United States: Gray Market Exports And Extraterritorial Application Of The Lanham Act

The Lanham Act provides little indication of the extent to which Congress intended to exercise its power beyond a broad definition of the "commerce" subject to the Act, encompassing "all commerce which may lawfully be regulated by Congress."³ The extraterritorial reach of the Act was first addressed by the Supreme Court in Steele v. Bulova Watch Co., 344 U.S. 280 (1952). In Bulova, the Court held that a district court had jurisdiction under the Lanham Act to enjoin a U.S. citizen from manufacturing in Mexico watches that were stamped "Bulova." Plaintiff had registered the "Bulova" mark in the United States but not in Mexico. In so concluding, the Court emphasized that the defendant’s Mexican "Bulovas" had been filtering into Texas and that the plaintiff had received numerous complaints from domestic watch-repairmen who had discovered that the watches were not genuine. Id. at 285. Because of the resultant confusion and harm to plaintiff’s goodwill within the U.S. the Court concluded that the Lanham Act reached defendant’s Mexican activities.⁴

Since Bulova Watch, a variety of conduct has been held sufficient for U.S. jurisdiction, including: the use of a U.S. agent for foreign distribution of a film falsely attributed to the author Stephen King⁵; the labeling and initial shipment in the U.S. of deodorant cans bearing an unauthorized well-know whiskey trademark prior to export⁶ negotiations in the U.S. and arrangements made from the U.S. for shipments of counterfeit jeans made primarily abroad⁷; orchestration from the U.S. of an infringement scheme executed abroad⁸; and sending promotional letters abroad from the U.S.⁹

However, in Totalplan Corp of America v. Colborne, 14 F.3d 824 (2d Cir. 1994), the Second Circuit held that the Lanham Act did not reach a Canadian company’s gray market distribution in Japan of cameras bearing an unauthorized U.S. trademark. Distinguishing Bulova, the Court noted that there was no evidence that the infringing goods ended up in the U.S. and ruled that the packaging and shipment of the cameras from the U.S. was, standing alone, insufficient. As the Piccoli case makes clear, the Totalplan case did not shut the door to Lanham Act claims in the context of gray market exports.

The Piccoli case was brought by the foreign exclusive trademark licensee and distributor of Calvin Klein jeans in Scandinavia ("CK Scandinavia") against its American counterpart and co-licensee ("CK America"). CK America and CK Scandinavia each ultimately derived its license to manufacture and distribute jeans from the U.S. beneficial owner of the Calvin Klein trademarks.¹⁰

CK Scandinavia alleged that CK America had conspired with its co-defendants (certain garment brokers and manufacturers) to export jeans to Scandinavian discounters, and thus destroy plaintiff’s high-end, high-margin market for Calvin Klein jeans in Scandinavia. CK Scandinavia alleged that the defendants, among other things, sent promotional materials to prospective purchasers which invited them to come to the United States to view, negotiate for, and purchase jeans for European distribution. CK Scandinavia alleged that the defendants’ exportation of Calvin Klein jeans into its exclusive territory deceived Scandinavian retailers and consumers as to the quality and origin of the jeans and thereby violated Section 43(a) of the Lanham Act.¹¹ CK America moved to dismiss CK Scandinavia’s Lanham Act claim, on the ground that extraterritorial application was improper essentially because the gray market activity allegedly deceived Scandinavian, not U.S., consumers.

The Piccoli court’s analysis was based upon Second Circuit precedent setting forth three factors to consider in determining whether extraterritorial application of the Lanham Act is appropriate:

First, whether the defendants are United States Citizens.¹² The Supreme Court in the Bulova Watch case held that the Lanham Act reflects Congress’ "power to prevent unfair trade practices in foreign commerce by citizens of the United States, although some of the acts are done outside the territorial limits of the United States."¹³ Second, whether there is a conflict between the defendants’ trademark rights under foreign law and under domestic law.¹⁴ Third, whether the defendants’ conduct has a substantial effect on U.S. commerce.¹⁵ "None of these three criteria is dispositive of the analysis concerning the Lanham Act’s extraterritorial effect, and a court must employ a balancing test of all three factors to determine whether the statute is properly implicated."¹⁶

There was no dispute in the Piccoli case that the defendants were United States citizens and that, as such, they had no trademark rights under foreign law that would conflict with a judgment in the action. The issue before the Piccoli court was reduced to whether CK Scandinavia had alleged a sufficient effect on U.S. commerce to support extraterritorial application of the Lanham Act.¹⁷

The Piccoli court noted that a substantial effect on U.S. commerce "clearly exists" where a defendant’s conduct results in U.S. consumer confusion or harm to a U.S. plaintiff’s goodwill.¹⁸ However, the law is less well established where damages are sought for infringement in a foreign market. For example, compare the results in cases in the Eleventh Circuit (Levi Strauss) and Second Circuit (Totalplan). The Eleventh Circuit in the Levi Strauss case upheld a preliminary injunction barring export of counterfeit jeans manufactured in China and shipped through the U.S. bound for Europe where negotiations and arrangements for the unlawful shipments were made in the U.S. by U.S. defendants.¹⁹ In contrast, the Second Circuit held in Totalplan that the packaging and shipment to Japan of cameras from the U.S. was insufficient, standing alone, to support application of the Lanham Act.²⁰ However, in Totalplan, the plaintiff was the only U.S. citizen involved in the case and thus the U.S. government’s "broad power to regulate the conduct of its citizens in foreign countries" was not implicated.²¹

The Piccoli Court distinguished Totalplan and found that the promotion, negotiation, and sale (in addition to packaging and shipment) of Calvin Klein jeans in the U.S. had a substantial effect on United States commerce because it was a use of the "physical stream of American commerce that was essential to the alleged infringement."²² Application of the Lanham Act was buttressed by the U.S. citizenship of the defendants.

The Piccoli case helps fill one of the interstices left by Bulova Watch and its progeny (including Totalplan) and is an important precedent, especially, for foreign licensees of U.S. trademarks. Such licensees often look to the U.S. Courts to be protected from infringement by U.S. co-licensees, manufacturers, and brokers. The extension of such protection increases the value of exclusive foreign territories, thereby ultimately benefitting the owners of U.S. trademarks. The Piccoli case demonstrates that careful investigation and pleading can result in appropriate protection for foreign licensees through extraterritorial application of the Lanham Act.

1. See, e.g., Hartford Fire Ins. Co. v. California, 509 U.S. 764, 796 (1993) (antitrust laws apply to "foreign conduct that was meant to produce and did . . . produce . . . substantial effect in the United States") North South Fin. Corp. v. Al-Turki, 100 F.3d 1046, 1050-53 (2d Cir. 1996) (RICO does not apply to acts in U.S. preparatory to fraud abroad); Itoba Ltd. v. Lep Group PLC, 54 F.3d 118, 121-22 (2d Cir. 1995) cert. denied, 516 U.S. 1044 (1996) (antitrust provisions of federal securities laws apply where conduct material to the competition of the fraud or substantial effects occur in the U.S.).

2. Piccoli A/S v. Calvin Klein Jeanswear Co., 19 F. Supp. 2d 157 (S.D.N.Y. 1998).

3. 15 U.S.C.A. § 1127.

4. Bulova Watch, 344 U.S. at 286-87.

5. King v. Allied Vision, Ltd., 807 F. Supp. 300, 307 (S.D.N.Y.), aff’d in relevant part, 976 F.2d 824 (2d Cir. 1992).

6. John Walker & Sons, Ltd. v. DeMert & Dougherty, Inc., 821 F.2d 399, 407-08 (7^th Cir. 1987).

7. Levi Strauss & Co. v. Sunrise Int’l Trading, Inc., 51 F.3d 982, 985 (11^th Cir. 1995).

8. The Gap, Inc. v. Stone Int’l Trading, Inc, 169 F.R.D. 584, 591 (S.D.N.Y.), aff’d, 125 F.3d 845 (2d Cir. 1997).

9. Gordon and Breach Science Publishers S.A. v. American Institute of Physics, 905 F. Supp. 169, 181 (S.D.N.Y. 1995).

10. CK Scandinavia was a sublicensee.

11. 15 U.S.C. § 1125.

12. Vanity Fair Mills, Inc. v. T. Eaton Co., 234 F.2d 633 (2d Cir.), cert. denied, 352 U.S. 871 (1956). See also, Atlantic Richfield v. ARCO Globus Int’l Co., 150 F.3d 189, 192 (2d Cir.1998) (citing Totalplan Corp. of America v. Colborne, 14 F.3d 824, 830 (2d Cir. 1994).

13. Bulova Watch, 344 U.S. at 286 (citations omitted).

14. Vanity Fair, 234 F.2d at 642.

15. Id. But see, e.g., American Rice, Inc. v. Arkansas Rice Growers Co-op Ass’n, 701 F.2d 408 (5^th Cir. 1983) (requiring only "some" effect on U.S. commerce.)

16. Warnaco Inc. v. VF Corp., 844 F. Supp. 940, 950 (S.D.N.Y. 1994).

17. Atlantic Richfield, 150 F.3d at 191-92 (holding Lanham Act inapplicable to extraterritorial conduct where no substantial effect on United States commerce even though defendant was a United States citizen and there was no conflict of laws).

18. Piccoli, 19 F. Supp. 2d at 170, citing Atlantic Richfield, 150 F. 3d at 193. The Piccoli Court did not reach plaintiff’s additional argument that the alleged conspiracy harmed United States commerce by weakening the Calvin Klein trademark, property of a (non-party) U.S. corporation. Exclusive distributions have standing to redress infringement of trademarks owned by their licensors. See, e.g., Business Trends Analysts v. Freedonia Group, Inc., 650 F. Supp. 1452, 1457-58 (S.D.N.Y. 1987); Calvin Klein Indus., Inc. v. BFK Hong Kong, Ltd., 714 F. Supp. 78, 80 (S.D.N.Y. 1989).

19. Levi Strauss & Co. v. Sunrise Int’l Trading Inc., 51 F. 3d 982 (11^th Cir. 1995).

20. Totalplan Corp. of America v. Colborne, 14 F.3d 824 (2d Cir. 1994).

21. Id. at 830.

22. Piccoli, supra at 171.