Brand owner's broad covenant not to sue may render invalidity counterclaims moot.
On January 9, the U.S. Supreme Court in Already, LLC v. Nike, Inc. held that a plaintiff trademark owner's dismissal of its infringement claims, coupled with the grant of a broad and irrevocable covenant not to sue a competitor, could render the competitor's invalidity counterclaims moot. This holding clarifies the standard governing how counterclaims can be rendered moot in the event the underlying infringement claim is dropped. Intellectual property owners should take this standard into account when developing and refining their intellectual property enforcement strategies.
Nike, a well-known designer and manufacturer of athletic footwear, filed a trademark infringement suit in federal district court against Already, another designer and manufacturer of footwear, alleging that Already's "Sugars" and "Soulja Boys" shoe lines infringed and diluted Nike's trademark in its "Air Force 1" product configuration. Already denied Nike's allegations and filed a counterclaim alleging that Nike's Air Force 1 claimed trademark was invalid.
Eight months after filing its complaint, Nike concluded that "'Already's actions . . . no longer infringe or dilute the [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. In the covenant, Nike agreed not to assert any claim or demand against Already or any affiliated entity (including distributors and their employees and customers) based on any of Already's existing shoe designs or any future Already designs that constituted a "colorable imitation" of Already's current products. After issuing the covenant, Nike moved to dismiss both its infringement claim and Already's invalidity counterclaim on the ground that the covenant eliminated the existence of a case or controversy necessary for the survival of Already's counterclaim. Already argued that, even though Nike had agreed to refrain from suing Already, a case or controversy still existed because Already would still be injured by the continued existence of Nike's trademark registration. The trial court dismissed Already's counterclaim and the U.S. Court of Appeals for the Second Circuit affirmed the trial court's decision. The Supreme Court granted certiorari.
The Supreme Court's Decision
The Supreme Court unanimously affirmed the decision of the Second Circuit, which dismissed as moot Already's counterclaim of trademark invalidity in light of Nike's broad covenant not to sue Already in the future. The district court held that the plaintiff's broad and irrevocable covenant not to sue removed the existence of an "actual case or controversy," an element necessary to demonstrate standing in federal court.
Article III of the Constitution prohibits federal courts from rendering advisory opinions or deciding legal disputes in the absence of an "actual case or controversy." The Supreme Court noted that an "actual controversy" must exist throughout the entirety of litigation, not just at the time the complaint is filed. A case becomes moot—and therefore no longer presents a case or controversy—when the issues presented are no longer live or when the parties no longer have a legally cognizable interest in the outcome. The Court held that the "voluntary cessation" doctrine applies when determining whether a declaratory judgment counterclaim is moot. Specifically, in this case, Nike bore the "formidable burden" of showing that another trademark infringement claim against Already was not reasonably likely to occur.
The Court determined that Nike had overcome its formidable burden under the voluntary cessation doctrine. Specifically, the Court reviewed Nike's covenant and determined that it was sufficiently broad to render Already's counterclaim moot for the following reasons: it was unconditional and irrevocable; it applied to Already's past and current shoe designs, as well as future designs that were "colorable imitations"; it applied to its distributors and customers; and it prohibited Nike from not only filing a suit, but also from making any claim or demand. Because the Court was unable to imagine a scenario under which Nike could bring another Air Force 1 trademark infringement claim against Already (absent blatant counterfeiting), Already's invalidity counterclaim was held to be moot.
The Court's holding is consistent with its 2007 decision in MedImmune, Inc. v. Genentech, Inc., which liberalized declaratory judgment jurisdictional considerations. In MedImmune, the Court held that a genuine threat of enforcement of intellectual property rights that inhibits commercial activity may support standing for a declaratory judgment claim. In the Already case, the Court found that Nike's covenant eliminated any genuine threat of future enforcement by Nike.
Implications of the Court's Holding
The Already decision is important to all trademark owners, particularly with respect to developing and implementing enforcement strategies. One of the risks associated with bringing a trademark infringement claim is that the defendant might file a counterclaim for a declaratory judgment that the plaintiff's trademark is invalid. The Court's decision clarifies that a plaintiff can successfully have the counterclaim dismissed by issuing a broad covenant not to sue.
Whether a covenant not to sue will divest a federal court of Article III jurisdiction over an invalidity counterclaim depends on whether the breadth of the covenant renders the threat of future litigation between the same parties based on the same trademark remote or nonexistent. Although future cases will hinge on the specific underlying facts, the Supreme Court's opinion sets forth the general elements necessary for a sufficiently broad covenant, including that it (i) be unconditional and irrevocable; (ii) cover the defendant and related entities; (iii) cover not only all current and previous products, but also "colorable imitations"; and (iv) prohibit the plaintiff from making any future claims or demands with respect to the pertinent trademark.
Although a broad covenant not to sue may be desirable to obtain dismissal of a trademark invalidity counterclaim, the decision to issue such a covenant must be balanced against the risk that such covenants could negatively impact the strength and enforceability of the trademark in the future. For instance, depending on the facts, broad covenants not to sue on multiple occasions could result in the loss of trademark rights by the trademark owner or a decrease in the owner's ability to assert such rights against other third parties not covered by the covenant. As a result, trademark owners should consider these issues before they initiate trademark infringement litigation, particularly when the alleged infringement is limited in scope and the infringement is not seriously impacting the trademark owner's business.
. Already, LLC v. Nike, Inc., No. 11-982 (U.S. Jan. 9, 2013), available here.
. Id. at 2.
. Id. at 5–6.
. 549 U.S. 118 (2007).