In Tommy Hilfiger Licensing Inc. v. Costco Companies Inc., the United States District Court for the Southern District of New York granted Costco's Motion for Summary Judgment on the ground that Tommy Hilfiger's trademark infringement claim involving "secondary market goods" distributed and sold in Canada does not warrant extraterritorial application of the Lanham Act.

At issue was the liability of Costco's U.S. subsidiary, National Clothing, for the sale of "secondary market goods" by Costco's Canadian subsidiaries (collectively, "Canadian entities"). National Clothing's only involvement was to pay vendors for the secondary market goods ordered and sold by Canadian stores. Specifically, the allegedly infringing goods were ordered, shipped and paid for by the Canadian entities. National Clothing would then write a check to the vendors on the Canadian entities' accounts, or, if the goods were to be paid for in U.S. dollars, from National Clothing's U.S. account. Costco-Canada paid Costco-U.S. a specified fee for these payment services.

The three factors applied in determining whether the Lanham Act should be applied extraterritorially are: (1) whether the defendant is a U.S. citizen; (2) whether there exists a conflict between the defendant's trademark rights under foreign law and the plaintiff's rights under domestic law; and (3) whether the defendant's conduct has a substantial effect on U.S. commerce. Regardless of the first two factors, the Lanham Act will not be applied extraterritorially if there is no substantial effect on U.S. commerce.

The Second Circuit has held there is no "substantial effect" on U.S. commerce where: (1) the alleged infringer's foreign use of a mark does not mislead U.S. consumers in their purchases or cause them to look less favorably on the mark; (2) the alleged infringer's mark does not physically use the stream of U.S. commerce to compete with the trademark owner by, e.g., manufacturing, processing or transporting the competing product in the United States; and (3) the alleged infringer's U.S. activities do not materially support the foreign use of the mark.

The court concluded that the facts in this case failed to establish a substantial effect on U.S. commerce warranting extraterritorial application of the Lanham Act. First, the court noted that the consumer confusion must occur in the United States. Since the infringing goods in this case were sold in Canada, and not in the United States, there was no confusion of U.S. consumers for purposes of the Lanham Act.

Second, the fact that Costco used U.S. post offices and banks to make and receive payments does not constitute use of the U.S. stream of commerce. The court distinguished Costco's activities from those which use the U.S. stream of commerce, such as the manufacture, processing and transport of infringing goods. Likewise, the fact that some of the infringing goods originated from U.S. vendors did not satisfy the "use in U.S. stream of commerce" requirement, since the Canadian entities actually ordered the goods from those vendors.

Third, the court concluded that Costco's payment service did not rise to the level of providing "material support" to the Canadian entities' infringing activities. The court again noted that National Clothing did not order, ship or pay for the infringing goods, and that the mere payment service provided was not sufficiently essential to the Canadian entities' infringing activities.

Finally, the court also rejected Tommy Hilfiger's claim that Costco's U.S. activities constituted contributory infringement, since Costco did not manufacture or distribute the infringing goods and its U.S. entities did not supply the Canadian entities with the means by which to commit the infringement.