January 22, 2013
As previously reported, on January 9, 2012, in Already, LLC, dba YUMS v. Nike, Inc., the U.S. Supreme Court issued a unanimous decision concerning federal jurisdiction. The Court held that Nike’s grant of a broad covenant not to sue to the plaintiff Already rendered moot a counterclaim filed by Already for a declaration of invalidity of Nike’s trademark in its asserted shoe trade dress.
Nike brought suit against Already for infringement of Nike’s registered Air Force 1 shoe trade dress. Already counterclaimed for a declaration that Nike’s Air Force 1 shoe trade dress was invalid. Eight months into the litigation, and four months after Already filed its counterclaim, Nike provided Already with a covenant not to sue. Nike’s covenant stated the following:
[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.
After issuing this covenant, Nike moved the district court to dismiss its claims with prejudice. Nike also moved to dismiss Already’s invalidity counterclaim without prejudice on the ground that the covenant extinguished the case or controversy. Already opposed the dismissal of its counterclaim, arguing that its trademark invalidity claim was not moot.
The district court dismissed Already’s counterclaim, holding that Nike’s covenant removed any case or controversy, and on appeal, the Court of Appeals for the Second Circuit affirmed. The Supreme Court then granted certiorari to address the question “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.”
In its decision, the Court affirmed, holding that Already’s counterclaim was indeed moot in light of the covenant. The Court held that, to obtain dismissal of Already’s counterclaim, Nike had to have met “the formidable burden of showing that it is absolutely clear the allegedly wrongful behavior could not reasonably be expected to recur” (quoting an earlier case, Friends of the Earth, Inc. v. Laidlaw Environmental Services (TOC), Inc.). The Court found that the breadth and scope of Nike’s covenant met this substantial burden. Specifically, the Court observed that (1) Nike’s covenant was unconditional and irrevocable, (2) the covenant prohibited Nike from making any claims or demands, (3) the covenant protected Already and its distributors and customers, and (4) the covenant extended to current or previous shoe designs and any colorable imitations of Already’s designs. Additionally, Already presented no concrete plans to engage in conduct that was not covered by Nike’s covenant. For these reasons, the Court concluded that the case was moot because the challenged conduct “cannot reasonably be expected to recur.”
In its decision, the Court cautioned that trademark owners should be wary when using covenants not to sue to end trademark litigation, in light of the potential for loss of trademark rights.