In 2007, the Supreme Court in MedImmune v. Genentech broadened
the scope of declaratory judgment jurisdiction, making it easier
for parties fearing IP claims to bring defensive lawsuits. Last
week, the Court made it easier for IP owners to end them.
In Already, LLC, dba Yums v. Nike Inc., 586 U.S. ___; No. 11-982,
2013 WL 85300 (January 9, 2013), a trade dress case involving an
athletic shoe design, the Court issued a unanimous decision
clarifying the applicable legal standard for dismissing a case as
moot where the defendant has voluntarily ceased the alleged
wrongful behavior. The case started when Nike sued Yums for
infringing its trade dress in its Air Force 1 shoe. After Yums
filed a counterclaim to invalidate Nike's trade dress
registration, Nike decided it wanted out. It dismissed its claims,
and provided Yums a covenant not to sue it in the future. Nike then
moved to dismiss the case, arguing that there was no longer any
"case or controversy," and thus, no subject matter
jurisdiction.
In affirming dismissal of a counterclaim for declaratory judgment,
the Supreme Court found that a broad covenant not to sue can render
a case moot, removing Article III standing. The Court clarified
that such cases are analyzed under the "voluntary
cessation" doctrine, and that a defendant hoping to rely on
such tactic will bear a heavy burden of showing that it is
"absolutely clear" the allegedly wrongful behavior will
not recur.
Although this opinion provides practical guidance on drafting a
covenant not to sue sufficient to defeat subject matter
jurisdiction, parties considering such a move must carefully
consider broader ramifications.
BACKGROUND
Nike originally filed the lawsuit in federal court in the
Southern District of New York, alleging that Yums' "Soulja
Boys" and "Sugars" shoe lines infringed and diluted
Nike's "Air Force 1" trade dress. Yums denied the
allegations and filed a counterclaim contending that the Air Force
1 trade dress registration was invalid. Several months later, after
settlement discussions, Nike issued a covenant not to sue,
promising that Nike would not raise trademark or unfair competition
claims based on any of Yums' existing footwear designs, or any
colorable imitations thereof. Nike then moved to dismiss its own
claims and Yums' invalidity counterclaim.
The district court granted Nike's motion. Construing the
covenant broadly, the district court found that Yums lacked Article
III standing to pursue its declaratory judgment counterclaim. The
Second Circuit affirmed, finding it hard to conceive of a shoe that
would infringe the Air Force 1 trademark yet not fall within the
scope of the covenant. Yums appealed, and the Supreme Court granted
certiorari in June 2012.
MOOTNESS AND VOLUNTARY CESSATION
The Supreme Court reaffirmed that Article III of the
Constitution requires that an actual controversy exist not only at
the time that the complaint is filed, but through all stages of the
litigation. A case becomes moot, and thus no longer a "case or
controversy," when the issues presented are no longer live or
the parties lack a legally cognizable interest in the
outcome.
The Court recognized, however, that a defendant cannot simply moot
a case by ceasing the disputed conduct once it is challenged in
court. Otherwise, a party could simply stop unlawful conduct when
sued, and pick up again when the case is declared moot. Instead,
when a party claims that its voluntary compliance moots a case, the
Court applies the "voluntary cessation" doctrine. Under
this doctrine, a defendant claiming that its voluntary termination
of conduct moots a case "bears the formidable burden of
showing that it is absolutely clear the allegedly wrongful behavior
could not reasonably be expected to recur."
NIKE'S COVENANT NOT TO SUE
Applying the voluntary cessation doctrine, the Court found that
Nike's covenant met the heavy burden imposed by the voluntary
cessation test. First, the covenant was unconditional and
irrevocable; Nike could not simply change its mind and pursue Yums
in the future. Second, the covenant prohibited Nike from not only
filing suit, but also from making any claim or any demand. Thus,
Yums was protected not only against future lawsuits, but other
cease and desist letters, demands or threats that might place a
cloud over its business activities. Third, the covenant reached
beyond Yums to protect Yums' distributors and customers,
protecting Yums from "downstream" IP claims. Fourth, the
covenant covered not just current or previous designs, but any
colorable imitations of those designs – thus protecting
Yums' going forward.
In considering whether Nike met its burden, the Court also noted
that Yums—despite ample opportunity to do so at all levels of
the proceedings—had failed to identify any evidence of
current or future shoe designs that would expose it to the prospect
of infringement liability yet not be covered by the covenant:
"If such a shoe exists, the parties have not pointed to it,
there is no evidence that [Yums] 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."
Based on the language of the covenant not to sue and Yums'
failure to show any evidence of a potentially infringing product,
the Court found that the case was moot because the challenged
conduct cannot reasonably be expected to recur.
ALTERNATIVE THEORIES OF ARTICLES III INJURY AND POLICY CONSIDERATION
The Court also considered and rejected three alternative
theories of Article III injury as insufficient to establish
standing. First, Yums argued that as long as Nike remained free to
assert its trademark, investors would be apprehensive about
investing. The Court disagreed, finding that such investor
decisions would be based on conjecture, which does not give rise to
a "concrete" and "actual" injury necessary to
establish Article III standing.
Second, Yums argued that, given Nike's decision to sue in the
first place, Nike's trademarks would hang over Yums'
operations "like a Damoclean sword" and that Nike might
interfere with its distributors and customers. The Court rejected
this argument on the grounds that the hypothetical misconduct would
either be barred by the covenant, or was unrelated to Nike's
trademark and would not be prevented by its invalidation.
Third, Yums made the sweeping argument that, as one of Nike's
competitors, it inherently had standing to challenge Nike's
intellectual property. The Court summarily rejected the premise
that a market participant is injured for Article III purposes
whenever a competitor benefits from something allegedly
unlawful.
Fourth, the Court observed that, in the trademark context,
covenants not to sue may be a risky long-term strategy for
trademark holders, given that widespread use of a mark by third
parties may be evidence of a lack of likelihood of confusion in
future litigations, and because uncontrolled, or "naked,"
licensing may result in a loss of trademark rights. Thus, the
concern that the case allowed Nike and other brand owners to bully
small innovators was unfounded. The Court observed that adopting
the position advocated by Yums, while benefitting the smaller
competitor here, would actually enable larger companies with more
resources to challenge the intellectual property portfolios of
smaller competitors, thus enabling companies to "employ
litigation as a weapon against their competitors rather than as a
last resort for settling disputes."
TAKEAWAYS
This case provides helpful clarification that the
"voluntary cessation" doctrine is alive and well, and
that a party claiming that its change of conduct has mooted a case
will bear a very heavy burden. In the intellectual property
context, the case makes clear that a properly crafted covenant not
to sue remains a viable option to end a declaratory judgment
lawsuit. While this situation arises relatively rarely, the ability
to terminate a lawsuit, rather than face ongoing litigation
expenses or a uniquely bad outcome, may be a useful tool for IP
owners managing broad portfolios or enforcement programs.
Nike's covenant not to sue, now blessed at the Supreme Court,
will likely become the gold standard against which courts will
scrutinize future covenants. Such agreements are more likely to
survive scrutiny where they (1) are irrevocable and unconditional,
(2) apply to all demands, not just lawsuits, (3) protect downstream
customers, and (4) cover not just past and present conduct, but
future infringement as well.
While a covenant not to sue that meets these requirements is
likely to satisfy the "voluntary cessation" doctrine,
Intellectual property owners should careful consider the broader
implications of such covenants, and should bear in mind the
potential risks and consequences to their IP rights.
As for Yums and similarly situated plaintiffs, this decision does
not eliminate all recourse. A party claiming harm from a trademark
registration may challenge it by pursuing opposition or
cancellation proceedings before the Trademark Trial and Appeal
Board. Likewise, parties may seek inter partes review or ex parte
reexamination of patents. But this case reaffirms the core
principle that federal courts are reserved for disputes over actual
injuries.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.