By Thomas Long, J.D.
Grocery store operator Trader Joe’s Company adequately stated Lanham Act trademark infringement and false endorsement claims against an individual for purchasing Trader Joe’s-branded products in Washington State and transporting them to Canada, where he sold them in a store designed to mimic a Trader Joe’s store, the U.S. Court of Appeals in San Francisco has decided. Whether the Lanham Act could be applied to extraterritorial conduct was a question relating to the merits of the underlying trademark claims; a district court erred in dismissing Trader Joe’s Lanham Act claims for lack of subject-matter jurisdiction. The alleged infringement could cause harm to Trader Joe’s in the United States. Dismissal of state-law dilution claims were, however, affirmed because Trader Joe’s did not allege that the defendant used Trader Joe’s marks in Washington (Trader Joe’s Company v. Hallatt, August 26, 2016, Christen, M.).
Defendant Michael Norman Hallatt purchased large quantities of Trader Joe’s-branded goods in the United States and took them back to Vancouver, British Columbia, where he operated a store called Transilvania Trading (later renamed "Pirate Joe’s"). At Pirate Joe’s, Hallatt resold Trader Joe’s products at substantially increased prices and allegedly used Trader Joe’s marks in advertising. Trader Joe’s asserted that the Pirate Joe’s store was designed to mimic Trader Joe’s trade dress. Trader Joe’s sued Hallatt in the federal district court in Seattle, alleging trademark infringement and false endorsement in violation of the Lanham Act, as well as trademark dilution in violation of Washington law. The district court dismissed the claims, and Trader Joe’s appealed.
Subject-matter jurisdiction over Lanham Act claims. The appellate court held that the extraterritorial reach of the Lanham Act was a merits question that did not implicate federal courts’ subject-matter jurisdiction. In La Quinta Worldwide LLC v. Q.R.T.M., S.A. de C.V., the Ninth Circuit held that the Lanham Act’s "use in commerce" element was not jurisdictional. In that decision, the court reasoned that federal courts had subject-matter jurisdiction over all suits pleading a colorable claim "arising under" laws of the United States, unless Congress had clearly indicated otherwise. The "use in commerce" element of a Lanham Act claim was not connected to the Act’s jurisdictional grant; therefore, the element was not a jurisdictional requirement. Section 45 of the Act provided that the Lanham Act applied to "all commerce which may lawfully be regulated by Congress." Accordingly, the district court erred as a matter of law when it decided that the extraterritorial reach of the Lanham Act was a jurisdictional issue.
Merits of Lanham Act claims. The Ninth Circuit then determined that Trader Joe’s alleged a nexus between Hallatt’s conduct and American commerce that warranted the extraterritorial application of the Lanham Act. Trader Joe’s allegations satisfied the test of the extraterritorial application of the Sherman Act byTimberlane Lumber Co. v. Bank of America National Trust & Savings Ass’n, 549 F.2d 597 (9th Cir. 1976), which was extended to the Lanham Act in Wells Fargo & Co. v. Wells Fargo Express Co., 556 F.2d 406 (9th Cir. 1977). According to Trader Joe’s, Hallatt’s foreign conduct affected U.S. commerce because Hallatt’s activities harmed Trader Joe’s reputation and decreased the value of its American-held trademarks.
Trader Joe’s accused Hallatt of using poor quality-control practices. If consumers who purchased Trader Joe’s-branded products from Hallatt became ill, news of such illness could travel across the border. This risk is particularly high because Pirate Joe’s displayed Trader Joe’s marks, which could lead consumers to believe it was an authorized Trader Joe’s retailer. Trader Joe’s asserted that it knew of at least one customer who became sick after consuming food sold by Pirate Joe’s. In addition, Hallatt allegedly sold Trader Joe’s goods at inflated prices, which could cause consumers to mistakenly associate Trader Joe’s with overpriced goods. Pirate Joe’s customer service allegedly was inferior, which also could cause harm to Trader Joe’s reputation.
Hallatt engaged in commercial activity in the United States as part of his infringement. Hallatt allegedly sourced his inventory from the United States, and his operation could have been assisted by his status as a lawful permanent resident (LPR) of the United States. Hallatt also allegedly hired third parties in Washington to purchase Trader Joe’s goods for him when Trader Joe’s refused to serve him as a customer.
Finally, considerations of international comity weighed in favor of applying the Lanham Act to Hallatt’s extraterritorial conduct. There was no pending adversarial proceeding between Trader Joe’s and Hallatt in Canada, or any other proceeding relating to Trader Joe’s Canadian marks. Hallatt, as a person with LPR status, was subject to U.S. laws. Hallatt allegedly held assets in the United States; remedies could be enforced against him by the district court. Trader Joe’s marks allegedly were well-known in Canada, and its Bellingham, Washington, store had a significant number of Canadian customers; these customers could be misled by Hallatt’s activities. The pleadings supported a conclusion that Hallatt intended to harm Trader Joe’s, or at least knew such harm would occur.
State-law dilution claims. The appellate court affirmed, however, the district court’s dismissal of Trader Joe’s state-law claims under Washington’s trademark dilution statute. That statute entitled courts to enjoin commercial use in Washington of a famous mark; the law did not reach conduct occurring outside the state. There was no allegation that Hallatt had used Trader Joe’s marks in Washington.
The case is No. 14-35035.
Attorneys: Anna-Rose Mathieson (California Appellate Law Group) and Tim Byron, Brian M. Berliner, and Jordan Raphael (O’Melveny & Myers, LLP) for Trader Joe’s Company. Nathan Alexander (Dorsey & Whitney LLP) for Michael Norman Hallatt d/b/a Pirate Joe’s a/k/a Transilvania Trading.
Companies: Trader Joe’s Company; Pirate Joe’s; Transilvania Trading
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