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Trademark Law — Effect of Covenant Not To Sue

SUPREME COURT RULES THAT COVENANT NOT TO SUE FOR TRADEMARK INFRINGEMENT DIVESTED DEFENDANT OF STANDING TO ASSERT COUNTERCLAIM TO INVALIDATE MARK

On January 9, 2013, the Supreme Court, in a unanimous decision, held that a covenant not to enforce a trademark against a competitor’s existing products and any future “colorable imitations” of those products mooted the competitor’s counterclaim to have the trademark declared invalid.  See Already LLC v. Nike Inc., No. 11-982, 568 U. S. ____ (2013) (Jan. 9, 2013) (slip op.)Justice Roberts delivered the opinion for the Court, with Justices Kennedy, Thomas, Alito and Sotomayor concurring. 

In Already, Plaintiff, Nike, filed suit against Already in the Southern District of New York alleging that Already’s “Sugars” and “Soulja Boys” sneakers infringed and diluted Nike’s Air Force 1 trademark.  Id. at 1.  Already denied Nike’s allegations and counterclaimed, contending that the Air Force 1 mark is invalid.  Id.  After eight months of litigation, Nike issued a “Covenant Not to Sue,” which states, in relevant part:

Already’s actions . . . no longer infringe or dilute the NIKE Mark at a level sufficient to warrant the substantial time and expense of continued litigation.

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[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 all customers . . . 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. at 1-2, 6 (internal emphasis omitted; citations omitted).  The Southern District of New York deemed this language sufficient to moot Already’s counterclaim and dismissed the suit for lack of a justiciable case or controversy (i.e., for lack of Article III standing).  Id. at 2. The Second Circuit affirmed.  Id. at 3.

In its analysis, the Supreme Court stated that, under the voluntary cessation doctrine, “it was Nike’s burden to show that it ‘could not reasonably be expected’ to resume its enforcement efforts against Already.”  Id. at 5 (quoting Friends of the Earth, Inc. v. Laidlaw Environmental Services (TOC), Inc., 528 U. S. 167, 190 (2000)).  The Court held that Nike’s broad covenant not to sue indeed met that burden and that, consequently, the burden shifted to Already “to indicate that it engages in or has sufficiently concrete plans to engage in activities not covered by the covenant.”  Id. at 7-8.  Observing that Already had failed, despite multiple opportunities, to “assert any intent to design or market a shoe that would expose it to any prospect of infringement liability” (id. at 8), the Court held that Already had not met that burden.  Id. at 8-9.

The Court also considered Already’s alternative arguments for Article III standing, which included that (1) Nike’s trademark registration continued to deter potential investors from investing in Already (id. at 10); (2) Nike had indicated to Already’s retailers that Nike would take retaliatory action against them if they continued to carry Already’s shoes (id. at 11); and (3) as a competitor of Nike, Already is harmed by the improper registration of the Air Force 1 mark and therefore has standing to seek its invalidation (id. at 11-14).  The Court rejected each of these arguments.

The Court reasoned that, because the covenant not to sue foreclosed any reasonable expectation that Nike would sue Already for infringement of the Air Force 1 mark, the fact that some of its potential investors “may base decisions on ‘conjectural or hypothetical’ speculation does not give rise to the sort of ‘concrete’ and ‘actual’ injury necessary to establish Article III standing.”  Id. at 10 (citation omitted).  The Court similarly reasoned that, because the covenant not to sue extends to Already’s distributors and customers, there was no reasonable expectation that Nike would bring suit against those entities.  Id. at 11.  The Court also observed that “Already ha[d] not explained how invalidating Nike’s trademark would do anything to stop [Nike from intimidating retailers into not stocking Already’s products].”  Id.

As to the argument that trademark registration confers Article III standing to seek invalidation of a competitor’s mark, the Court deemed that theory of standing to be overly broad and not supported by any precedent.  Id. at 12-13.  The Court opined that, if it were to rule that mere registration is enough to provide a competitor with standing to sue, it could have the undesirable effect of empowering large companies to use their resources to harass smaller competitors with lawsuits targeting their trademarks.  Id. at 13.

The circumstances of Already bring into focus some of the challenges that smaller defendants face in infringement litigation with large competitors.  It is difficult to know Already’s motivation for litigating, all the way to the Supreme Court, its right to continue its suit against Nike notwithstanding the covenant not to sue.  However, if credence is to be given to Already’s arguments, it indeed continued to have an interest in vindicating itself in the eyes of at least some potential investors and retailers by continuing to litigation the issue of whether Nike’s Air Force 1 mark is invalid.  Already may have also perceived that, if it were allowed to continue its suit, it might have leverage to negotiate a settlement agreement with Nike that would have built-in business benefits, such as precluding Nike from taking any further action to convince retailers not to carry Already’s sneakers.  See id. at 11.

Regardless of what Already’s specific motivations might have been, there is no question that when a defendant is the target of a trademark infringement action – or an infringement action of any sort – it can have a significant impact on the defendant’s ability to attract investors or to convince distributors or retailers to sell the products implicated by the plaintiff’s claims.  Further, the lawsuit may result in a stigma attaching to the defendant that can be difficult to remove in the absence of court order or judgment vindicating the defendant.  While the impact of a trademark infringement suit may be offset to some extent by a quick settlement or defeating a motion for a preliminary injunction, it is not always the case that a suit settles quickly, and where a preliminary injunction issues, the impact on the defendant’s business can be worse than that of the lawsuit alone, even if a settlement is reached shortly thereafter.  In short, the defendant in an infringement suit may face significant business challenges as a result of litigation, to which there may not be any simple approach to overcoming.

The concurring justices in Already recognized some of these issues and urged caution, going forward, in the application of the Court’s holding:

In later cases careful consideration must be given to the consequences of using a covenant not to sue as the basis for a motion to dismiss as moot. . . .  The very suit the trademark holder initiated and later seeks to declare moot may still cause disruption and costs to the competition. . . .  It would be most unfair to allow the party who commences the suit to use its delivery of a covenant not to sue as an opportunity to force a competitor to expose its future business plans or to otherwise disadvantage the competitor and its business network, all in aid of deeming moot a suit the trademark holder itself chose to initiate.

Id. (concurring opinion at 3).

Given the tendency of trademark suits to settle relatively early, and the potential negative consequences to a trademark owner that could flow from failure to vigorously enforce its marks, it is not clear how often the issue presented in Already will arise.  In a case where a plaintiff trademark owner faces risks to its marks in litigation or perceives the costs of continuing litigation to enforce the marks as greatly outweighing the benefits of doing so, issuing a covenant not to sue may be an appropriate tactic.  Where a plaintiff issues such a covenant, and the defendant still wishes to pursue a counterclaim to invalidate the mark, the question will remain whether the circumstances justify an outcome similar to that of the Already case or, instead, a finding that a justiciable controversy exists notwithstanding the covenant.

Authored by Jason B. LattimoreView Jason Lattimore's profile on LinkedIn

© 2013, Jason B. Lattimore, Esq. LLC

 

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