Already LLC v. Nike, Inc.: Covenants Not to Sue Can Moot Invalidity Counterclaims

January 09, 2013

In a unanimous decision issued January 9, 2013, the Supreme Court ruled that a broadly worded covenant not to sue issued by a trademark owner foreclosed the possibility of future infringement litigation between the parties. The Court concluded that the covenant mooted the alleged infringer’s invalidity counterclaim and defeated Article III standing.1 In order to have standing to bring and maintain suit in federal court, Article III requires an actual case or controversy.2 This case or controversy must remain extant through all phases of the litigation, not only at filing. The case or controversy is extinguished and the case rendered moot “if the dispute is no longer embedded in any actual controversy about the plaintiffs’ particular legal rights.”3 The party asserting mootness bears the “formidable burden” of demonstrating that it is “absolutely clear” the voluntary cessation of its wrongful behavior “could not reasonably be expected” to recur in future.

I. The Facts of Already LLC v. Nike, Inc.

In 2009, Nike filed suit against Already, alleging the appearance of Already’s “Soulja Boys” and “Sugars” shoe lines infringed and diluted Nike’s Air Force 1 trademark. Already subsequently filed a counterclaim challenging the validity of the Air Force 1 mark. In March 2010, having determined Already had ceased the allegedly infringing activity, Nike issued a “Covenant Not to Sue.” The document contained an unconditional and irrevocable covenant to refrain from pursuing any infringement or dilution claims against Already, its related entities, and its distributors based on current or previous shoe designs or “colorable imitations thereof.”4 Nike then sought dismissal of its own claims and Already’s invalidity counterclaim on the ground that the covenant had terminated the case or controversy.

In opposition to Nike’s motion, Already maintained that the case or controversy survived and presented supporting affidavits stating that Already planned to introduce new versions of its shoe lines, that investors would not invest in Already unless Nike’s mark was invalidated, and that Nike had coerced retailers into not carrying Already’s shoes. The district court determined that no controversy remained because any future infringing products would necessarily be “colorable imitations” of the current product lines and thus protected by the covenant. The Second Circuit affirmed, noting that it was difficult to conceive of an infringing shoe not covered by the covenant. Because Already presented no intention to market a shoe not covered by Nike’s covenant not to sue, it failed to demonstrate continuing injury.

II. The Supreme Court’s Decision

The Court affirmed the decision of the lower courts and held that the broad covenant was sufficient to meet Nike’s burden of proving mootness. The terms of the covenant were such that the recurrence of Nike’s allegedly wrongful behavior—the assertion of an allegedly invalid trademark against Already—was wholly barred. Nike agreed that no prospect existed of an Already shoe that would infringe the Air Force 1 mark but fall outside the covenant.5 The Court pointed out that in taking this stance, Nike was likely foreclosed from later arguing that such a shoe did exist, and pursuing infringement claims against it. That is, Nike was effectively prohibited from ever asserting the Air Force 1 mark against any of Already’s activities, short of counterfeiting.

As Nike had demonstrated that the covenant encompassed all allegedly unlawful conduct, the burden shifted to Already to demonstrate that it either had developed or had concrete plans to develop products not covered by the covenant. The Court did not credit Already’s attempt to carry this burden. The only evidence presented, the Court said, was an affidavit from Already’s president stating that Already intended to introduce new shoe lines and make modifications to existing shoe lines. The affidavit did not claim that the new shoe lines would potentially infringe Nike’s mark but be beyond the scope of the covenant. Without this assertion, the affidavit was insufficient to refute Nike’s showing.

Already further argued that controversy was alive because Nike’s original decision to sue would inhibit Already’s legitimate economic activity and that Already inherently had standing to challenge Nike’s intellectual property as one of its competitors. Already submitted affidavits of potential investors stating that they would not consider investing unless Nike’s trademark was invalidated and argued Already’s activities would be hampered by the specter of future litigation. It argued that “‘[n]o covenant, no matter how broad, can eradicate the effects’ of a registered but invalid mark.”6 The Court roundly rejected both arguments. The Court found Already’s position would seemingly grant Article III standing to a market participant “whenever a competitor benefits from something allegedly unlawful” and rejected this “boundless theory of standing.”

The majority opinion also included a note of caution for those inclined to follow Nike’s model. While the Court found that Nike’s broadly drafted covenant clearly proved that its assertion of the mark against Already could not reasonably be expected to recur, it also noted such covenants are not without drawbacks. It suggested that third party use of the mark could negatively impact a trademark owner’s ability to demonstrate likelihood of confusion in future suits against other infringers.

III. Justice Kennedy’s Concurrence

Justice Kennedy’s concurring opinion, in which he was joined by Justices Thomas, Alito and Sotomayor, emphasized that broadly written covenants like Nike’s should not be an “automatic means” for a trademark owner to dismiss a suit while avoiding the risk of invalidation. The concurrence cautioned courts facing covenants not to sue in the future should “proceed with caution before ruling that they can be used to terminate litigation.” Justice Kennedy observed that the initial litigation can cause disruption to the alleged infringer’s future business relationships. He suggested it would be contrary to the trademark owner’s “formidable burden” for it to force its competitor to divulge future business plans or to otherwise hinder the competitor’s business to moot a suit that the trademark owner itself initiated. Justice Kennedy suggested that the trademark holder’s burden of proving mootness should include an initial showing that the business and supply network of the competitor would not be hindered by “satellite litigation over mootness or by any threat latent in the terms of the covenant itself.” In future cases, the concurrence urged, courts should strictly enforce proper allocation of the burden to the party asserting mootness to prevent unfairness.

Authored by Katherine E. Muller of Merchant & Gould, P.C.

 


 

1Already LLC v. Nike, Inc., No. 11-982, slip op. at 3-4 (2013).
2U.S. Const. art. III, § 2.
3Already, slip op. at 4 (internal quotation marks omitted).
4Id. at 6. The precise language of the covenant read: [Nike] unconditionally and irrevocably covenants to refrain from making any claim(s) or demand(s)… against Already or any of its…related business entities…[including] distributors…and employees of such entities and allcustomers…on account of any possible cause of action based on or involving trademark infringement, unfair competition, or dilution, under state or federal law…relating to the NIKE Mark based on the appearance of any of Already’s current and/or previous footwear product designs, and any colorable imitations thereof, regardless of whether that footwear is produced…or otherwise used in commerce before or after the Effective Date of this Covenant.
Id. (alterations and emphases in opinion).
5The Supreme Court also suggested that it could not conceive of such a shoe and stated that if it exists, “[i]t sits, as far as we can tell, on a shelf between Dorothy’s ruby slippers and Perseus’s winged sandals.”
Id. at 7.
6Id. at 11-12.