Nike’s Successful Retreat Strategy: Trademark Defendant’s Invalidity Counterclaim Is Moot Following Plaintiff’s Covenant Not to Sue

by Foley Hoag LLP - Trademark, Copyright & Unfair Competition
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Nike, having sued competitor Already LLC for infringing its marks, later issued a covenant not to sue to Already and sought to dismiss the case.  Defendant Already, however, had filed a counterclaim seeking a declaration that Nike’s mark was invalid, and argued that that counterclaim should proceed.  The District Court dismissed the counterclaim, and the Second Circuit affirmed that there was no ongoing case or controversy.  In an opinion issued yesterday, the Supreme Court affirmed this outcome.

Much of the affirming opinion came down to semantics.  The Court stated that its analysis differed from that of the district court and Second Circuit because it applied the “voluntary cessation doctrine” (which had been, until now, applicable to defendants who ceased their infringing activity, rather than plaintiffs who covenanted not to sue).  The Supreme Court therefore placed the burden of proof on Nike to show that the case was moot.  However, all Nike had to do in order to satisfy this burden was, apparently, to point to its covenant not to sue:  at that point the burden rather clearly shifted back.  Given Nike’s covenant, the court wrote, “it was incumbent on Already to indicate that it engages in or has sufficiently concrete plans to engage in activities not covered by the covenant . . .  But when given the opportunity before the District Court, Already did not assert any intent to design or market a shoe that would expose it to any prospect of infringement liability.”  Already had submitted affidavits in the district court stating that it was considering new lines of shoes, that investors were shying away from it in light of Nike’s efforts to enforce its registration, and that Nike was continuing to intimidate customers.  The Court held that these were not sufficient to show an ongoing case or controversy.  Indeed, the Court acknowledged that even though it applied a nominally different doctrinal standard, no remand was necessary because the district court and Second Circuit had addressed the “same questions we have addressed today under that standard.”

The much-discussed issue of trademark “bullying” (see prior posts) came up in the majority opinion, as the Court addressed two amicus briefs arguing that all competitors in a given field should have standing to challenge the validity of issued marks.  The court acknowledged their argument that “dismissing this case allows Nike to bully small innovators lawfully operating in the public domain” by using suits, and threats of suits, while always keeping the option to abort.  The court dismissed this, however, as a “policy objection” rather than a constitutional standing argument.  It also noted that a broader doctrine of standing could be a two-edged sword from a policy perspective, because “larger companies with more resources [would] have standing to challenge the intellectual property portfolios of their more humble rivals — not because they are threatened by any particular patent or trademark, but simply because they are competitors in the same market.”

A concurrence by four of the justices was “written to underscore that covenants like the one Nike filed here ought not to be taken 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.”  However, since the concurring justices agreed with the result notwithstanding Already’s affidavits, it seems clear that a well-drafted, broad covenant will do the job in most cases.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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