Trade dress, sovereign immunity and world politics collide before DC Circuit

United States of America

In Bell Helicopter Textron Inc v Islamic Republic of Iran (Case No 12-7103, November 1 2013), the US Court of Appeals for the District of Columbia Circuit has affirmed the vacatur of final default judgment against the Islamic Republic of Iran for alleged trade dress infringement. The unanimous panel agreed with the district court that Iran’s marketing and sales of government-manufactured helicopters did not establish subject-matter jurisdiction because the plaintiff had failed to demonstrate that the alleged injury had a “direct effect” in the United States so as to overcome Iran’s sovereign immunity.

The legal issues in this appeal are premised on similarities between a distinctive line of Bell helicopters and a line of helicopters manufactured by the Iranian government. Bell Helicopter Textron Inc manufactures and sells a line of helicopters branded the Jet Ranger 206. This particular model takes its design from automotive concepts, displaying a protruding nose rather than a rounded front; Bell represented that the non-functional design sets the Bell brand apart from other helicopters. From the 1966 until the Iranian revolution in 1979, Bell operated a helicopter manufacturing plant in Iran. Years later, in 2001, the Iranian government began using the former Bell plant to manufacture a military helicopter known as the Shahed 278 that, according to Bell, intentionally resembled the Jet Ranger 206. Bell maintained that Iran marketed and sold the Shahed 278 in 'Third World' markets not subject to European and North American safety restrictions.

In 2006 Bell sued Iran for, among other things, dilution and infringement of its trade dress. The alleged violations of the Lanham Act proceeded pursuant to the Foreign Sovereign Immunities Act of 1976. Section 1605(a)(2) of the act provides an exception to sovereign immunity if the alleged conduct occurs outside the United States in connection with a commercial activity of a foreign state and the foreign state’s commercial activity causes a “direct effect” in the United States. In this case, Bell argued that the marketing and sale of Shahed 278 helicopters directly caused it financial and reputational loss in the United States.

After Bell served Iran with the complaint, the case proceeded without Iran making an appearance. A default judgment was entered against Iran in 2009 after Bell had presented evidence that its trade dress was infringed and that it was entitled to damages for the loss of revenues. The district court awarded Bell in excess of $22 million and almost $500,000 in attorneys’ fees. After the State Department filed an affidavit notifying Iran of its liability for the default judgment, counsel for Iran entered an appearance in the case and moved under Rule 60(b) to vacate the default judgment as void for lack of subject-matter jurisdiction. The district court granted the motion after determining that Iran was immune from suit under the Foreign Sovereign Immunities Act because Bell had not established that Iran’s actions had caused a “direct effect” in the United States. Bell appealed.

Although the decision to set aside a judgment under Rule 60(b) is typically an issue where the district court enjoys broad discretion, the appellate panel reviewed de novo whether a challenge to subject matter jurisdiction was governed by reasonable time restrictions. After tracing precedent of the DC Circuit and the US Supreme Court, the DC Circuit concluded that Iran’s Rule 60(b) motion was not barred for untimeliness because Iran never submitted to the district court’s jurisdiction and, in entering a final judgment, the district court exceeded its statutory grant of subject-matter jurisdiction. The court drew a distinction between a judgment that is “voidable” and a judgment that is “void”, finding that, in the absence of subject-matter jurisdiction, the final judgment against Iran was void.

The DC Circuit also reviewed the jurisdictional analysis, interpreting the Foreign Sovereign Immunities Act, and concluded that the record did not reflect a meaningful connection between Iran’s commercial activities and the alleged harm in the United States. The court rejected Bell’s contention that interference with a property right gives rise to a “direct effect” under the statute, and similarly found that the direct effect requirement could not be satisfied by virtue of Bell’s citizenship in the United States. The court explained that Bell had the burden to prove that selling the Shahed helicopters abroad caused a “direct effect” in the United States, noting that such an effect could have been proved through evidence of marketing and/or sales of the Shahed helicopters in the United States, evidence of potential confusion by Bell’s customers (or potential customers) or market evidence of the likelihood of crossover between the market for Bell spare parts and Shahed spare parts.

While the court recognised the conceivable harm that might follow from the infringing use of Bell’s trade dress, it disagreed that the alleged intellectual property torts against Bell, in isolation, cause the requisite “direct effect” contemplated by the commercial activities exception of Section 1605(a)(2). The court explained that, had Bell established that the IP tort caused direct financial or reputational loss, Bell might be entitled to a finding of waiver of sovereign immunity, but the court concluded that the evidence here was too speculative and attenuated.

Natalie Bennett, McDermott Will & Emery LLP, Washington DC

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