United States: Supreme Court: Broad Covenant Not To Sue Negates Jurisdiction Over Counterclaims For Non-Infringement And Cancellation Of Trademark

Last Updated: January 17 2013
Article by Paul Devinsky and Rita Weeks

In Already, LLC v. Nike, Inc., the Supreme Court of the United States ruled that the trademark plaintiff's voluntary dismissal of its infringement suit, together with a covenant not to sue, deprived the district court of declaratory judgment jurisdiction and consequently its consideration of a counterclaim of trademark invalidity. 

The Supreme Court of the United States, agreeing with the U.S. Court of Appeals for the Second Circuit, concluded that a trademark plaintiff's voluntary dismissal of its infringement suit, together with a covenant not to sue, deprived the district court of declaratory judgment jurisdiction and consequently its consideration of a counterclaim of trademark invalidity.  Already, LLC v. Nike, Inc., U.S. No. 11-982, January 9, 2013 (Roberts, C. J.) (Kennedy, J., concurring; joined by J. J. Thomas, Alito and Sotomayor).

History

In 1982, Nike designed a shoe called "Air Force 1."  It has sold millions of pairs each year since.  In 2009, Nike sued Already for federal and state infringement and dilution of Nike's registered "Air Force 1" trade dress.  Already filed counterclaims seeking a declaratory judgment that Nike's registered trademark was invalid and that Already did not infringe the mark, as well as for cancellation of the associated U.S. trademark registration.

Eight months after it had filed the infringement suit, Nike delivered to Already a "covenant not to sue," which covered all of Already's alleged infringing designs, past and present, as well as future sales of present designs.  Nike then moved to dismiss its complaint with prejudice.  Nike also moved to dismiss Already's counterclaims without prejudice on the ground that the district court lacked subject matter jurisdiction.  Already argued that a "case or controversy" persisted despite Nike's covenant not to sue, claiming that Nike's litigation—and Nike's trade dress registration itself—constituted a "continuing libel" against Already by causing it to appear that Already had infringed and was continuing to infringe Nike's trade dress.  The district court agreed with Nike and dismissed the counterclaims for lack of subject-matter jurisdiction, holding that the covenant ended the controversy between the parties.  Already appealed to the Second Circuit.

On appeal, the Second Circuit ruled that, in a trademark context, under the Supreme Court's 2007 decision in MedImmune v. Genentech, a covenant not to sue deprives the district court of declaratory judgment jurisdiction, and held, as a matter of law, that Nike's delivery of the covenant to Already divested the district court of subject-matter jurisdiction, thus affirming the district court.  (IP Update, Vol. 14, No. 11).  The Second Circuit explained that in determining whether a covenant not to sue eliminates a justiciable case or controversy in a declaratory judgment action involving a trademark, courts must consider three factors: "(1) the language of the covenant, (2) whether the covenant covers future, as well as past, activity and products, and  (3) evidence of intention or lack of intention, on the part of the party asserting jurisdiction, to engage in new activity or to develop new potentially infringing products that arguably are not covered by the covenant."  Applying those factors, the Second Circuit agreed with the district court that no actual case or controversy existed in the case at bar.  The Second Circuit pointed to the broad language of Nike's covenant not to sue, noting that it covered both present and future products, and concluded that "the breadth of the Covenant renders the threat of litigation remote or nonexistent even if [the defendant] continues to market and sell these shoes or significantly increases their production."  Moreover, the court explained that "[g]iven the similarity of [the defendant's] designs to [the plaintiff's registered trade dress] and the breadth of the Covenant, it is hard to imagine a scenario that would potentially infringe [the plaintiff's registered trade dress] and yet not fall under the Covenant."

The Supreme Court

A unanimous Supreme Court has now agreed with the Second Circuit, concluding that the breadth of the Nike covenant was sufficient to meet the "formidable burden" imposed by the voluntary cessation test, i.e., of showing that the allegedly wrongful behavior cannot reasonably be expected to recur.

As noted by Chief Justice Roberts, the record here only indicated that while Already may have had plans to introduce new shoe lines, there was no indication that those lines would arguably infringe.  Given the breadth of the Nike covenant, the Supreme Court concluded that Already did not meet its burden of showing it was engaging in or planning to engage in activities not covered by the covenant.

The Supreme Court rejected Already's alternative theories as not supportive of Article III standing.  Specifically, the Supreme Court concluded that neither Nike's theoretical freedom to assert its trademark (which Already argued would give rise to investor apprehension) nor Nike's prior suit (which Already argued gave rise to apprehension of another suit) were legally cognizable injuries to support standing.  As Justice Roberts explained, "once it is 'absolutely clear' that challenged conduct cannot reasonably be expected to recur . . . the fact that some individuals may base decisions on 'conjectural or hypothetical' speculation does not give rise to the sort of 'concrete' and 'actual' injury necessary to establish Article III standing."

The Supreme Court also rejected Already's "sweeping argument" that no covenant, no matter how broad, can eradicate the effects of a registered but invalid trademark.  As Justice Roberts countered, under that approach, Nike's earlier filed suit would not even be relevant as Already, simply because it is a competitor to Nike, could initiate its action with no threat of suit from Nike and with no plans to make anything resembling Nike's product.  "We have never accepted such a boundless theory of standing," Judge Roberts explained.

Concurrence

In his concurring opinion, Justice Kennedy warned trademark holders that covenants are "not to be taken as an automatic means . . . to abandon a suit to avoid without incurring the risk of an ensuing adverse adjudication."  Rather, Justice Kennedy emphasized the Supreme Court's awareness that charges of trademark infringement can be marketplace disruptive and adversely affect business relations between the manufacturer alleged to have been an infringer and its distributors, retailers and investors.  He noted that the "mere pendency of litigation can mean that other actors in the marketplace may be reluctant to have future dealings with the alleged infringer."  Alluding to Nike's awareness of this marketplace "dynamic," Justice Kennedy noted: 

The formidable burden to show the case is moot ought to require the trademark holder, at the outset, to make a substantial showing that the business of the competitor and its 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.  It would be most unfair to allow the party who commences the suit to use its delivery of a covenant not to sue as an opportunity to force a competitor to expose its future business plans or to otherwise disadvantage the competitor and its business network, all in aid of deeming moot a suit the trademark holder itself chose to initiate.

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