When an owner registers a trademark he is entitled to national protection for the use of his registered mark, with a notable exception. The territorial exception found in §15 and §33(b)(5) of the Lanham Act provides protection to companies whose use of a mark predates the national registration within the original geographic territory in which they “did business.” This exception allows regional brands to continue the use of their trademark, even after a national brand adopted a similar mark. This exception was simple enough in a time prior to the internet, but in an age where even a small business can have a national reach, it has become increasingly unclear where a company “does business,” and the extent to which a small extant entity is shielded from claims of trademark infringement.

While the way that a company does business has vastly changed because of the internet, the legal analysis has not kept pace with reality. The increased commercial use of the internet challenges the traditional analysis governing the territorial exception. This post discusses the impact of the internet on the traditional analysis governing the territorial exception, and whether distinct geographic divisions of trademark usage are workable or desirable in an economy of online consumers.

Each circuit defines the extent of the territorial exception differently; but generally a company’s area of doing business is determined by the area where the registered and non-registered users’ combined use of the mark would likely cause consumer confusion. Courts use multi-factor tests to determine likelihood of confusion by looking at the similarities between the two parties’ methods and manners of doing business. The country is then divided and parceled out; the non-registered user has the right to use the mark in areas in which there is a likelihood of confusion while the registered user has the right to the mark where there is no likelihood of confusion.

However, this confusion test was developed in an era before the internet. The fundamental assumptions about the locality of commerce that underlie these tests simply don’t apply in a world where a small business can gain instant access to nationwide consumers through online advertisements and sales. Twelve years ago the court in Brookfield Communications, Inc. v. W. Coast Entertainment Corp., predicted the necessary change that the internet would bring to trademark territoriality analysis, saying “[w]e must be acutely aware of excessive rigidity when applying the law in the Internet context; emerging technologies require a flexible approach.” Judicial acknowledgment of the issue has grown in recent years, but no cohesive solution has appeared.

Though each circuits’ factor test is different, each analyzes the similarities between the parties’ channels of trade, advertising methods, prospective customers, and market penetration. Market penetration is determined by the number and frequency of sales in a given area. This analysis is done with an eye towards the user’s physical location: the further you travel from a user’s brick-and-mortar shop, the less likely you are to receive the territorial exception. However, the precedent is thin and non-committal in situations where there is no physical location to refer to, as in the case of online companies. In Pure Imagination, Inc. v. Pure Imagination Studios, Inc., a company that operated almost solely on the internet attempted to gain a nation-wide territorial exception. The court largely side-stepped the issue but noted “that the operation of an active web site on the Internet could constitute nationwide trademark use.” In Optimal Pets, Inc. v. Nutri-Vet, LLC, though one of the parties had both physical store locations and a large internet presence, the Court’s analysis of the territorial exception was focused on the store locations and largely ignored the company’s significant commercial internet presence. Courts generally side-step this issue possibly because of the inherent difficulty of applying these rules to the internet and possibly because if these situations were fully analyzed under the traditional tests, the internet companies might end up with a common law territorial exception that is nation-wide.

Another basic principle of trademark territoriality is the rule of expansion. Derived from the seminal case Dawn Donut Co. v. Hart’s Food Stores, Inc., the principle states that the registered user has the right to his territorial exception only if the geographic area does not fall within the registered user’s zone of expansion, which is defined as the geographic area where a company has taken concrete steps to expand to. The rise of internet commerce undermines not only the basic structure of geographic trademarks divisions but the ability of a court to determine what a company’s zone of expansion is. Many of the tell-tale signs of planned expansion into a new geographic market, for example location-specific advertising, appear differently or not at all when the company is internet-based. In recent years courts have reduced the importance of Dawn Donut analysis, which, in combination with the problems posed by internet-based commerce, has led many commentators to predict the demise of the rule completely.

Courts have continuously found that the law favors giving a registered user exclusive use of a mark in as large an area as possible. As the law stands now though, it is uncertain what the territorial extent of internet-based companies’ trademark rights are. Courts might choose to limit internet-based companies depending on the frequency of sales, or potential confusion to particular regions, but both the legal test and the practical application seem unworkable. Conversely, if internet companies are given a wide-ranging national territorial exception, the registered user loses any semblance of exclusive nation-wide use.

Numerous systems have been proposed to replace the current geographic system including transforming trademark rights into property rights and creating separate domains where virtual use of a mark is protectable as a quasi-geographic “territorial exception.” In light of current difficulties and the untested nature of the proposed solutions it is apparent that the geographically based trademark system needs to be reformed to accommodate new technologies and businesses, even if it is not so clear what that reformation would look like.

Michael Crowley is a J.D. candidate, ’15, at the NYU School of Law.

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