U.S. Supreme Court Says “Enough Already”

High Court tosses competitor’s trademark invalidity challenge where trademark owner had covenanted not to sue

In a rare decision involving trademark matters, the U.S. Supreme Court issued a decision in Already, LLC v. Nike Inc., a ruling that will likely impact disputes both inside and outside the trademark arena. The holding, which found that a defendant no longer had standing to cancel a trademark registration that the owner had asserted against the defendant, approves of a strategy where a plaintiff can eliminate standing in a case on behalf of both parties. The Court’s holding will likely affect litigation strategy in matters of enforcement, although the Court’s opinion contains some cautionary advice about using covenants not to sue.

Case History:

The original controversy arose when Nike filed suit against Already (d/b/a Yums) for trademark infringement of its famous “Air Force 1” shoe design. Already denied Nike’s allegations and filed a counterclaim against Nike, challenging the validity of its “Air Force 1” trade dress registration. While the dispute was still pending in the Southern District of New York, Nike unilaterally issued a “Covenant Not to Sue” in which Nike promised not to sue Already or any affiliated entity based on current or previous designs, or future designs of Already’s contested footwear that constitute a “colorable imitation” of Already’s current products. The covenant covered not just Already, but its distributors and customers.

Following the terms of the covenant, Nike abandoned its pending litigation against Already, but Already refused to drop its counterclaim against Nike. In response, Nike filed a motion to dismiss the counterclaim asserting that the action could no longer be heard because of the covenant not to sue eliminates any potential for future litigation. In response, Already argued that its counterclaim qualified as an existing case or controversy under Article III of the Constitution and was not barred by the “Covenant Not to Sue.”

The court was not persuaded by Already’s argument and granted Nike’s motion and dismissed Already’s counterclaim as “moot” for lack of an existing controversy. The Second Circuit affirmed, noting that the covenant was drafted so broadly that it could not conceive of a shoe that could infringe Nike’s trademark and not fit within the covenant.

Supreme Court’s Decision:

On June 25, 2012, the Supreme Court granted certiorari as to “whether a covenant not to enforce a trademark against a competitor’s existing products and any future ‘colorable imitations’ moots the competitor’s action to have the trademark declared invalid.” Already urged the Supreme Court to reverse, citing possible harm that may exist by the existence of Nike’s trademark that could be asserted against others. Justice Roberts, writing for the Court, disagreed. While the Court noted that “a defendant cannot automatically moot a case simply by ending its unlawful conduct once sued,” the Court found that Nike had satisfied its “formidable burden” to show that it “could not reasonably be expected” to resume its enforcement efforts against Already.

The Bottom Line:

While the decision gives a plaintiff comfort that its trademark registration will be insulated from counterclaims if the plaintiff grants a broad enough covenant, both the opinion of the Court and the concurring opinion noted that they should not be used lightly and warned against potential for abuse. Justice Roberts called granting covenants not to sue a potentially “risky long-term strategy for a trademark holder,” noting that allowing potential infringers or third parties to freely use a trademark that is identical or similar to a trademark owner’s mark could end up weakening the strength of the mark.

Justice Kennedy, writing the concurring opinion, noted that other measurable damage could occur through suing then mooting a claim – including business disruption. The concurrence advised, “[c]ourts should proceed with caution before ruling that [covenants not to sue] can be used to terminate litigation.” The ruling makes covenants look like an “easy out,” but for a given plaintiff, one might not be so easy.