US extends trademark jurisdiction

Federal trademark law can extend to Canada even when all infringing activity has occurred here

FOR THE FIRST TIME, a US appellate court has ruled that federal trademark law can extend to Canada even where all of the infringing activity has occurred in this country.

The August decision from the US Court of Appeals for the Ninth Circuit arose on a jurisdictional point.

“We hold that the extraterritorial reach of the Lanham Act [governing federal trademark law] is a merits question that does not implicate federal courts’ subject matter jurisdiction,” Judge Morgan Christen wrote for a unanimous panel in Trader Joe’s Co. v. Hallatt.

In other words, the ruling means only that a US court could hear the case on the merits, not that it would necessarily decide in the plaintiff’s favour. But it doesn’t look good for the defendant.

“There are a number of bad facts going against the defendant,” says Sheldon Burshtein of Blake, Cassels & Graydon LLP in Toronto. “They include the fact that he had ties to the US, that deception was involved, and that the goods moved across the border included perishables, about which people always have health concerns.”

The case arose after Michael Hallatt, a Canadian with immigration status in the US, bought groceries at Trader Joe’s Washington state store and sold them for inflated prices in Vancouver. California-based Trader Joe’s, which operates throughout the US, sells its branded products only at its own stores and does not franchise or license others to deal in its products.

The store at which Hallatt made his purchases was in Bellingham, just over 30 kilometers south of the border. Canadians constituted some 40 per cent of its business. About five years ago, some store employees noticed that Hallatt was buying large quantities several times weekly.

It turned out that Hallatt was reselling the goods, some of which were perishable, at Pirate Joe’s, his Vancouver store. The store’s logo mimicked the Trader Joe’s logo. The Bellingham store banned Hallatt, but he disguised himself and continued to make purchases in Seattle, Portland and California to the tune of some $350,000 worth of goods.

Hallatt claimed his activities were not illegal. In 2013 a US District Court Judge in Seattle ruled that US courts don’t have jurisdiction over infringement that occurs solely in Canada.

On appeal, Trader Joe’s alleged reputational harm, claiming that Hallatt’s failure to adhere to quality control measures could affect its business in the US. Trader Joe’s also claimed that its trademarks were well-known in Canada.

These arguments found favour in the Court of Appeals. The court concluded that the alleged harm to Trader Joe’s US interests was plausible because “incidents of food-borne illness regularly make international news,” because Pirate Joe’s customers could mistakenly associate Trader Joe’s brand with high prices and inferior customer service, and because the sale of the branded goods at Hallatt’s outlet in Vancouver could mislead consumers, including those who shopped regularly in Bellingham.

Although US courts have upheld the extraterritorial application of the Lanham Act in other circumstances, Burshtein says Trader Joe’s was driven by its unique facts.

“It’s an oddball case where the defendant had some sort of [immigration] status in the US, he used disguises, and he was bragging about what he was doing and getting away with,” Burshtein says. “These are all things courts don’t like.”

But why didn’t Trader Joe’s sue in Canada, avoiding the time and expense of the jurisdictional complexities? Burshtein says it’s not clear that the plaintiff would have succeeded in Canada.

“There may have been a reasonable shot at a passing-off claim because Hallatt made the goods look like they were legitimately from Trader Joe’s, and there may have been an infringement claim if the perishable goods had been adulterated or contaminated,” he says. “But in theory, it’s quite possible that Canadian and US courts could come to opposite conclusions about whether this is trademark infringement.”

Daniel Drapeau of Drapeaulex Inc. in Montreal says succeeding in a passing-off action in Canada on these facts would be “difficult, but not impossible.” Trader Joe’s would need to demonstrate that it had goodwill in association with its mark in Canada, although it had not used the mark in Canada. Because it had no business in Canada, proving damages could also be a challenge.

“While the status of grey goods is uncertain under Canadian law, following the SCC decision in Euro-Excellence Inc. v. Kraft Canada Inc., you can still get in trouble for selling them,” he says.