Supreme Court Decision Makes Partnerships With International Manufacturers More Crucial For US Firms

A recent US Supreme Court decision should steer marketers across branded product sectors, including consumer health care products, to make sure their agreements with manufacturers, distributors and other businesses in other countries will prevent infringing their trademarks.

“They should make it clear that they own the trademark rights, and that those companies are not allowed to start making their own kinds of products with those brands abroad and selling it,” said trademark and intellectual property rights attorney Sharona Sternberg.

Sternberg spoke with HBW Insight about the Supreme Court’s unanimous ruling published on 29 June overturning a 10th Circuit Court of Appeals decision upholding a $96m award to US firm Hetronic International Inc., a manufacturer of remote controls for construction equipment. Hetronic had sued Abitron Austria Gmbh and other foreign distributors, which had been licensed by Hetronic, for trademark infringement and other claims.

Abitron and the others, claiming rights to much of Hetronic’s intellectual property, began selling its branded products without trademark licenses; little of their Hetronic-branded products reached the US.

SHARONA STERNBERG: "“TYPICALLY, WHAT WE SEE WITH SMALLER COMPANIES IS THEY THINK,ONLY DOMESTICALLY AND ARE ONLY FILING IN THE US.”Source: Sunstein LLC

The decision swung on whether sections of the Lanham Act – codified as 15 USC Secs. 1114 (1)(a), prohibiting counterfeit goods, and 1125(a)(1), prohibiting false designation of origin – apply to sales in foreign countries of goods bearing US trademarks, Sternberg explained in a JD Supra blog post.

The court’s opinion, written by Justice Samuel Alito, noted prior cases creating a presumption against extraterritorial reach of US laws and stated Congress never “affirmatively and unmistakably instructed” that the Lanham Act provisions Hetronic’s attorneys referenced should apply to foreign conduct.

Those sections of the Lanham Act, Alito wrote, aren’t extraterritorial and extend only to claims where the conduct that is the focus of the provisions, the “infringing use in commerce,” is domestic.

Infringement Doesn’t Know Borders

Contracting with manufacturers abroad is one potential pitfall for protecting trademarks, along with licensing brands to foreign marketers.

“Because that is what happened in this Abitron case. It started out as a licensed store and then decided, ‘Hey, why am I paying for this, I can just do it on my own’ and it started selling products with that brand abroad,” Sternberg said.

She noted numerous products sold only in the US are manufactured outside the country. Those brands aren’t immune from international infringement, though.

“I think what we see happen is that if you don't trust your manufacturer, and you don't have good agreements in place with your manufacturer, they can actually start distribution deals with other companies abroad and say, ‘Oh, well, we'll just make extra versions of this. And let some other companies sell it in this other country because you've only licensed it for the US’.”

Smaller US companies, even those not distributing internationally, could be just as likely to incur trademark infringement abroad as large firms with sales footprints around the world. 

“Typically, what we see with smaller companies is they think only domestically and are only filing in the US,” Sternberg said.

“But now, we will be counseling our clients to really think more broadly about foreign trademark registrations, especially with brands that you think could blow up in other countries or get some appeal. If you start seeing that you are getting a lot of attention in some random country, because of whatever social media post blew up, that will be a time to start thinking, ‘Hey, I need to make sure nobody else is going to get ahead of me online there’.”

She acknowledged that a small business might be besieged by the question of international trademark rights.

“The nice thing is that it's actually not as overwhelming as it sounds because typically, you can have your US lawyers to handle working with all of the foreign associates to get those on file. It's not like you have to find lawyers in each country to do it.”

China ‘Notoriously Difficult’

The Supreme Court’s decision doesn’t affect firms’ protection of trademarks in the US, regardless of where a product is manufactured.

“Whether the goods started from the US, enter the US, if there's infringement happening in the United States then you're still well within your rights to enforce it in the United States,” Sternberg said.

US trademark owners’ rights in other countries, though, aren’t protected. China and India are countries of particular concern.

“China is notoriously difficult to police. There's so many companies and kind of small entities in China, where you can try to go after them and then they'll suddenly close their doors and open up down the street with a new name,” Sternberg said.

"What we see happen is that if you don't trust your manufacturer, and you don't have good agreements in place with your manufacturer, they can actually start distribution deals with other companies abroad." – Sharona Sternberg, trademark and intellectual property attorney

“Another one is India for similar reasons. They have in the last 10 years developed robust trademark filings there, but what's difficult about some of those jurisdictions is that a company can file for a trademark for every good under the sun and suddenly own that brand for any possible kind of product.”

The European Union, like the US on the other hand, trademark registrations are limited to its use.

“There's a lot of bad faith filings that happened in China and India to kind of crowds the registry and make it really difficult for brands that are actually using those trademarks to get on file,” Sternberg said.

USPTO Registry Also Crowded

“As far as US trademark filings go, we've seen a real slowdown in the US trademark office being able to process applications. That's partly due to the kind of flooding of foreign applications in the United States that has happened in the last five years, particularly from China,” Sternberg said.

The US Patent and Trademark Office’s 2022 annual report stated applicants from China contributed the largest share of filings from any foreign country, with around 16% of total classes filed from applicants in China. Trademark applications owned by applicants in China decreased overall by 44% from fiscal year 2021 to FY2022.

“Trademarks monitors all filings and consults with global IP partners to monitor filing trends to help take away insight for future planning,” the report adds.

In a 2021 blog post, attorneys for intellectual property law firm Gerben Perrott PLLC argued that the “Chinese government is paying its citizens to obtain US trademark registrations — regardless of the legitimacy of the registration.”

“The result of this program has been the apparent massive wave of fraudulent filings with the United States Patent and Trademark Office. The filings, from China-based applicants, use fraudulent statements and photographs which attempt to trick the USPTO into issuing a trademark registration,” the Gerben Perrott post states.

The attorneys add “there is no official study linking the payments to the rise in fraudulent filings,” but “there does not seem to be any other logical explanation.”