Supreme Court Decision May Allow Infringement Plaintiffs to Use a Covenant Not to Sue to Avoid an Invalidity Ruling

In an important intellectual property ruling likely to affect patent law as much as trademark law, the U.S. Supreme Court issued its opinion in Already, LLC v. Nike, Inc., No. 11-982 (U.S. Jan. 9, 2013), unanimously holding that a trademark owner (Nike) who has withdrawn its infringement claims can avoid counterclaims for invalidity by providing a broad covenant not to sue.  The decision is a victory for intellectual property owners who want to end infringement actions they have initiated without subjecting their intellectual property to potential validity challenges, but infringement plaintiffs should take heed of the “formidable burden” they face in convincing a court to dismiss such a case.  In particular, the decision confirms that courts need to review the breadth of any covenant, and the future plans of the alleged infringer, to determine whether there is any risk that the party offering the covenant will resume enforcement actions against the defendant sometime in the future.

Background

Nike sued Already LLC d/b/a Yums (“Already”) for trademark infringement, alleging that two of Already’s athletic shoes infringed Nike’s trademarks, including registered rights in the appearance of Nike’s Air Force 1 shoes. Already filed a counterclaim seeking, among other things, to have Nike’s trademark declared invalid.  Nike later dismissed its own infringement claims with prejudice, provided Already with a broad covenant not to enforce its trademark against Already, and moved to dismiss Already’s counterclaim.  Already resisted dismissal of its counterclaim, pressing for a ruling of invalidity.  The issue then raised was whether Nike’s covenant not to enforce its trademark mooted Already’s counterclaim for invalidity.  The Supreme Court affirmed that it did.

The Supreme Court’s Decision

Under the U.S. Constitution, federal courts only have the power to hear “cases or controversies.” That means when a case becomes moot for any reason, it is no longer subject to federal court jurisdiction.  The Court held that a case does not become moot, however, merely because a defendant stops its allegedly wrongful conduct, or a plaintiff voluntarily dismisses its claims.  The Supreme Court wrote that a party who claims mootness in a litigated matter bears a “formidable burden of showing that it is absolutely clear the allegedly wrongful behavior could not reasonably be expected to recur.”

Not all covenants not to sue will suffice to moot a case, and the Supreme Court confirmed  the key to a finding of mootness is the breadth of the covenant.  Here, Nike’s covenant rendered the case moot because it (1) was “unconditional and irrevocable,” (2) “prohibit[ed] Nike from making any claim or any demand” (the Court emphasized both), (3)  protected Already’s distributors and customers, and (4) covered not just current or previous designs, but any “colorable imitations.”  The Court also focused on the fact that Already presented no evidence of plans to market a product that would arguably infringe Nike’s trademark rights yet fall outside the scope of the covenant.  As a result, Nike walked away with its trademark registration intact.

Potential Implications

Although this is a trademark case, this decision likely will also affect other kinds of intellectual property, including patents. According to the Court, all such cases may be moot if, after considering a covenant’s language and the plaintiff’s anticipated future activities, it is determined that “it is ‘absolutely clear’ that the allegedly unlawful activity cannot reasonably be expected to recur.”  The existence of a covenant not to sue, by itself, has no talismanic significance.  Courts will review the language of each covenant on a case-by-case basis to see if it meets this test as well as consider evidence from the alleged infringer about its future plans. 

Before offering a covenant not to sue, therefore, litigants should cautiously consider both its long-term and short-term impact, including whether entering into such a covenant may render future litigation claims moot.