A Court of Appeals Applies US Trademark Law Extraterritorially in a Case Involving Non-US Defendants Outside the US

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2021-11-19

In a case involving trademarks related to radio remote controls, a court of appeals ruled last August that the United States federal trademark statute applies extraterritorially, because the trademark infringement in this case created substantial effects in the United States and because the extraterritorial application did not conflict with trademark rights in other countries.

Source: Hetronic

Background

The plaintiff was Hetronic International, Inc., a US company that manufactures radio remote controls used to operate heavy-duty construction equipment. The defendants were Hetronic Germany GmbH, Hydronic Steuersysteme GmbH, Abi Holding GmbH, Abitron Germany GmbH, and Albert Fuchs (collectively, the "Defendants"). The Defendants distributed Hetronic International's products, mostly in Europe.

Based on a legal interpretation of a development agreement, the Defendants concluded that they owned the rights to Hetronic International's trademarks. The Defendants then manufactured products that were identical to Hetronic International's products, and sold them primarily in Europe. Hetronic International terminated the distribution agreements, but Defendants continued selling their infringing products.

A jury awarded Hetronic International over 100 million dollars for trademark infringement, and the federal district court granted Hetronic International a worldwide injunction prohibiting Defendants from selling their infringing products.

Corporate History

In 2000, Hetronic International entered into a research agreement with the Defendants' predecessors, stating that the predecessors would have rights to all work developed under the agreement. Additionally, Hetronic International entered into several distribution and license agreements with the Defendants or their predecessors to distribute Hetronic International's products in Europe.

In 2008, a company called Methode attempted to acquire all Hetronic-related companies. Before completing the sale, the seller consolidated all Hetronic-related intellectual property into Hetronic International. Thus, the seller believed that once the sale was completed, Methode would own all intellectual property rights of all Hetronic-related companies. Methode completed the purchase of the Hetronic companies in September 2008; the purchase included all trademarks and trade dress of the Hetronic companies' products.

However, due to a tax dispute with German authorities, the sale did not include Hetronic Deutschland. In 2009, Hetronic Deutschland indicated to a potential buyer that it had no trademarks or trademark applications. Hetronic Germany bought Hetronic Deutschland in 2010; the agreement indicated that the buyer sold to the seller all intangible assets (including trademarks) it owned at the time of the sale.

Hetronic Germany maintained that Hetronic Deutschland had only sold the Hetronic trademark to Methode, but not other intellectual property. Thus, Hetronic Deutschland argued that it owned all the intellectual property that its predecessor had at the time of the sale, including any intellectual property developed under the 2000 research agreement.

In summary, the litigation focused on whether the disputed trademarks were sold to Hetronic International in 2008 or to the Defendants in 2010.

Analysis

The United States Court of Appeals for the Tenth Circuit addressed the following issues:

whether it had personal jurisdiction over the Defendants;
whether the United States Trademark Act (commonly known as the "Lanham Act") applied extraterritorially;
whether the Defendants owned any Hetronic-related intellectual property; and
whether a worldwide injunction was warranted.

The Court of Appeals concluded that it had personal jurisdiction over the Defendants and that an injunction was only warranted in those countries where Hetronic International actually sold products.

The rest of this article focuses on the other two issues: the extraterritorial application of the Trademark Act and the Defendants' alleged ownership of Hetronic-related intellectual property.

The extraterritorial application of the Trademark Act

The U.S. Court of Appeals considered the only precedent from the U.S. Supreme Court on this issue and precedents from other federal courts of appeals. The framework that the U.S. Court of Appeals developed to evaluate the extraterritorial application of the Trademark Act involves three issues:

(1) whether the defendant is a U.S. citizen;
(2) if the defendant is not a U.S. citizen, whether the defendant's conduct had a substantial effect on U.S. commerce; and
(3) whether the extraterritorial application of the Trademark Act conflicts with trademark rights in other countries.

None of the Defendants were U.S. citizens, so the next question is whether their conduct had a substantial effect on U.S. commerce. Hetronic International presented evidence that products worth 1.7 million euros ended up in the United States, although they had been sold outside that country. Additionally, Hetronic International presented evidence that the Defendants' products had confused U.S. consumers. For example, consumers located in the United States had contacted the Defendants to purchase Hetronic International products, and other consumers had sent the Defendants' products to Hetronic International for repair. Other evidence suggested that Hetronic International had lost tens of millions of dollars in sales due to the Defendants' conduct.

The Defendants did not even raise the third issue, whether the extraterritorial application of the Trademark Act conflicted with their trademark rights in other countries.

The U.S. Court of Appeals concluded that the requirements for the extraterritorial application of the U.S. Trademark Act were met, and held that it applied to the Defendants' conduct.

The Defendants' argument about trademark ownership

The Defendants had claimed that they owned all the intellectual property in dispute. The U.S. Court of Appeals had to determine whether a decision by the Board of Appeal of the European Union Intellectual Property Office (EUIPO) precluded relitigating the issue.

According to the doctrine of issue preclusion, a party who has previously litigated an issue cannot relitigate it. The issue is precluded if the following elements are met:

(1) The issue in the prior action is identical to the issue in the current action;
(2) the merits of the prior action were resolved;
(3) the party against whom preclusion is sought was a party in the prior action and is a party in the current action; and
(4) the party against whom preclusion is sought had an adequate opportunity to litigate the issue in the prior action.

(1) The U.S. Court of Appeals determined that the issue raised before the EUIPO Board of Appeal and the U.S. courts was the same: whether the transfer of a business implies the transfer of all its trademarks (registered or not). The EUIPO Board of Appeal decided in favor of Hetronic International, holding that it was impossible to separate a business's trademarks from the operation of the business as a whole. Since Methode had bought Hetronic International in 2008, it had obtained all of Hetronic International's trademarks.

(2) The U.S. Court of Appeals concluded that the EUIPO Board of Appeal had resolved the merits of the prior action because it resolved the parties' dispute and dismissed the Defendants' petition.

The U.S. Court of Appeals did not assess elements (3) and (4) because the Defendants did not challenge them.

In summary, the U.S. Court of Appeals determined that the Defendants could not relitigate the issue of ownership of the intellectual property in dispute because the EUIPO Board of Appeal had already resolved it.

Conclusion

This case was the first resolved by this U.S. Court of Appeals that involved the extraterritorial application of the U.S. Trademark Act against non-U.S. Defendants. The only precedent from the U.S. Supreme Court involved a U.S. citizen who had manufactured and sold in Mexico watches that infringed on another manufacturer's U.S. trademarks. The U.S. Supreme Court applied the Trademark Act extraterritorially because the defendant was a U.S. citizen, but also because his defective watches had ended up in the United States, damaging the plaintiff's reputation in that country.

The general rule remains that U.S. trademark law is limited to the territory of the United States. However, some trademark infringement activities may create effects in the United States. The different federal courts of appeals have slightly different criteria for evaluating the extraterritorial application of the U.S. Trademark Act; several of them require only some effects in the United States. However, the Court of Appeals that resolved this case has concluded that these effects must be substantial and that the extraterritorial application must not conflict with trademark rights in other countries.

Sources

Hetronic International, Inc. v. Hetronic Germany GmbH et al. (United States Court of Appeals for the Tenth Circuit, 2021)

Abitron Germany GmbH v. Hetronic International, Inc. (EUIPO Board of Appeal, 2019)

Jose Felgueroso Abogado | Attorney