Trader Joe's can go after Canadian reseller in US because harm to goodwill is so easy to allege

Trader Joe’s Co. v. Hallatt, No. 14-35035, 2016 WL 4488009, -- F.3d – (9th Cir. Aug. 26, 2016)

Hallatt buys Trader Joe’s-branded goods in Washington state, transports them to Canada, and resells them there in Pirate Joe’s, a store he designed to mimic a Trader Joe’s store. The district court dismissed Trader Joe’s claims for lack of subject-matter jurisdiction because Trader Joe’s did not adequately explain how Hallatt’s activity impacts American commerce.  The court of appeals reversed on the Lanham Act claim.  Trader Joe’s alleged a sufficient nexus between Hallatt’s conduct and American commerce to justify extraterritorial application of the Lanham Act. However, Trader Joe’s didn’t allege trademark dilution in Washington or harm to a Washington resident or business, so the dismissal of the state law claims was affirmed.

According to the complaint, Trader Joe’s does not operate outside of the United States, but Canadian consumers regularly travel across the border to shop at Trader Joe’s stores located in northern Washington.  Trader Joe’s also alleged fame in the US and abroad.

Hallatt allegedly advertises his wares with Trader Joe’s trademarks, operates a website accessible from the United States, displays an exterior sign at Pirate Joe’s that uses a font similar to the trademarked “Trader Joe’s” insignia, and designed the Pirate Joe’s store to mimic Trader Joe’s trade dress. Further, Hallatt allegedly sells perishable goods at Pirate Joe’s that he does not transport or store in a manner consistent with the strict quality control standards used by Trader Joe’s. Trader Joe’s alleged that it received at least one complaint from a consumer who became sick after eating a Trader Joe’s-branded product she purchased from Pirate Joe’s.

“Trader Joe’s declined to serve Hallatt as a customer, but Hallatt, undeterred, began donning ‘disguises to shop at Trader Joe’s without detection’ and driving ‘to Seattle, Portland, and even California to purchase TRADER JOE’S-branded products and evade Trader Joe’s refusal to sell them.’” Hallatt also allegedly pays third parties in Washington to buy Trader Joe’s goods on his behalf. On appeal, Trader Joe’s identified Hallatt as a United States Lawful Permanent Resident (LPR), which enables him to live and work legally in the United States.

The Lanham Act’s “use in commerce” element and broad definition of “commerce” clearly indicate Congress’s intent that the Act should apply extraterritorially. Steele v. Bulova Watch Co., 344 U.S. 280 (1952). Thus, the question was “the limits Congress has (or has not) imposed on the statute’s foreign application.” This wasn’t a subject-matter jurisdiction question but one going to the merits.

The Ninth Circuit’s three-part test for extraterritorial application ask whether “(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 defendant’s foreign activities need not have a substantial or even significant effect on American commerce.  The usual way to satisfy (1) and (2) is to allege that infringing goods, though sold initially in a foreign country, flowed into American domestic markets.  Here, however, Trader Joe’s allegations that Hallatt’s acts harmed its reputation and decreased the value of its American-held trademarks were sufficient.  Hallatt allegedly ignored Trader Joe’s quality control.  Though this was a circumvention of the first sale doctrine, that’s ok: “[d]istribution of a product that does not meet the trademark holder’s quality control standards may result in the devaluation of the mark by tarnishing its image.”  [So if I sell a used Ford that’s a lemon, I’m an infringer? Many of the foundational cases here involved goods diverted before their first authorized sale; here we see the expansion past true first sale, possibly limited by the idea that a bulk seller is a “distributor” while an individual seller is not.  I hope Liberty Puzzles never goes after my collection, with its crumpled tissue paper.]

Trader Joe’s theory was that “Hallatt’s poor quality control practices could impact American commerce if consumers who purchase Trader Joe’s-brand products that have been transported to Canada become ill, and news of such illness travels across the border.”  [Interesting question about how to show that each link in this chain is more likely than not, including the “brand devaluation” outcome.]  The court of appeals found this concern perfectly plausible, because food-born illness regularly makes international news and Trader Joe’s alleged one sick customer complaint.  “[R]eputational harm to an American plaintiff may constitute ‘some effect’ on American commerce.”

“Hallatt’s alleged attempt to pass as an authorized Trader Joe’s retailer could similarly harm Trader Joe’s’ domestic reputation and diminish the value of its American-held marks.”  If, as alleged, Hallatt sells at inflated prices, Pirate Joe’s shoppers “may come to mistakenly associate Trader Joe’s with overpriced goods” or poor customer service.  Trader Joe’s may suffer harm in the US because it draws international shoppers to its northern-Washington stores.

In addition, Trader Joe’s alleged that Hallatt engages in commercial activity in the United States as part of his infringing scheme: buying his inventory and hiring third parties to buy it.  Such domestic economic activity weighed in favor of applying the Lanham Act.

Part (3) of the test requires consideration of international comity, balancing: “[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.”  Considering these factors, it was appropriate to apply the Lanham Act to Hallatt.

For conflict with foreign laws: a conflict typically exists if there’s an ongoing trademark dispute or similar proceeding abroad, which there was not here.  Hallatt’s admission that he holds LPR status weighed in Trader Joe’s’ favor, and he allegedly has assets here. 

As for the relative significance of effects, the court quoted McCarthy on trademark’s twin goals of “protect[ing] property” in trademarks and protecting consumers from confusion.  The property was American; the most likely deceived consumers were Canadian, and federal courts ordinarily don’t have an interest in protecting foreign consumers from confusion.  But Trader Joe’s alleged that its trademarks were well-known in Canada, and that more than forty percent of the credit card transactions at one Washington store were with non-United States residents. Hallatt’s sale of Trader Joe’s goods in Canada had the potential to mislead these consumers, weighing in favor of extraterritorial application.

Trader Joe also pled facts indicating a purpose to harm American commerce, or at least the foreseeability of that.  As for the relative importance of the conduct within/without the US, an essential part of Hallatt’s commercial venture was in the US.  Still, arguably the most important part occurred in Canada: the display of Trader Joe’s marks on the store in a way that confused Canadian consumers and the resale of Trader Joe’s goods.  This factor weighed against extraterritorial application of the Lanham Act.  Still, overall, the factors didn’t weigh against extraterritorial application.

State law: Washington’s dilution statute requires fame in Washington and diluting conduct in Washington.  Trader Joe’s argued that the law only required dilution, not diluting activity, to occur in Washington, but the court disagreed, given that the primary remedy was the power of courts to enjoin “commercial use in this state of a [famous] mark.” A ripple effect wasn’t enough; use in Washington was required, and Trader Joe’s didn’t allege that. 

Similarly, the Washington Consumer Protection Act claims required the practices at issue to be carried out in “trade” or “commerce,” including “the sale of assets or services, and any commerce directly or indirectly affecting the people of the state of Washington.”  In Thornell v. Seattle Servs. Bureau, 363 P.3d 587 (Wash. 2015), the state Supreme Court held that the CPA creates a cause of action for a plaintiff residing outside of Washington to sue a Washington corporate defendant for allegedly deceptive acts, as well as for an out-of-state plaintiff against an out-of-state defendant for the allegedly deceptive acts of the defendant’s in-state agent.  This scope prevented Washington businesses from targeting out-of-state consumers for harm.  Here, though, none of the defendants were Washington residents. Trader Joe’s is a California corporation, so harm to the value of its trademarks was not a Washington-based harm. The alleged deception at the heart of the case allegedly occurs only in Canada and therefore harms only Canadian consumers. Nor did Trader Joe’s’ complaint allege that the existence of a low-quality, high-cost Trader Joe’s knock-off store in Vancouver puts honest Washington grocery stores at a competitive disadvantage.