In Trader Joe’s Company v. Michael Norman Hallatt, the Ninth Circuit recently found that Trader Joe’s allegations of infringing conduct occurring within Canada supported a cognizable claim under the Lanham Act.

In particular, Trader Joe’s, a well-known American grocery store chain, filed suit in federal court in Washington State in 2013, alleging trademark and unfair competition claims under the Lanham Act and Washington law for infringement occurring in Canada. According to Trader Joe’s, a Canadian resident, Michael Norman Hallatt, was purchasing Trader Joe’s branded goods in Washington, taking them to Canada, and reselling them at inflated prices in a store named “Pirate Joe’s” which he designed to mimic a Trader Joe’s store. Hallatt is alleged to have advertised with Trader Joe’s trademarks and displayed an exterior sign at Pirate Joe’s in Canada that uses a font similar to the trademarked “Trader Joe’s” insignia.

The district court in Washington granted Hallatt’s motion to dismiss, dismissing all of Trader Joe’s claims. The district court found, among other things, that Trader Joe’s federal trademark and unfair competition claims under the Lanham Act lacked subject matter jurisdiction because the Lanham Act did not reach Hallatt’s conduct in Canada. Trader Joe’s appealed.

On appeal, the Ninth Circuit reversed the district court’s decision with respect to the Lanham Act, finding (i) that the extraterritorial application of the Lanham Act is not an issue that implicates federal courts’ subject matter jurisdiction, but, rather, is a merits based non-jurisdictional question; and (ii) that Trader Joe’s alleged that Hallatt’s conduct impacted American commerce in a manner sufficient to invoke Lanham Act protections.

With respect to the subject matter jurisdiction issue, the Ninth Circuit noted that at the time of the district court’s decision, the court below did not have the benefit of the Ninth Circuit’s recent decision in La Quinta Worldwide LLC v. Q.R.T.M., S.A. de C.V., 762 F.3d 867 (9th Cir. 2014), which held that the Lanham Act’s “use in commerce” element (the element that gives the Act extraterritorial reach) is a non-jurisdictional merits question. In La Quinta, the specific issue was whether the defendant’s intent to expand its business into the United States constituted “use” within the meaning of the Lanham Act. It did not address the extraterritorial scope of the Act. Nonetheless, the Ninth Circuit reasoned that La Quinta’s conclusion – that the Lanham Act’s “use in commerce” element is not jurisdictional – applied equally to the extraterritorial reach of the Act.

In further support of the Ninth Circuit’s conclusion that the extraterritorial reach of the Act is a merits question, and not a question of federal courts’ subject matter jurisdiction, the Court pointed to Morrison v. Nat’l Aust. Bank, Ltd., 561 U.S. 247, 253-54 (2010) and Arbaugh v. Y & H Corp., 540 U.S. 500 (2006), which held that the extraterritorial reach of Title VII and the Securities and Exchange Act, respectively, were merits questions rather than subject matter jurisdiction questions.

The Ninth Circuit then fully analyzed the Rule 12(b)(6) merits question, determining that the Lanham Act’s extraterritorial reach extended to Hallatt’s allegedly infringing conduct. Specifically, the Ninth Circuit applied the three Timberlane factors (whether (i) the alleged violations have an effect on American foreign commerce; (ii) that effect presents an injury to Plaintiff cognizable under the Lanham Act; and (iii) 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) and found that Trader Joe’s alleged a nexus between the foreign conduct and American commerce sufficient to state a Lanham Act claim.

In reviewing Hallatt’s conduct – especially with respect to Hallatt’s poor quality control practices, inflated prices, and inferior customer service in offering Trader Joe’s branded goods in Canada – the Ninth Circuit found that such conduct could cause Trader Joe’s reputational harm in the United States and could decrease the value of its American-held trademarks. The Ninth Circuit further noted that Hallatt operates in American commerce streams when he buys Trader Joe’s goods in Washington and hires locals to assist him, which weighed in favor of applying the Lanham Act to Hallatt’s conduct. The Ninth Circuit also found that the seven sub-factors used to evaluate potential “interference with other nations’ sovereign authority”, did not counsel against applying the Lanham Act.

Finally, the Circuit affirmed the dismissal of the state law dilution and consumer protection claims.

As a result of the Ninth Circuit’s decision regarding the extraterritorial reach of the Lanham Act, Trader Joe’s federal trademark claims are revived and Trader Joe’s will get to go back to district court and proceed past the pleadings stage.