General Publications May 2013

“Supreme Court Holds That Broad Covenants Not to Sue Divest District Courts of Jurisdiction to Hear Counterclaims for Trademark Invalidity,” Intellectual Property & Technology Law Journal, Vol. 25, No. 5, May 2013.

The U.S. Supreme Court has held that a sufficiently broad covenant not to sue can divest a federal court's jurisdiction to hear trademark invalidity counterclaims. In Already, LLC v. Nike, Inc.,[1] the Court held that a covenant not to sue issued by the plaintiff, Nike, Inc., after it filed suit against the defendant, Already, LLC, mooted Already's counterclaim to cancel Nike's mark. We believe the Supreme Court's holding will have relatively limited significance in trademark or patent litigation because of the unique fact pattern of the case. Nevertheless, the decision provides some guidance to intellectual property owners on how to terminate litigation, including invalidity counterclaims, if discovery reveals that the facts of a case are not what the IP owner understood them to be at the time of filing.

Background

Nike owns a registered trademark covering the design of its popular Air Force 1 shoe, U.S. Reg. No. 3,451,905. In July 2009, Nike brought a trademark infringement suit in the Southern District of New York against Already, LLC, which does business under the name "Yums,' Already produced two shoes, the "Sugar" and the "Soulja Boy," which Nike alleged infringed its registered mark for the Air Force 1 shoe. In response, Already asserted counterclaims against Nike alleging that the '905 mark was not a valid trademark and requesting that the registration for the mark be cancelled.

Nike learned during settlement talks that only one of the three retail store chains it anticipated would sell Already's allegedly infringing shoes was actually carrying them.[2] In light of this new information, Nike concluded that the threat posed by Already's shoe designs was no longer worth the significant expense of litigation. Accordingly, Nike issued Already a broad, unilateral "Covenant Not to Sue" that covered all of Already's current designs and any future "colorable imitations" of Already's existing designs. Nike then moved to dismiss its claims with prejudice and Already's counterclaims without prejudice. Already opposed the dismissal of its counterclaims, arguing that the covenant not to sue did not moot the case.

The district court granted the dismissal, holding that there was no longer a justiciable controversy because Already had not stated that it intended to produce shoes that would potentially infringe Nike's mark but that would not also fall within the covenant not to sue as "colorable imitations" of Already's previous designs. The Court of Appeals for the Second Circuit affirmed, noting that "it is hard to imagine a scenario that would potentially infringe the '905 mark and yet not fall under the Covenant."[3]

The Covenant Not to Sue Rendered the Case Moot

Chief Justice Roberts, writing for a unanimous Court, noted that under the "voluntary cessation doctrine," Nike had the "formidable burden" of showing that it "could not reasonably be expected" to continue its enforcement efforts against Already. Thus, Nike was required to prove that the covenant not to sue truly eliminated any threat of litigation against Already concerning the Nike trademark. [4]

The Court found that Nike met this burden by the broad reach of the Covenant. Specifically, the Covenant was "unconditional and irrevocable" and went "[b]eyond simply prohibiting Nike from filing suit[.]"[5] Indeed, the Covenant prohibited Nike from "making any claim or any demand," and covered not just Already but its distributors and customers as well.[6] Moreover, the Covenant covered "not just current or previous designs, but any colorable imitations,"[7] In the Court's words, any shoe that might both fall outside the covenant but still infringe Nike's mark "sits ... on a shelf between Dorothy's ruby slippers and Perseus's winged sandals."[8] The burden thus shifted to Already to show that it had an intention to produce a shoe that would fall outside the covenant, but Already, even at oral argument before the Court, did not make such a showing.

Already presented several theories as to why its counterclaim was not mooted by Nike's covenant, including that the continued existence of Nike's mark was deterring Already's potential investors from investing with Already and that Already had standing simply because it was one of Nike's competitors.[9] The Court rejected all of Already's alternative arguments, holding that fears of investor deterrence were too speculative to evidence cognizable harm and that merely being a competitor was insufficient to give a party standing to sue for invalidity.[10] In the Court's view, Already was essentially arguing that, as a matter of policy, the Court should rule for Already to prevent large companies like Nike from "bully[ing] small innovators lawfully operating in the public domain.[11] But the Court noted that there was little risk of covenants not to sue becoming commonplace because large companies that issued an excessive number of such covenants risked losing protection for their marks.

In sum, the Court held that "Already's only legally cognizable injury-the fact that Nike took steps to enforce its trademark-is now gone and, given the breadth of the covenant, cannot reasonably be expected to recur. There being no other basis on which to find a live controversy, the case is clearly moot."[12]

Concurring Opinion

Justice Kennedy wrote a concurring opinion, joined by Justices Thomas, Alito and Sotomayor, to emphasize that this decision should not be read to state that covenants not to sue always moot ongoing litigation. Justice Kennedy wrote that the burden is on the party offering the covenant, and "[c]ourts should proceed with caution before ruling that [covenants not to sue] can be used to terminate litigation."[13] The concurring opinion stresses that the "formidable burden to show the case is moot ought to require the trademark holder, at the out-set, to make a substantial showing the business of the competitor and its supply network will not be disrupted or weakened by satellite litigation over mootness ... ."[14] Critically, courts must "ensure that covenants are not automatic mechanisms for trademark holders to use courts to intimidate competitors without, at the same time, assuming the risk that their trademark will be found invalid and unenforceable." [15] 
 
Significance of Decision

Given the unique fact pattern of the Nike case, we anticipate that the Supreme Court's holding will have limited significance in trademark litigation. It is possible the ruling will have more applicability in patent litigation, where invalidity contentions are brought more routinely. Nevertheless, if a trademark or patent owner determines after filing an infringement lawsuit that the facts are not what they understood them to be at the time of filing, the Supreme Court's decision provides some guidance on how to terminate the litigation and extinguish counterclaims for invalidity. In drafting covenants to terminate the litigation, IP owners would be wise to adhere closely to the language used by Nike in the covenant it issued to Already, which can be found in the Court's decision.[16]

Before issuing a covenant not to sue, brand owners should be aware that the covenant is not necessarily without risk. As the Supreme Court noted, the issuance of a covenant could adversely impact the strength of the brand owner's mark. Moreover, the defendant might still have a claim for attorney's fees against the brand owner, which could be granted if the district court concludes that the suit was brought to bully the defendant. (Already sought its fees and costs against Nike, but the claim was denied and not appealed). Those wishing to moot litigation through a covenant not to sue should also consider carefully Justice Kennedy's concurring opinion, which emphasizes that covenants not to sue should not be found to terminate litigation unless it is clear that there is no cognizable harm to the defendant.


Notes
1. No. 11-982, slip op. (U.S. Jan. 9, 2013).
2. Brief of Respondent, Already, LLC v. Nike, Inc., at 6
(Sept. 24, 2012).
3. Nike, Inc. v. Already, LLC, 663 E3d 89, 97 (2d Cir.
2011).
4. Already, LLC v. Nike, Inc., slip op. at 5-6.
5. Id. at 6.
6. Id.
7. Id.
8. Id. at 7.
9. Id. at 9.
10. Id. at 10-12.
11. Id. at 13.
12. Id. at 13-14.
13. Already, LLC v. Nike, Inc., slip op. at 3 (J. Kennedy,
concurring).
14. Id.
15. Id. at 3-4.
16. Already, LLC v. Nike, Inc., slip op. at 6.

 




 

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