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Melinda S. Giftos
Tuesday, May 14, 2013

Implications of Already, LLC v. Nike, Inc.: A Covenant Not to Sue May Render Counterclaims of Invalidity Moot


On Jan. 9, 2013, the U.S. Supreme Court issued its opinion in the closely watched trademark case, Already LLC v. Nike Inc., 568 U.S. ---, 133 S.Ct. 721, No. 11-982 (2013) (Slip Op.). At issue in the case was whether a plaintiff can avoid invalidity counterclaims by issuing a broad covenant not to sue the defendant during the pendency of trademark infringement litigation. The Supreme Court held that a party may avoid invalidity claims where the covenant not to sue encompasses all possible related claims. However, the Court warned that covenants not to sue should not be used with impunity, as they may result in the loss of valuable rights. They also caution that covenants not to sue will not automatically render counterclaims of invalidity moot. However, it did set forth important parameters and analysis that can provide intellectual property owners important guidance in their enforcement strategies and actions.

Background

Nike sued Already, alleging that its “Soulja Boy” and “Sugar” athletic shoe lines violated Nike’s Air Force 1 trademark. Already denied the allegations and responded with a counterclaim, challenging the validity of Nike’s trademark. Several months into litigation, Nike announced that Already no longer infringed or diluted its Air Force 1 trademark at a “sufficient level to warrant the substantial time and expense of continued litigation.” Nike also issued a broad, irrevocable and unconditional covenant not to sue, promising not to raise any trademark or unfair competition claims against Already or any affiliated entity based on Already’s existing footwear designs or any future Already designs that constituted a “colorable imitation” of Already’s existing products. Nike then moved to dismiss its claims and Already’s claim of invalidity on the ground that the covenant had extinguished the case or controversy. The district court dismissed all of the claims and the Second Circuit Court of Appeals affirmed, holding that the covenant not to sue divested the court of Article III jurisdiction over Already’s invalidity claim.

Already’s Arguments in Favor of Standing

Already wanted to proceed with its invalidity claim, however, and opposed dismissal, contending that Nike had not established its burden that its covenant had mooted the case. Already argued that the district court had standing over its invalidity claims despite the covenant not to sue on the following grounds: (1) so long as Nike remained free to assert its trademark, investors would be apprehensive about investing in Already; (2) given Nike’s decision to sue in the first place, Nike’s trademarks would hang over Already’s operations like a Damoclean sword; and (3) as one of Nike’s competitors, Already inherently has standing to challenge Nike’s intellectual property. Already presented several affidavits claiming that it planned to introduce new versions of its lines into the market; that its potential investors would not consider investing in Already until Nike’s trademark was invalidated; and that Nike had intimidated retailers into refusing to carry Already’s shoes. The court rejected all of Already’s arguments, however, and upheld the rulings of the district court and the Second Circuit Court of Appeals.

Voluntary Cessassion Doctrine

The court first clarified that to avoid Already’s claim of invalidity, Nike had the burden of showing that it “could not reasonably be expected” to resume its enforcement efforts against Already.Under the voluntary cessation doctrine, a case becomes moot if a claim cannot be resumed in “this or any subsequent action” and where it is entirely speculative that any similar claim would arise in the future. Because Nike’s covenant not to sue was very broad, was unconditional and irrevocable, and covered current products and any colorable imitations created in the future, the court could not conceive of any instance where Nike could pursue a claim against Already’s shoes. Thus, the court held that Nike met its burden of demonstrating that its covenant not to sue rendered Already’s claims moot.

Injury Required to Demonstrate Standing

The court next turned to Already’s claims that it had suffered sufficient injury by Nike’s actions to have Article III standing. Already argued that Nike’s actions exposed Already to substantial and unpredictable risks, including the threat of loss of potential investors and that retailers may be dissuaded from carrying Already’s shoes. Already also asserted the sweeping argument that it should have recourse against trademark bullying—no matter how broad the covenant not to sue was, it could not eradicate the effects of Nike wielding an invalid trademark registration over its competitors. The court disagreed, holding that the risks Already identified were nothing more than “conjectural or hypothetical” in light of the broad covenant not to sue. Competitors do not have standing to sue without demonstrating a real and concrete injury. To hold otherwise would improperly create a “boundless theory of standing” under which any market participant could use litigation as a weapon against their competitors without any real injury. Because Already had no evidence of an actual injury, it did not have standing.

Nonetheless, the court noted that there are potentially negative consequences for trademark owners who engage in trademark bullying and issue broad covenants not to sue to avoid invalidation of their intellectual property. Granting covenants not to sue can be a risky long-term strategy for a trademark holder because it could be viewed as an uncontrolled or naked license, which could result in loss of valuable trademark rights. Further, if a trademark owner engages in abusive litigation practices, attorneys’ fees may be available if the case is considered “exceptional.”

Concurring Warning

Justice Kennedy wrote a concurring opinion that was joined by Justices Thomas, Alito and Sotomayor. The opinion was written to underscore that covenants not to sue must not to be viewed as an automatic means for the party who first charged a competitor with trademark infringement to suddenly abandon the suit without incurring the risk of a finding of invalidity. To the contrary, courts should carefully consider the consequences of using a covenant not to sue as the basis for rendering claims of invalidity moot and should recognize that the trademark owner does have a “formidable burden” of demonstrating that the business of its competitor and supply network will not be disrupted or weakened by satellite litigation over mootness or any latent threats in the terms of the covenant not to sue.

Indeed, the concurrence noted that there may be instances where a covenant not to sue will not render claims of invalidity moot. For example, if the alleged infringer can demonstrate actual evidence of reluctance by investors, distributors or retailers to maintain good relationships with the alleged infringer, it can demonstrate actual injury.

Takeaways from the Supreme Court’s Opinion

While this opinion dealt with an invalidity counterclaim in the trademark context, all federal claims require standing under Article III of the Constitution. Thus, the U.S. Supreme Court’s ruling may potentially be applied in the context of copyright and patent litigation as well. Whether a covenant not to sue will render invalidity claims moot will certainly hinge on the breadth of the covenant and the factual circumstances of the dispute between the parties. Nonetheless, to render an invalidity claim moot, the covenant not to sue should: (1) cover the defendant and all of its affiliates, such as distributors and retailers; (2) be unconditional and irrevocable; (3) cover all existing products and any colorable imitations created in the future; and (4) foreclose the plaintiff from asserting the intellectual property at issue in any future demands or litigation.
While issuing a covenant not to sue to avoid an invalidity claim may in some circumstances be desirable, an intellectual property owner should always weight the potential pitfalls of such a covenant and the possibilities that even a broad covenant not to sue may not be sufficient to render invalidity claims moot if the alleged infringer can still demonstrate actual injury.

For more information, please contact Melinda Giftos at (608) 234-6076 or mgiftos@whdlaw.com, or another member of the Intellectual Property Litigation Team.



Related Practice Areas:

Intellectual Property Counseling & Protection
Intellectual Property Litigation