Why it matters: On August 26, 2016, the Ninth Circuit in Trader Joe's Company v. Hallatt reversed the district court's dismissal of a Lanham Act trademark infringement suit on lack of subject matter jurisdiction grounds and ruled that the Lanham Act could apply extraterritorially to the actions of a Canadian man who purchased Trader Joe's products in the United States and then resold them at inflated prices in his Vancouver store (designed to mimic Trader Joe's distinctive trademark and trade dress) under the name "Pirate Joe's."

Detailed discussion: On August 26, 2016, the Ninth Circuit in Trader Joe's Company v. Hallatt reversed a Western District of Washington judge and ruled that plaintiff Trader Joe's Company (Trader Joe's) could proceed with its federal Lanham Act claims against a Canadian man, Michael Norman Hallatt (Hallatt), who purchased branded items from Trader Joe's stores in the United States and then sold them at inflated prices in a store located in Vancouver, Canada, called Pirate Joe's (designed to mimic Trader Joe's distinctive trademark and trade dress).

Relevant facts and procedural history

To briefly review the relevant facts and procedural history of the case, Trader Joe's, described as "a well-known American grocery store that sells specialty goods at reasonable prices from its distinctive, South Pacific-themed stores," was first alerted to Hallatt's actions in 2011 by employees at a Trader Joe's in Bellingham, Washington, near the Canadian border who got suspicious after observing Hallatt purchasing large quantities of Trader Joe's products (branded and unbranded) several times a week. When confronted, Hallatt admitted to reselling the products at his copycat store in Vancouver, at which point the Bellingham Trader Joe's asked that he cease and desist. Undeterred, Hallatt continued to purchase items from other Trader Joe's stores in Washington, Oregon and even California (often in disguise or through locals hired for the purpose), take them over the border, and sell them in his Vancouver store Pirate Joe's.

Trader Joe's subsequently filed a lawsuit against Hallatt in the Western District of Washington alleging trademark and trade dress infringement under the Lanham Act as well as trademark infringement, unfair competition and other claims under Washington state law. The district court granted Hallatt's motion to dismiss Trader Joe's Lanham Act claims on lack of subject matter jurisdiction grounds, ruling that the Lanham Act did not apply to Hallatt's conduct in Canada. After subsequently dismissing Trader Joe's motion for reconsideration on the Lanham Act claims, the district court dismissed Trader Joe's remaining state law claims, at which point Trader Joe's appealed to the Ninth Circuit.

Ninth Circuit decision

In a unanimous opinion, the Court reversed the district court and ruled that the Lanham Act can reach extraterritorially to cover Hallatt's actions in Canada (it affirmed as to the state law claims). The Court conducted numerous multistep analyses to reach its holding, detailed below, but in short the Court found that (1) the Lanham Act has extraterritorial reach generally; (2) contrary to the district court's ruling, whether or not the Lanham Act applies specifically to any particular set of facts relating to foreign conduct is a merits question that has nothing to do with subject matter jurisdiction; and (3) Trader Joe's adequately pleaded a claim on the merits under the Lanham Act and could proceed with its federal trademark infringement lawsuit against Hallatt.

Extraterritorial reach of the Lanham Act generally

The Court began its analysis by stating that "we determine whether any statute, including the Lanham Act, reaches foreign conduct by applying a two-step framework." The Court said that the first step in this framework is to determine "whether the statute gives a clear, affirmative indication that it applies extraterritorially," while the second step is to determine " 'the limits Congress has (or has not) imposed on the statute's foreign application.' " The Court answered the question raised by the first step in the affirmative, citing to a 1952 Supreme Court case which held that the Lanham Act's " 'use in commerce' element and broad definition of 'commerce' clearly indicate Congress's intent that the Act should apply extraterritorially." With respect to the second step, the Court found no limitations imposed by Congress on the Lanham Act's extraterritorial reach.

Application of the Lanham Act to Hallatt's extraterritorial conduct

In order to ascertain whether the Lanham Act applied to Hallatt's conduct in Canada, the Court said it needed to answer the following two questions: "First, is the extraterritorial application of the Lanham Act an issue that implicates federal courts' subject-matter jurisdiction? Second, did Trader Joe's allege that Hallatt's conduct impacted American commerce in a manner sufficient to invoke the Lanham Act's protections?" The Court concluded, "[b]ecause we answer 'no' to the first question but 'yes' to the second, we reverse the district court's dismissal of the federal claims and remand for further proceedings."

With respect to the first question, the Court relied on its 2014 decision in La Quinta Worldwide LLC v. Q.R.T.M., S.A. de C.V. and Supreme Court precedent to hold that "the extraterritorial reach of the Lanham Act is a merits question that does not implicate federal courts' subject-matter jurisdiction, and that the district court erred as a matter of law when it decided otherwise."

The Court answered the second question in the affirmative after analyzing the facts in accordance with the following three-part test established by the Supreme Court in the 1976 case of Timberlane Lumber Co. v. Bank of America National Trust & Savings Ass'n:

Under Timberlane, the Lanham Act applies extraterritorially if: "(1) the alleged violations . . . create some effect on American foreign commerce; (2) the effect [is] sufficiently great to present a cognizable injury to the plaintiffs under the Lanham Act; and (3) 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."

The Court concluded that "Trader Joe's satisfied its burden under Timberlane prongs one and two, at least at this early stage of the proceeding" when it alleged in its complaint, among other things, that Hallatt's conduct affected American commerce because (1) Hallatt's activities harmed Trader Joe's reputation and decreased the value of its American-held trademarks, (2) Hallatt transported and sold Trader Joe's goods in Canada without using proper quality control measures or established product recall practices, (3) Hallatt attempted to pass off Pirate Joe's as an authorized Trader Joe's retailer which caused customer confusion, harmed Trader Joe's domestic reputation and diminished the value of its American-held marks and (4) Hallatt purchased Trader Joe's goods in the United States and often hired local U.S. residents to assist him, thereby engaging in domestic commercial activity and commerce as part of his "infringing scheme."

The Court then looked to the third prong of the Timberlane test which "considers international comity … and gives effect to the 'rule that we construe statutes to avoid unreasonable interference with other nations' sovereign authority where possible.' " The Court enumerated the following "seven separate factors" that needed to be considered in a Timberlane prong three analysis:

[1] the degree of conflict with foreign law or policy, [2] the nationality or allegiance of the parties and the locations or principal places of business of corporations, [3] the extent to which enforcement by either state can be expected to achieve compliance, [4] the relative significance of effects on the United States as compared with those elsewhere, [5] the extent to which there is explicit purpose to harm or affect American commerce, [6] the foreseeability of such effect, and [7] the relative importance to the violations charged of conduct within the United States as compared with conduct abroad.

After weighing and balancing each of these separate factors, the Court concluded that prong three had been satisfied:

In sum, Timberlane's three prongs favor extraterritorial application of the Lanham Act here. On prongs one and two, Trader Joe's alleges a nexus between Hallatt's foreign conduct and American commerce sufficient to state a Lanham Act claim: Hallatt's conduct may cause Trader Joe's reputational harm that could decrease the value of its American-held trademarks, and Hallatt operates in American commerce streams when he buys Trader Joe's goods in Washington and hires locals to assist him. On prong three, the seven subfactors we use to evaluate potential "interference with other nations' sovereign authority," … taken together, do not counsel against applying the Lanham Act here. We therefore conclude that the Lanham Act reaches Hallatt's allegedly infringing activity, and we reverse the district court's dismissal of Trader Joe's' four Lanham Act claims.

See here to read the Ninth Circuit's 8/26/16 opinion in Trader Joe's Company v. Hallatt.