. and used it there since 2004. Belmora's packaging closely mimicked Bayer's Mexican packaging. Belmora also made various statements in marketing materials implying that its FLANAX brand was the same product sold by Bayer in Mexico, such as, "Flanax products have been used [for] many, many years in Mexico" and are "now being produced in the United States by Belmora LLC".

Bayer produced evidence showing that such statements caused Belmora's distributors, vendors, and marketers to believe that Belmora's FLANAX product was the same as, or was affiliated with, Bayer's FLANAX product.

Bayer successfully petitioned the TTAB to cancel Belmora's U.S. registration. Belmora appealed, and Bayer filed an additional suit in federal court alleging false association and false advertising claims. The cases were consolidated and, on Belmora's motion to dismiss, the court ruled for Belmora on all counts.

The court concluded that: (1) Bayer's claims fell outside the Lanham Act's "zone of interests" because Bayer did not possess a protectable interest in the FLANAX mark in the U.S.; and (2) a cognisable economic loss under the Lanham Act cannot exist as to a "mark that was not used in United States commerce."

The Fourth Circuit disagreed and vacated the district court's judgment. The court emphasised that, "this is an unfair competition case, not a trademark infringement case." Though Belmora owns the FLANAX mark in the U.S., "trademark rights do not include using the mark to deceive customers as a form of unfair competition, as is alleged here."

According to the Fourth Circuit, the plain language of the Lanham Act's Section 43(a) does not require that a plaintiff possess or have used the trademark in U.S. commerce. "Under § 43(a), it is the defendant's use in commerce—whether of an offending 'word, term, name, symbol or device' or of a 'false or misleading description [or representation] of fact'—that creates the injury under the terms of the statute."

Here, the "offending word, term, name, symbol or device" was Belmora's FLANAX mark. The Fourth Circuit noted that "courts must be careful not to import requirements into this analysis that Congress has not included in the statute."

Therefore, to plead a Section 43(a) claim: (1) it must fall within the "zone of interests" protected by the statute; and (2) the plaintiff's injury must be proximately caused by violations of the statute. The Fourth Circuit found Bayer's false association and false advertising claims satisfied these elements. To come within the "zone of interests" in a suit under Section 43(a), a plaintiff must allege an injury to a commercial interest in reputation or sales. Here, Bayer alleged that Belmora's misleading association with Bayer's FLANAX mark caused Bayer's customers to buy the Belmora FLANAX product in the U.S. instead of Mexico, resulting in a loss of revenue for Bayer.

For reasons that largely overlapped with this analysis, the court found that the district court also erred in overturning the TTAB's cancellation decision.

The significance of this decision should not be underestimated; it arms trademark owners with a significant tool for stopping others from seeking a free ride on their international reputation— even absent direct sales in the U.S.

Use of a Mark Outside the U.S. Can Infringe

The Ninth Circuit also addressed the extraterritorial reach of the Lanham Act this year, holding in Trader Joe's Company v. Hallatt,² that a U.S. trademark holder can pursue a Lanham Act claim against activity that occurred mainly in Canada.

The defendant, Michael Hallatt, was a lawful permanent resident of the U.S. and was thus allowed to live and work there. Hallatt purchased Trader Joe's-branded goods in Washington state, transported them to Canada, and resold them in his "Pirate Joe's" store. Hallatt used Trader Joe's trademarks in his Canadian advertising, used a font similar to the Trader Joe's insignia for his "Pirate Joe's" sign, and sold perishable goods that were not transported or stored in accordance with Trader Joe's strict quality control standards. Trader Joe's received at least one complaint from a customer who became sick after eating a Trader Joe's branded product purchased from Pirate Joe's.

Trader Joe's sued Hallat in the U.S. The district court dismissed the case for lack of subject matter jurisdiction, concluding that the Lanham Act did not apply to Hallat's activities in Canada. Trader Joe's appealed.

To determine whether the Lanham Act could reach Hallatt's conduct in Canada, the Ninth Circuit examined two questions: (1) is the extraterritorial application of the Lanham Act an issue that implicates federal courts' subject-matter jurisdiction; and (2) were Trader Joe's allegations that Hallat's conduct impacted U.S. commerce sufficient to invoke the Lanham Act's protections?

On the first question, the Ninth Circuit held that the extraterritorial reach of the Lanham Act is a merits question concerning the court's power to hear a case. The Lanham Act's "use in commerce" element and its broad definition of "commerce" give the statute its extraterritorial reach, and these elements derive from Congress's power to regulate interstate and foreign commerce under the Commerce Clause. Because the "use in commerce" element of the Lanham Act is not connected to its jurisdictional grant in 15 USC 1121(a), that element is not a jurisdictional requirement.

On the second question, the court applied a three-part test. The Lanham Act can apply extraterritorially if: (1) the alleged violations create some effect on U.S. foreign commerce; (2) the effect is sufficiently great to present a cognisable injury under the Lanham Act; and (3) the interests of and links to U.S. foreign commerce are sufficiently strong in relation to those of the foreign jurisdiction to justify the assertion of extraterritorial authority. Trader Joe's allegations met all elements.

Trader Joe's satisfied the first two elements because it sufficiently alleged a nexus between Hallatt's foreign conduct and U.S. commerce. Its Lanham Act claim was based, in part, on the allegation that Hallatt transported and sold Trader Joe's products without using the proper quality control measures.

Further, Hallatt's infringing scheme including sourcing his inventory entirely from the U.S. The court observed, "There is nothing implausible about the concern that Trader Joe's will suffer a tarnished reputation and resultant monetary harm in the United States from contaminated goods sold in Canada."

Trader Joe's satisfied the third element even though most of Hallatt's infringing activity occurred in Canada because Trader Joe's alleged, among other things, that (1) Hallatt subjected himself to U.S. law by his permanent resident status, (2) the harm to Trader Joe's was foreseeable, and (3) Trader Joe's trademarks are well-known in Canada.

In June 2017, the parties settled. Trader Joe's agreed to drop the lawsuit, and Hallat agreed to shut down Pirate Joe's.

As the world of international commerce grows smaller each day, this case arms trademark owners with another potent tool to fight non-U.S. piracy. Brand owners should be cognisant, however, that this case involved a series of activities commencing in the U.S. (including the purchase of goods here by someone with permanent resident status) that impacted U.S. commerce.

Use in Commerce; One Sale Can Be Enough

In Christian Faith Fellowship v. Adidas AG,³ the Federal Circuit held that a single sale of two hats is sufficient to meet the Lanham Act's "use in commerce" requirement for trademark registration, potentially contravening longstanding jurisprudence on "token use".

Christian Faith Fellowship Church began selling caps and shirts emblazoned with the phrase "Add A Zero" in January 2005. In February of the same year, the Church made one sale of two ADD A ZERO-marked hats to an out-of-state resident, and in March, the Church applied for federal registration of the ADD A ZERO mark.

In 2009, Adidas sought a clothing trademark for ADIZERO, but the USPTO refused its application based on the Church's ADD A ZERO marks. Adidas then sought to cancel the Church's marks arguing, among other things, that the Church had failed to use the marks in commerce before registration. The board agreed, finding the Church's February 2005 sale de minimus and not sufficient to satisfy the Lanham Act's "use in commerce" standard. The Federal Circuit reversed. It held that the question turned on whether the Church made a sale of marked goods in commerce regulable by Congress.

The court noted that Congress's power under the Commerce Clause is broad. In a 1942 case involving a farmer who grew wheat for commercial sale (but also for personal and farm use), and who argued that his wheat harvesting was local in nature and had only a trivial effect on interstate commerce, the Supreme Court stated, "[The farmer's] own contribution to the demand for wheat may be trivial by itself is not enough to remove him from the scope of federal regulation where, as here, his contribution, taken together with that of many others similarly situated, is far from trivial."

Under the "substantial effects" doctrine, when "a general regulatory statute bears a substantial relation to commerce, the de minimus character of individual instances arising under that statute is of no consequence." The court noted that the Lanham Act is a comprehensive scheme for regulating economic activity, and that the Federal Circuit's past Lanham Act "use in commerce" cases similarly reflect the broad scope of Congress's Commerce Clause powers.

Consequently, the court found it indisputable that the private sale of goods to an out-of-state resident is "quintessentially economic," concluding: "[T]he Church's sale of two 'ADD A ZERO'-marked hats to an out-of-state resident is regulable by Congress under the Commerce Clause and, therefore, constitutes 'use in commerce' under the Lanham Act.'" According to the court, this transaction, taken in the aggregate, would cause a substantial effect on interstate commerce; the Church did not need to present evidence to that effect. The court therefore reversed and remanded to the board to address Adidas's other cancellation grounds.

This decision has significant implications both offensively and defensively. No longer must one wait to prove an actual impact on commerce to support a federal registration. And, when read with the Belmora and Trader Joe's cases, this case should alter the way parties approach the enforcement of their brands.

Attorneys' Fees; Whether a Case is "Exceptional"

In SunEarth, Inc v. Sun Earth Solar Power,4 the Ninth Circuit became the latest court to hold that the Supreme Court's 2014 decision
in Octane Fitness, LLC v. ICON Health & Fitness, Inc., which outlined the standard for finding a case "exceptional" in patent feeshifting
disputes, applies to the Lanham Act.

Both the Lanham Act and the Patent Act provide that "the court in exceptional cases may award reasonable attorney fees to the prevailing party." In Octane, the Supreme Court overturned the Federal Circuit's existing standard for awarding attorneys' fees under the Patent Act, holding that a district court should look to the "totality of the circumstances" to determine if a case is exceptional.

The court explained that an "exceptional" case is one that stands out from others with respect to: (1) "the substantive strength of a party's litigation positions (considering both the governing law and the facts of the case)"; or (2) "the unreasonable manner in which the case was litigated." Factors for courts to consider include frivolousness, motivation, factual or legal unreasonableness, and "the need in particular circumstances to advance considerations of compensation and deterrence." Further, the court lowered the burden of proof, holding a party's entitlement to fees must be proven by a preponderance of the evidence.

In May, a three-judge panel in the Ninth Circuit rejected the applicability of Octane, applying instead the prior Ninth Circuit standard, requiring "malicious, fraudulent, deliberate, or willful" infringement. On rehearing, however, the en banc panel joined the Third, Fourth, Fifth, and Sixth Circuits and held that the Supreme Court's decision changed the standard for fee-shifting disputes under the Lanham Act. Noting that only the Second and Seventh Circuits have continued to apply pre-Octane Fitness case law, the court stated that the fee-shifting provisions in the Patent Act and the Lanham Act are "parallel and identical" and should be interpreted in tandem.

The trend to follow Octane in trademark cases is likely to continue among the remaining circuits. As a result, fee awards should increase as they have in patent cases. And given the high cost of U.S. litigation, this will impact how parties conduct themselves in litigation—particularly with litigation misconduct as now part of the analysis.

Key Takeaways

• Once you have sufficient activity to establish an impact on U.S. commerce (which we now know can come from a single sale), promptly seek to federally register your important marks.
• Consider asserting your rights against copycats seeking to trade off your goodwill—even if you have not used your mark in the U.S., or the infringing conduct occurs outside the U.S.
• Be mindful of the lower standard for awarding attorneys' fees in U.S. litigation, particularly the impact that litigation misconduct can have in assessing such an award.

Footnotes

1 819 F.3d 697 (4th Cir 2016).

2 835 F.3d 960 (9th Cir 2016).

3 841 F.3d 986 (Fed Cir 2016).

4 2016 WL 6777328 (9th Cir 2016).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.