U.S. Supreme Court Holds That a Covenant Not to Sue Can Moot a Trademark Challenge

January 11, 2013

In a decision that reaffirms that federal courts do not have jurisdiction to decide hypothetical challenges to the validity of intellectual property, the U.S. Supreme Court held in Already LLC v. Nike, Inc., No. 11-982 (January 9, 2013), that Nike successfully mooted a challenge to the validity of one of its trademarks by issuing a broad covenant not to sue to enforce the trademark against defendant Already or its customers.

The case involved a complaint initially filed by Nike asserting that Already’s "Sugars" and "Soulja Boys" line of shoes infringed and diluted Nike’s own "Air Force 1" trademark.  Already denied these allegations, and filed a counterclaim asserting the invalidity of the Air Force 1 mark.  Months later, Nike determined that Already’s shoe lines were unlikely to threaten its Air Force 1 mark "at a level sufficient to warrant the substantial time and expense of continued litigation," and issued a covenant not to sue Already.  Op. at 2.  In this covenant, Nike promised not to make any "claim(s) or demand(s)" against Already or any of its affiliates based on any of Already’s existing footwear designs, or any future Already designs that constitute a "colorable imitation" of Already’s current products.  Op. at 6.  Nike then asked the district court to dismiss its own claims with prejudice, and to dismiss Already’s invalidity counterclaim without prejudice on the ground that the covenant rendered the case moot.  Already objected to the dismissal of its counterclaim, but both the district court and the Second Circuit held that Nike’s covenant eliminated any justiciable case or controversy.

The Supreme Court unanimously affirmed, holding that Already’s counterclaims were moot because the covenant assured that Nike could not later claim that Already’s footwear infringed Nike’s trademark.  Chief Justice Roberts, writing for the Court, observed that Already did have standing to pursue its challenge to Nike’s mark at the outset of the litigation, when Nike brought its formal infringement claims against Already.  But the Court found that when Nike dismissed its affirmative claims and issued a broad "unconditional and irrevocable" covenant not to sue, it met its burden to show "that it ‘could not reasonably be expected’ to resume its enforcement efforts against Already,"  Op. at 5-6 (quoting Friends of the Earth, Inc. v. Laidlaw Env’tal  Servs. (TOC), Inc., 528 U.S. 167, 190 (2000)).

The Court noted that the covenant went "[b]eyond simply prohibiting Nike from filing" a new suit against Already.  Op. at 6.  "[The covenant] prohibits Nike from making any claim or any demand.  It reaches beyond Already to protect Already’s distributors and customers.  And it covers not just current or previous designs, but any colorable imitations."  Id. (emphasis in original).  The Court found it important that Already’s lawyers could not–either before the district court, the Second Circuit or the Supreme Court–articulate "any plans to create any arguably infringing shoe that does not unambiguously fall within the scope of the covenant."  Op. at 8, 14.  "If such a shoe exists," the Court derisively noted, "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."  Op. at 7.

The standard, as set forth by the Court, is that an invalidity challenge can be mooted by a covenant not to sue "if the court, considering the covenant’s language and the plaintiff’s anticipated future activities, is satisfied that it is ‘absolutely clear’ that the alleged unlawful activity cannot reasonably be expected to recur."  Op. at 8. 

The Court distinguished this set of circumstances from patent cases where a court’s finding of noninfringement did not moot the defendant’s challenge to the validity of the patent because "a court’s ‘decision to rely on one of two possible alternative grounds [to dispense with the claims] did not strip it of power to decide the second question . . . .’"  Op. at 8-9 (citing Cardinal Chem. Co. v. Morton Int’l, Inc., 508 U.S. 83 (1993); Altvater v. Freeman, 319 U.S. 359 (1943)).  At the same time, the Court explicitly rejected Already’s theory that federal registration of an intellectual property right alone creates standing for anyone engaged in a similar business.  Op. at 12. 

Finally, the Court also evaluated and dismissed Already’s argument that it has already been harmed by Nike’s decision to assert its intellectual property rights in the first place.  "The fact that some individuals [such as Already customers] may base decisions [to avoid business with Already] on ‘conjectural or hypothetical’ speculation [as to what Nike may do in the future] does not give rise to the sort of ‘concrete’ and ‘actual’ injury necessary to establish Article III standing."  Op. at 10.  Even if Nike had hypothetically overstepped in reaching out to Already’s customers and "engag[ed] in harassment or unfair trade practices" (which the Court did not find), the Court nevertheless concluded that even under those circumstances, "invalidating Nike’s trademark would [not] do anything to stop it."  Op. at 11.  Although the Court expressed sympathy for the concern that small businesses may be harmed by aggressive enforcement tactics of larger businesses, it concluded that "lowering the gates for one party" to challenge the validity of intellectual property "lowers the gates for all."  Op. at 13.

In a concurrence joined by three other members of the Court, Justice Kennedy warned that lower courts should not take the Court’s holding "as an automatic means for the party who first charged a competitor with trademark infringement suddenly to abandon the suit without incurring the risk of an ensuing adverse adjudication."  Justice Kennedy cautioned that once litigation is commenced, an insufficient covenant not to sue may leave the defendant "and its business network to engage in costly satellite proceedings to demonstrate that future production or sales might still be compromised."  Because of this risk, Justice Kennedy cautioned lower courts to "proceed with caution" before reflexively ruling that a covenant not to sue "can be used to terminate litigation" that was commenced by a trademark owner.

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The Court’s decision opens at least the possibility that mark holders can avoid a judicial determination of the validity of their trademarks by voluntarily removing any threat of an infringement suit against a particular infringer and its interests.  Although Justice Kennedy’s concurrence counseled caution and suggested limits on the availability of this tactic, the Court’s main opinion reaffirms the longstanding principle that courts lack jurisdiction to hear a challenge to intellectual property that its owner has not asserted in a real "case or controversy."

Gibson, Dunn & Crutcher LLP

Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues. For further information, please contact the Gibson Dunn lawyer with whom you work, the authors of this alert, Howard S. Hogan (202-887-3640; [email protected]) or Jacob S. Siler (202-955-8529, [email protected]), or any of the following practice group co-chairs:

Intellectual Property Group
Wayne Barsky - Los Angeles (310-557-8183, [email protected])
Mark Reiter – Dallas (214-698-3360, [email protected])
Josh Krevitt – New York (212-351-2490, [email protected])

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