U.S. Supreme Court Ruling Bars Competitor Defendant’s Trademark Invalidity Claim Following Plaintiff’s Covenant Not to Sue


January 23, 2013

The U.S. Supreme Court unanimously held that a covenant not to sue granted by Nike, Inc. to rival shoe manufacturer and alleged trademark infringer, Already, LLC, eliminated any controversy between the parties and prevented courts from considering Already’s counterclaim that Nike’s trademark was invalid. The high court’s opinion offers guidance to trademark holders on the effect of covenants not to sue on trademark litigation and enforcement strategy, while simultaneously opening the door and cautioning against the use of such covenants as a tactical means to disadvantage competitors.

Background and Ruling

The controversy began when Nike brought an action against Already alleging that one of Already’s athletic footwear products infringed and diluted Nike’s Air Force 1 trademark. Already denied the allegations and counterclaimed that Nike’s Air Force 1 trademark was invalid.

Approximately four months later, Nike granted Already a covenant not to sue, which promised that Nike would not raise any trademark or unfair competition claim against Already or its affiliates based on any of Already’s existing footwear designs or any future designs that constituted a “colorable imitation” of Already’s current products. Nike then moved to dismiss its infringement and dilution claims with prejudice and Already’s invalidity counterclaim without prejudice on the grounds that the covenant had extinguished the controversies.

Already opposed the dismissal of its counterclaim, arguing that Nike had not established that its voluntary cessation had mooted the case. The District Court dismissed Already’s counterclaim, concluding that there was no evidence that Already sought to develop any shoes not covered by the covenant, and, therefore, there was no longer a substantive controversy. The Second Circuit affirmed, finding it hard to conceive of shoes that would infringe the trademark, but not fall within the covenant, and concluding that, since Already could not show any continuing injury, no justiciable controversy remained.

The U.S. Supreme Court, in an opinion delivered by Justice Roberts, unanimously affirmed the lower courts’ ruling. The high court explained that a party claiming that its voluntary compliance moots a case bears the “formidable burden” of showing that it is “absolutely clear” the alleged wrongful behavior could not reasonably be expected to recur. The court found that Nike met its burden, and that Already failed to demonstrate that it has conceived of or has plans to market a shoe that would infringe Nike’s trademark and not be covered by Nike’s covenant, going so far as to say that “if such a shoe exists, it sits…on a shelf between Dorothy’s ruby slippers and Perseus’ winged sandals.” Given the covenant’s broad language, and Already’s failure to assert any concrete plans to engage in conduct not covered by the covenant, the Supreme Court concluded that the case is moot because the challenged conduct cannot reasonably be expected to recur. However, Justice Kennedy, in a concurring opinion joined by Justices Clarence Thomas, Samuel Alito and Sonia Sotomayor, cautions that covenants like the one drafted by Nike should not be used as an automatic means for the party initiating infringement proceedings to end litigation or circumvent challenges to its intellectual property.

Implications of Ruling

The impact of the high court’s ruling will be closely monitored, but the Supreme Court’s decision provides the following guidance with respect to intellectual property litigation and enforcement strategy:

  • Challenges to the validity of intellectual property can be mooted with a broad covenant not to sue.
  • Though the lower courts did not expressly invoke the voluntary cessation doctrine, the Supreme Court explained that the analyses employed by the lower courts addressed the same questions articulated by the Court under the voluntary cessation standard — namely, could the allegedly wrongful behavior reasonably be expected to recur? Nike’s covenant not to sue is irrevocable and unconditional; prohibits Nike from making any claim or demand against Already or its affiliates with respect to the trademark; protects Already’s distributors and customers; and covers previous, current and future designs that are “colorable imitations” of current Already shoe designs. The Supreme Court concluded that the broad scope of Nike’s covenant, together with the absence of any indication that Already would produce an infringing shoe, was sufficient to meet the voluntary cessation test. With this decision, the Supreme Court offers an example of how to craft a covenant not to sue that could effectively shelter a plaintiff’s intellectual property against invalidity claims by the defendant when the plaintiff abandons its infringement suit.

  • The existence of a covenant not to sue is not, by itself, sufficient to render challenges to intellectual property moot; the covenant must be broad enough to satisfy the voluntary cessation test.
  • The concurring opinion underscores the Supreme Court’s view that covenants like the one drafted by Nike should not be viewed as a means to avoid plaintiff’s risk of ensuing adverse adjudication or as a tactic to intimidate plaintiff’s competitors. Justice Kennedy’s opinion explained that such covenants should not be used by plaintiffs to force defendant competitors to reveal their future business plans or to otherwise disadvantage their competitors or their competitors’ business networks. The “formidable burden” to show the case is moot should require the plaintiff to substantially demonstrate that the business of the defendant and its supply network will not be disrupted or weakened by satellite litigation over mootness “or by any threat latent in the terms of the covenant itself.” The high court’s opinion relied on the breadth of Nike’s covenant, whereby Nike effectively surrendered all of its rights to sue Already for infringement of Nike’s Air Force 1 trademark. Trademark holders need to carefully consider issuing such broad covenants not to sue since they can have onerous consequences for the trademark holder’s rights, such as dilution of the trademark and limitations on potential recovery for damages.

  • Adverse effects on a competitor defendant’s business as a result of the plaintiff’s infringement claim are not sufficient grounds to compel a broader theory of standing.
  • Article III of the U.S. Constitution contains the “case or controversy” limitation on judicial power that is the cornerstone of the standing doctrine. The Supreme Court has found Article III to require that plaintiffs demonstrate actual injury, that it be fairly traceable to the defendant’s challenged action and that the injury is one that can be redressed by a favorable decision. Already argued that there are alternative theories to Article III injury that save the case from mootness: (a) that investors will be apprehensive about investing in Already as long as Nike is free to assert its trademark; (b) that Nike’s decision to sue in the first place adversely impacted Already’s business; and (c) that, as one of Nike’s competitors, Already inherently has standing to challenge Nike’s intellectual property. The Supreme Court did not find any of these theories sufficient to support Article III standing. Specifically, the Court stated that, once the defendant has shown that the challenged conduct cannot be reasonably expected to recur, the fact that some individuals base decisions on speculation does not give rise to the concrete and actual injury necessary to establish Article III standing. In addition, if Nike were engaging in harassment or unfair business practices to intimidate Already, Already did not demonstrate how invalidating Nike’s trademark would stop such conduct.
    Most notably, the Supreme Court expressly rejected Already’s argument that, as one of Nike’s competitors, Already inherently had standing to challenge the validity of Nike’s intellectual property. This argument posits that Article III standing should be granted to any market participant whenever a competitor benefits from something allegedly unlawful, and the Court stated that it has never accepted “such a boundless theory of standing.” Furthermore, “[l]owering the gates for one party lowers the gates for all,” and accepting such a broad theory of standing would permit larger companies with more resources to challenge the intellectual property portfolios of smaller companies on the basis that they are competitors in the same market and encourage litigation as an anticompetitive weapon.

This article was originally published by Bingham McCutchen LLP.