Trader Joe's Co. v. Hallatt

• Citation: 835 F.3d 960
• Decision Date: 26 August 2016
• Docket Number: No. 14–35035,14–35035
• Parties: Trader Joe's Company, a California Corporation, Plaintiff–Appellant, v. Michael Norman Hallatt, an individual, DBA Pirate Joe's, AKA Transilvania Trading, Defendant–Appellee
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

835 F.3d 960

Trader Joe's Company, a California Corporation, Plaintiff–Appellant,

v.Michael Norman Hallatt, an individual, DBA Pirate Joe's, AKA Transilvania Trading, Defendant–Appellee

No. 14–35035

United States Court of Appeals, Ninth Circuit.

Argued and Submitted on June 7, 2016 Seattle, Washington

Filed August 26, 2016

Anna–Rose Mathieson (argued), California Appellate Law Group, San Francisco, California; Tim Byron, O'Melveny & Myers LLP, San Francisco, California; Brian M. Berliner and Jordan Raphael, O'Melveny & Myers, LLP, Los Angeles, California; for Plaintiff–Appellant.

Nathan Alexander (argued), Dorsey & Whitney LLP, Seattle, Washington, for Defendant–Appellee.

Before: Richard A. Paez, Jay S. Bybee, and Morgan Christen, Circuit Judges.

OPINION

CHRISTEN

, Circuit Judge:

This trademark infringement case turns on the extraterritorial reach of the Lanham Act. It is uncontested that Defendant Michael Norman Hallatt purchases Trader Joe's-branded goods in Washington state, transports them to Canada, and resells them there in a store he designed to mimic a Trader Joe's store. Trader Joe's sued for trademark infringement and unfair competition under the Lanham Act and Washington state law. The district court recognized that the Lanham Act can apply to conduct that occurs abroad, but it dismissed the Lanham Act claims for lack of subject-matter jurisdiction after concluding that Hallatt's allegedly infringing activity takes place in Canada, and that Trader Joe's did not adequately explain how Hallatt's activity impacts American commerce. The district court dismissed Trader Joe's' state law claims for similar reasons.

We affirm in part and reverse in part. Consistent with recent case law from the Supreme Court and our court, we hold that the extraterritorial reach of the Lanham Act raises a question relating to the merits of a trademark claim, not to federal courts' subject-matter jurisdiction. On the merits, we conclude that Trader Joe's alleges a nexus between Hallatt's conduct and American commerce sufficient to warrant extraterritorial application of the Lanham Act. We therefore reverse in part. But because Trader Joe's does not allege trademark dilution in Washington or harm to a Washington resident or business, we affirm the court's dismissal of the state law claims.

BACKGROUND

The complaint alleges that Trader Joe's is a well-known American grocery store that sells specialty goods at reasonable prices from its distinctive, South Pacific-themed stores.¹ It is headquartered in Monrovia, California, but it operates hundreds of stores throughout the United States, including more than a dozen stores in Washington. About eighty percent of the goods Trader Joe's sells in its stores are Trader Joe's-branded products that are available only at Trader Joe's. Trader Joe's does not franchise its intellectual property or license others to sell its products. Trader Joe's maintains strict quality control standards when transporting and storing perishable goods to protect the safety of its customers and to ensure that Trader Joe's stores sell only fresh, high-quality goods. Trader Joe's has rejected offers from third parties to enter into franchise agreements, in part because of the difficulty of “ensuring that these third parties will ship, handle, and store food products pursuant to Trader Joe's exacting standards.” 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 owns several federally registered and common-law trademarks associated with its stores and products. Its family of marks includes a trademark for the red, stylized “Trader Joe's” text, see Fig. 1, and numerous trademarks for Trader Joe's-branded products. Trader Joe's also alleges that it has trade dress protection for its South Pacific-themed store design. See Two Pesos, Inc. v. Taco Cabana, Inc. , 505 U.S. 763, 775–76, 112 S.Ct. 2753, 120 L.Ed.2d 615 (1992)

(recognizing that distinctive store design is a form of trade dress). Trader Joe's carefully cultivates its brand through advertising, promotion, and word-of-mouth referrals, and, according to the complaint, its trademarks and trade dress “have come to symbolize extraordinary goodwill and have achieved great fame both within and outside the United States” due to these efforts. This fame and popularity has generated substantial domestic and international demand for Trader Joe's products.

Fig. 1:

In October 2011, staff members at the Bellingham Trader Joe's store noticed something odd about one of their customers: Canadian resident Michael Norman Hallatt visited the store several times per week to buy large quantities of Trader Joe's products.² When questioned, Hallatt admitted that he drives the goods he purchases across the Canadian border where he distributes them to Canadian customers. Trader Joe's later learned from one of its Canadian customers that Hallatt opened a store in Canada named Transilvania Trading (which he later renamed “Pirate Joe's”) where he resells, at substantially inflated prices, Trader Joe's goods purchased in Washington. Trader Joe's alleges that Hallatt uses its intellectual property to solicit business for Pirate Joe's: He 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, Fig. 2, and designed the Pirate Joe's store to mimic Trader Joe's trade dress. Hallatt 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 has 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.

Fig. 2:

Trader Joe's told Hallatt that it does not sanction his activity and demanded that he stop reselling Trader Joe's products from Pirate Joe's. Hallatt refused. 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 to them.” The complaint also alleges that Hallatt pays third parties in Washington to buy Trader Joe's goods on his behalf. On appeal, Trader Joe's contends that Hallatt accomplishes his scheme in part because he is a United States Lawful Permanent Resident (LPR), an immigration status that enables him to live and work legally in the United States. All told, Hallatt has spent more than $350,000 purchasing Trader Joe's products to resell in Canada.

Trader Joe's sued Hallatt (doing business as Pirate Joe's) for trademark infringement in the Western District of Washington, invoking that court's federal question and supplemental jurisdiction. 28 U.S.C. §§ 1331

, 1367. Trader Joe's alleged that Hallatt violated federal and state trademark and unfair competition laws by misleading consumers “into falsely believing that Pirate Joe's and/or Transilvania Trading have been authorized or approved by Trader Joe's,” displaying Trader Joe's trademarks and mimicking Trader Joe's trade dress, and reselling Trader Joe's goods without authorization and without adhering to Trader Joe's' strict quality control practices. According to Trader Joe's, this conduct dilutes its trademarks, confuses consumers, and damages Trader Joe's' reputation by associating it with high-cost, reduced-quality goods. The complaint includes six claims for relief, four of which arise under the Lanham Act and two of which arise under Washington law: (1) federal trademark infringement, 15 U.S.C. § 1114(1) ; (2) unfair competition, false endorsement, and false designation of origin, 15 U.S.C. § 1125(a)(1)(A) ; (3) false advertising, 15 U.S.C. § 1125(a)(1)(B) ; (4) federal trademark dilution, 15 U.S.C. § 1125(c) ; (5) state trademark dilution, Wash. Rev. Code § 19.77.160 ; and (6) deceptive business practices in violation of the Washington Consumer Protection Act, Wash. Rev. Code § 19.86.020. Trader Joe's asked the district court to award it damages and permanently enjoin Hallatt from reselling its goods or using its trademarks in Canada.

The district court granted Hallatt's motion to dismiss Trader Joe's' federal claims for lack of subject-matter jurisdiction, concluding that the Lanham Act did not apply to Hallatt's conduct in Canada. The court denied Trader Joe's leave to amend its federal claims, but granted Trader Joe's the opportunity to assert an independent jurisdictional basis for its state law claims. Trader Joe's filed a motion for reconsideration in which it argued that the extraterritorial scope of the Lanham Act is a merits question that does not implicate the district court's subject-matter jurisdiction. The district court denied the motion. Trader Joe's then filed an amended complaint reasserting its state law claims and invoking the district court's diversity jurisdiction. Hallatt filed a motion to dismiss for failure to state a claim, which the district court granted.

The district court entered final judgment on December 18, 2013, and Trader Joe's timely appealed. We have jurisdiction under 28 U.S.C. § 1291

.³

DISCUSSION

A. Lanham Act claims

The Lanham Act is the federal trademark and unfair competition statute. It creates a civil cause of action against “[a]ny person who shall ... use in commerce any ... colorable imitation of a registered mark,” 15 U.S.C. § 1114(1)

(Lanham Act section 32), or “[a]ny person who ... uses in commerce any” word, false description, or false designation of origin that “is likely to cause confusion ... or to deceive as to the affiliation,” origin, or sponsorship of any goods, id. § 1125(a)(1) (Lanham Act section 43). The Act broadly defines commerce as “all commerce which may...