Oct 19 2016

On August 26, 2016, the United States Court of Appeals for the Ninth Circuit issued the decision in the case of Trader Joe’s v. Michael Norman Hallatt, holding that the Lanham Act may be enforceable in cases even where most of the defendant’s infringing acts happen in Canada. The implications of the Ninth Circuit decision for Canadian businesses that adopt a trademark that is similar to a U.S. trademark are potentially far reaching.

Background on the Case:

According to the decision, Trader Joe’s is an American specialty grocery store chain that does not operate in Canada. There are no Trader Joe’s stores in Canada, and Trader Joe’s does not sell directly into Canada. About eighty percent of the goods in Trader Joe’s stores are Trader Joe’s brand products that are only available in Trader Joe’s. The company does not license others to sell its products.

The defendant in the case, Michael Hallatt, purchased Trader Joe’s goods in Washington State, and transported the goods across the border to Canada. Hallatt proceeded to sell the goods in a store in Vancouver, British Columbia designed to mimic Trader Joe’s, called Pirate Joe’s.

In 2013, Trader Joe’s sued Hallatt in the U.S. District Court for the Western District of Washington. Hallatt denied culpability, claiming that he notified customers that he was not authorized to act on behalf of Trader Joe’s.

Further, Hallatt argued that the case should be dismissed on the basis that the Lanham Act did not apply to the alleged trademark violations occurring in Canada. The court agreed, stating that there was a lack of evidence that Hallatt’s operation impacted Trader Joe’s in the United States sufficiently to support a Lanham Act claim – since the alleged violation occurred in Canada. The case was dismissed.

On Appeal, the decision with respect to the Lanham Act was overturned by the Ninth Circuit.

Case Analysis:

At first glance, this decision appears to afford a US trademark holder broad protection against foreign infringing activities under the Lanham Act. However, a closer look at the analysis by the court reveals that the decision is largely based on the particular facts of this case.

What is clear from this decision is that the Lanham Act could, in some cases, apply to extraterritorial conducts — and further, it is sufficient that the infringing conducts had some effect on American foreign commerce, where the effects can be based on the quality control theory of infringement and reputation harm. Additionally, the importance of domestic effects of the foreign activities may be reduced when there is a scheme involving conduct both inside and outside the United States.

What is not clear, however, is what particular facts will tip the balance toward enforcing the Lanham Act against foreign infringing activities.

In the decision, the court noted the following when determining that the Lanham Act should apply to the defendant’s infringing activities:

• Trader Joe’s was granted Canadian trademarks¹, and there is no ongoing proceeding relating thereto;
• the defendant is subject to US law because he is a lawful permanent resident (LPR) of the United States;
• the defendant held assets in the United States and sourced the goods from the United States, and that the district court could enforce an injunction against the defendant’s foreign conduct;
• “more than forty percent of the credit card transactions at its [Trader Joe’s] Bellingham, Washington store are with non-United States residents;” and
• the defendant knowingly pirated Trader Joe’s’ intellectual property and disguised himself to purchase from Trader Joe’s to avoid being identified.

However, the court noted that the fact that the defendant purchased the goods in the United States using American commerce streams, while most of the infringing activities happened outside the United States, counseled against enforcing the Lanham Act against the infringing activities.

The decision begs the question what would happen if the facts were different. As an example, a US trademark holder may not be protected by the Lanham Act if a Canadian citizen, who is not an LPR of the United States, imports clothes of a certain brand for resale in Canada, if this clothing brand has no presence in Canada, did not register a trademark in Canada or does not operate a store in the United States where a significant portion of the sales are to Canadian visitors.

Also, if the goods are not perishable goods similar to what Trader Joe’s sells, it may be harder to base the infringement on the quality control theory and to circumvent the first sales doctrine. For example, electronic gadgets and clothes, regardless of where they are sourced, may be of the same quality as the goods sold at the trademark holder’s stores, while special handling and transportation may not be required.

Clearly, there are many factors that a US trademark holder cannot control. However, to tip the scale somewhat toward application of the Lanham Act against infringing activities in Canada, we strongly encourage US trademark holders to register their trademarks in Canada.

US companies, however, may be afforded IP protection nonetheless against activities in Canada, even if a mark is not registered in Canada. This may have significant implications for Canadian businesses that adopt a trademark that is similar to a US trademark, especially Canadian businesses that have operations in the United States and/or own assets there. It is also worth noting that, in certain cases, activities in Canada (such as those of Michael Hallatt and PIRATE JOE’S) can affect a court’s decision in the United States, even for American companies that do not operate in Canada. We therefore recommend that Canadian companies be mindful of marks in the US – even when only interested in registering marks in Canada.

Authors: Janet Fuhrer, Lei Gao, Stacy Rush (former professionals)

For more information on dealing with trademarks, contact one of our professionals.

This article is for information purposes only and does not constitute legal or professional advice.

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¹ Represented by Ridout & Maybee, LLP

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Tags: Trademark Infringement, Trademarks