Supreme Court Holds Covenant Not to Sue Moots Counterclaim for Invalidity

09 January 2013 Publication
Author(s): Andrew Baum

Legal News Alert: Intellectual Property

In a unanimous decision issued in Already, LLC d/b/a/ Yums v. Nike (No. 11-982, January 9, 2013), the Supreme Court held that a plaintiff’s dismissal of a trademark infringement case, combined with a broad covenant not to assert any claims against the accused products or “colorable imitations” thereof, moots the defendant’s counterclaim for trademark invalidity. The decision may encourage plaintiffs to assert infringement claims on questionable trademarks, secure in the knowledge that they can escape strong challenges to validity by abandoning the claims thereafter. However, a concurring opinion by four justices urges courts to be skeptical of such a tactic.

The case began in 2009 with Nike’s claim that Already’s “Sugars” and “Soulja Boys” athletic shoes infringed and diluted Nike’s registered design trademark for its “Air Force 1” shoes. Already counterclaimed for a declaration that the Nike mark was invalid and for cancellation of the registration.

Four months after the counterclaim was filed, Nike delivered to Already a “covenant not to sue” and moved to dismiss its own complaint and Already’s counterclaim with prejudice. Already opposed dismissal of the counterclaim, asserting that it was not mooted by the dismissal of the infringement action. Already lost in both the district court and in the Second Circuit, 663 F.3d 89 (2d Cir. 2011). Today, in an opinion by Chief Justice Roberts, the Supreme Court affirmed.

Key to the decision was the breadth of the covenant. In it, Nike “unconditionally and irrevocably covenants to refrain from making any claim(s) or demand(s) … against Already or any of its … related business entities … [including] distributors … on account of any possible cause of action based on or involving trademark infringement, unfair competition or dilution … relating to the NIKE mark based upon the appearance of any of Already’s current and/or previous footwear product designs, and any colorable imitations thereof…” (emphasis added in opinion). 

Thus, said the Court, the covenant is unconditional and irrevocable; prohibits claims or demands of any kind (not just lawsuits); protects Already’s distributors and customers; and covers not just current or previous designs, but any “colorable imitation” sold in the future. The latter condition caused the Second Circuit to find that “it is hard to imagine a scenario that would potentially infringe [Nike’s trademark] and yet not fall under the covenant,” 663 F.3d at 97, and the Supreme Court agreed. “If such [an infringing] shoe exists, the parties have not pointed to it, there is no evidence that Already has dreamt of it, and we cannot conceive of it. It sits, as far as we can tell, on a shelf between Dorothy’s ruby slippers and Perseus’s winged sandals.” Because Already had no “sufficiently concrete plans to engage in activities not covered by the covenant,” there was no case or controversy and therefore no standing to assert the counterclaim.

Already also attempted to show standing by submitting affidavits from three potential investors, who asserted that they would not consider investing in Already until Nike’s trademark was invalidated, and another affidavit alleging intimidation of customers by Nike. Already also argued that, as a Nike competitor, it had inherent standing to challenge Nike’s intellectual property, as a means to control the power of companies like Nike to “brandish invalid trademarks to intimidate smaller competitors.” The Court rejected all of these arguments, holding that none of them would be sufficient to establish Article III standing in the first place.

The Court held that the inchoate fears expressed by the investors were “conjectural or speculative” and that the fears of customer intimidation were mooted by extension of the covenant to Already’s customers. It also held that Already’s sweeping argument on inherent standing proved too much. “Under this approach,” said the Court, “Nike need not even have threatened to sue first. Already … could sue to invalidate the trademark simply because Already and Nike both compete in the athletic footwear market.” 

Already’s policy arguments based on fear of trademark bullying were considered, but rejected. While acknowledging that accepting Already’s theory might benefit a small competitor in this case, “lowering the gates for one party lowers the gates for all.” A lower standard for standing could allow larger companies to challenge the IP portfolios of their more humble rivals, encouraging the use of litigation as a competitive weapon.

Justice Anthony Kennedy, along with Justices Thomas, Alito, and Sotomayor, concurred in the result but emphasized the Court’s holding that Nike bore the “formidable burden of showing that … the allegedly wrongful behavior could not reasonably be expected to recur,” citing Friends of the Earth, Inc. v. Laidlaw Environmental Services (TOC), Inc., 528 U.S. 167, 190 (2000). In other words, in a case of "voluntary cessation" such as this, the burden was not on Already to show the existence of a case or controversy; the burden was on Nike to demonstrate that the covenant was so broad that Already could have no reasonable anticipation of a future infringement claim. The concurrence agreed that Nike met its burden here, but said that future plaintiffs should not believe they have carte blanche to intimidate competitors by suing and then suddenly dropping the suit. 

Justice Kennedy cautioned that, in the future, “careful consideration must be given to the consequences of using a covenant not to sue as the basis for a motion to dismiss as moot.” Such plaintiffs should, in his view, “make a substantial showing that the business of the competitor and the supply network will not be disrupted or weakened by satellite litigation over mootness or by any threat latent in the terms of the covenant itself.” Otherwise, an IP owner could use the covenant not to sue “as an opportunity to force a competitor to expose its future business plans or otherwise disadvantage the competitor and its business network.” 

In summary, the Court’s decision gives comfort to trademark plaintiffs who seek to drop a case rather than fight an invalidity counterclaim. But the price for doing so will be a very broad, unambiguous, and comprehensive covenant which removes any foreseeable threat to the alleged infringer. Despite this decision, then, trademark plaintiffs must still consider the risk of exposing their rights to challenge if they choose to commence litigation.

The decision can be found online at Already, LLC d/b/a/ Yums v. Nike

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Andrew Baum
New York, New York