Monday, April 29, 2024

Hetronic remand: the continued rise of "use"

Hetronic International, Inc. v. Hetronic Germany GmbH, --- F.4th ----, Nos. 20-6057 & 20-6100, 2024 WL 1724995 (10th Cir. Apr. 23, 2024)

Hetronic has US registrations; Abitron sold Hetronic-branded products without permission to customers around the world, including in the United States. The Supreme Court remanded for the court of appeals to revisit its decision that Lanham Act penalties extended to Abitron’s foreign sales to foreign customers because the foreign sales substantially affected U.S. commerce. The court of appeals remands, after a discussion of what the district court is to do on remand. Look for the cross-issue use of the idea of "use in commerce," including the cited cases.

Hetronic makes radio remote controls used to operate large industrial equipment. It executed licensing and distribution agreements for the remotes with two European companies, collectively Abitron. Abitron decided that it owned some of Hetronic’s IP under a years-old research-and-development agreement. Abitron began assembling Hetronic-branded remotes with parts that it sourced from unauthorized suppliers, in violation of its agreements with Hetronic, and sold the remotes to foreign and American customers. Hetronic terminated its licensing and distribution agreements with Abitron, but Abitron continued to sell Hetronic-branded remotes without Hetronic’s authorization.

The products circulate worldwide; “a product manufactured in Germany is often destined for another country, like the United States.” Abitron usually sold remotes to OEMs, like manufacturers of cranes. A crane manufacturer would install the remotes in its cranes, and then send the cranes around the world, including to the US. Knowing this, Abitron secured the required FCC certifications and hired a U.S.-based distributor to service Abitron’s U.S. products and to market them at U.S. tradeshows.

Hetronic understandably sued Abitron; a jury found for Hetronic on all its claims, including that Abitron had willfully infringed the Hetronic trademarks, and awarded Hetronic about $96 million in damages related to the Lanham Act violations, along with compensatory and punitive damages for the state-law claims. The district court enjoined further infringing uses of Hetronic trademarks “within and outside of the United States.”

After Abitron, the keystone for liability is the “specific action” that the alleged infringer took in the United States, and whether that action contravened the Act’s focus. Footnote: The concurrence for four Justices would have regarded domestic confusion as the key, not domestic conduct. Ultimately, a domestic, infringing “ ‘use in commerce’ of a trademark” draws “the dividing line between foreign and domestic applications” of the Lanham Act.

What to do here?  

The relevant conduct is use of a trademark “in commerce” “in connection with any goods or services,” specifically “the sale, offering for sale, distribution, or advertising,” in a manner “likely to cause confusion.” So (?), the court first looked at which Abitron’s allegedly infringing activities amounted to an infringing use of Hetronic trademarks. Once there was an infringing use, the court then considered where that use occurred—domestically or overseas—to determine whether the Lanham Act applied. (Citation: 15 U.S.C. § 1117;  see also 1-800 Contacts, Inc. v. WhenU.Com, Inc., 414 F.3d 400, 412 (2d Cir. 2005) [a resurrected blast from the past; why “use as a mark” may be a very interesting doctrine going forward].

Direct sales to US customers: obviously covered. But Abitron contested the amount of those sales that could have caused confusion—all but about €1500 of sales went to Hetronic’s US-based affiliates, and Abitron argued that they had to have known what they were buying and that any confusion stemmed from confusion about “whether [the goods] were constructed with the parts Hetronic requested,” which goes to the “contractual obligations” between Abitron and Hetronic, not to “the goods’ source.” The court wasn’t going to touch the jury finding of likely confusion. And the confusion posited by Abitron was sponsorship/affiliation confusion, anyway. “[E]ven if Hetronic’s affiliates knew that Abitron sourced the remotes, part of a mark’s core function is to help consumers ‘quickly and easily’ identify that ‘this item—the item with this mark—is made by the same producer as other similarly marked items that he or she liked (or disliked) in the past.’” That quality assurance was gone if Abitron sold products under Hetronic trademarks that “varied substantively” from those affiliated with the Hetronic brand, as the evidence showed.

What about foreign sales?

In the initial appeal, this panel held that some of Abitron’s foreign sales triggered a domestic application of the Lanham Act either because the goods wound up in the United States or the foreign sales diverted customers from Hetronic, costing Hetronic tens of millions of dollars in sales that “would have flowed into the U.S. economy but for [Abitron’s] conduct infringing a U.S. trademark.” But neither theory works under the Supreme Court’s new framework.

€1.7 million of Abitron’s foreign sales “ended up” in the United States, but “the ultimate destination of the infringing goods” lacked significance compared to “the location of the conduct relevant to the focus” of the Lanham Act. Because that focus is “the punishment of illegal trademark uses in U.S. commerce detrimental to U.S. businesses and consumers,” foreign sales don’t trigger Lanham Act liability, even if they cause losses in the US. “[P]urely foreign conduct—that is, foreign sales to foreign customers”—can’t be the basis for Lanham Act liability.

There was other domestic conduct than direct US sales, though. “Use in commerce” covers “the sale, offering for sale, distributing, or advertising of any goods or services ... which ... is likely to cause confusion, or to cause mistake, or to deceive.” Thus, any marketing, advertising, and distributing activities that Abitron undertook in the United States were also “uses in commerce.”

What about downstream sales from OEMs to end-users? Justice Jackson thinks they’re infringing, and Hetronic relied on her concurrence to argue that these “goods [were] intended to be sold downstream” and that Abitron “took ... steps to facilitate downstream sales in the United States,” making those sales “sufficiently domestic” for Lanham Act purposes.

Abitron pointed out that, even if that happened, the uses would be uses by the OEM, not by Abitron. Anyway, Justice Jackson joined the majority in full, and also she was making a different point: She argued that use in commerce occurs “wherever the mark serves its source-identifying function.” But she also reasoned that, in the panel’s words, “infringing goods do not offend the Lanham Act merely by their presence in the United States.” Only resale would trigger Justice Jackson’s definition of “use.” Hetronic didn’t show that remotes originally sold abroad were then resold in the US; only then would the goods have begun “serving a source-identifying function in the way Congress described.” Hetronic didn’t introduce evidence that U.S. end-users ever resold Abitron products in U.S. commerce. And allegedly infringing uses in the US by other entities weren’t Abitron’s domestic infringing uses. “Hetronic’s downstream-sales theory strikes us as the sort of ‘repackag[ing]’ [of foreign conduct as domestic] the majority sought to prevent. Hetronic needs to keep its eye on the prize: Abitron’s infringement of Hetronic trademarks in U.S. commerce.”

What about the steps Abitron took to facilitate US sales: obtaining FCC licenses and hiring a U.S.-based distributor? Hetronic argued that these were “essential steps” towards US sales, as in Steele v. Bulova Watch Co. But Steele is “outdated” and the new test gives no weight to Steele’s considerations. “[T]he majority eschewed everything Steele stood for: that any ‘essential steps’ taken domestically to facilitate trademark infringement abroad subject infringers to Lanham Act liability.” (Presumably contributory infringement is still available.)  Thus, Abitron’s acquiring FCC licenses, hiring a U.S. distributor, or repairing a broken part didn’t count as infringing domestic conduct because “none of those actions require using Hetronic trademarks in commerce.” Citing U.S. Surgical Corp. v. Orris, Inc., 5 F. Supp. 2d 1201, 1208–09 (D. Kan. 1998) (rejecting the plaintiff’s claim that defendant’s “conduct in receiving, reprocessing, and returning the instruments” constituted uses in commerce under the Lanham Act); Soc. Techs. LLC v. Apple Inc., 4 F.4th 811, 817 (9th Cir. 2021) (“[U]se in commerce within the meaning of the Lanham Act requires use of a genuine character,” meaning a use “sufficiently public to identify or distinguish the marked goods in an appropriate segment of the public mind.” (citation omitted)). “[T]hese behaviors strike us as merely intermediary or incidental to Abitron’s foreign infringement because none involve affixing Hetronic’s trademark to goods and introducing those goods into U.S. commerce by selling, advertising, marketing, or distributing them to American consumers.”

However, the U.S. distributor’s advertising at U.S. tradeshows or marketing Abitron’s infringing products online to U.S. customers would qualify as domestic infringing uses in commerce under Abitron. “[A]ny activities that Abitron engaged in through its U.S. distributor to sell, market, advertise, or distribute infringing goods to U.S. consumers do violate the Lanham Act.” (Why is this direct liability? Is it a vicarious liability analysis?)

Turning now to disgorgement:  Any portion of the disgorgement award based on Abitron’s foreign sales was improper, assuming those sales were unconnected to any infringing use of Hetronic trademarks in domestic commerce. Disgorgement should account for Abitron’s foreign sales that flowed from its domestic infringing conduct, like advertising, but Abitron argued that the record was insufficient to tether its foreign sales to its infringing domestic conduct. “Hetronic bears the burden of proving the connection between Abitron’s domestic infringing conduct and its foreign sales.” (The court of appeals proceeded in ignorance of Romag, but since the jury found willfulness, that didn’t matter.)\

The plaintiff’s burden is to identify the “total sales” that resulted “from the [defendant’s] infringing activity with reasonable certainty.” That requires more than showing the defendant’s gross revenues, though an estimation of infringed profits based on gross revenues is sufficient. “Above all,” the plaintiff needs to “show some connection between the identified ‘sales’ and the alleged infringement.” This is a proximate cause requirement (citing Lexmark).

Neither side requested a new trial, but the parties on remand could put on “limited opinion evidence as necessary for the district court to interpret which of Abitron’s domestic activities meet the infringing ‘uses in commerce’ threshold.” Hetronic argued that the district court should take into account that it declined to pursue attorney’s fees and treble damages; the court of appeals expressed no opinion on this (which is weird since it held a bunch of other arguments waived) and just said the district court has discretionary authority under the statute (which isn’t even fully accurate, since treble damages have to be compensatory and not a penalty).

Injunctive relief:  Can only cover domestic conduct.

Abitron sought a new trial on the state law claims, arguing that they were tainted by the now-irrelevant foreign conduct evidence, but that was waived.


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