Trademark Law | Expert Legal Commentary
April 2, 2013
Already, LLC v. Nike, Inc.: Supreme Court Affirms that Covenant Not to Sue Can Moot Trademark Case
Already, LLC v. Nike, Inc.
Tom Zuber and Jeff Zuber of Zuber Lawler & Del Duca
The Supreme Court recently upheld that a covenant not to sue can moot a trademark case. In Already, LLC v. Nike, Inc., 11-982 (U.S. Jan. 9, 2013), the Court held that a trademark holder’s covenant not to sue extinguished the case or controversy, rendering moot the defendant’s counterclaim of trademark invalidity.
Nike sued competitor Already, LLC (“Already”) for allegedly infringing Nike’s Air Force 1 trademark. Air Force 1 is one of Nike’s signature shoe lines. Already counterclaimed, arguing that the trademark was invalid.
Eight months after filing its complaint, Nike issued a covenant not to sue in favor of Already. The covenant promised that Nike would not raise any trademark or unfair competition claims based on any of Already’s existing designs or future designs that constituted a “colorable imitation” of existing designs. The covenant covered Already as well as any affiliated entities. As a result, Nike moved to dismiss its own claims with prejudice and those of Already without prejudice. Already opposed dismissal, arguing that Nike had not established that its voluntary cessation had mooted the case. Already cited continuing problems due to Nike’s suit, including investor hesitation and distributors refusing to carry Already’s shoes.
The district court dismissed Already’s counterclaim. The court placed the burden on Already to prove subject matter jurisdiction over its counterclaim. In its analysis, the court read Nike’s covenant broadly, concluding that “any of Already’s future products that arguably infringed the Nike Mark would be ‘colorable imitations’ of Already’s current footwear and therefore protected by the covenant.” (internal quotations omitted). The court found no evidence that Already sought to develop shoes not protected by the covenant. Thus, the court held that there was no longer “a substantial controversy…of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.”
The Second Circuit affirmed under a “totality of circumstances” test. To determine whether a covenant not to sue eliminates a justiciable case or controversy, courts should look to the totality of circumstances, including “(1) the language of the covenant; (2) whether the covenant covers future, as well as past, activity and products; and (3) evidence of intention…on the part of the party asserting jurisdiction to engage in conduct not covered by the covenant.” Like the district court, the Second Circuit could not envision a shoe that would infringe Nike’s trademark but not fall within the scope of the covenant. The court also found no evidence that Already had asserted any intention to market such a shoe. The court concluded that Already could not show any continuing injury, and held that no justiciable controversy remained.
Nike’s Covenant Sufficiently Broad; Meets Voluntary Cessation Doctrine
Writing for a unanimous Court, Chief Justice Roberts disagreed with the Second Circuit’s analysis but affirmed the result. Generally, Article III of the Constitution limits federal courts to hear only “actual controversies” that must be extant at all stages of review. A case becomes moot “when the issues presented are no longer ‘live’ or the parties lack a legally cognizable interest in the outcome.” Murphy v. Hunt, 455 U.S. 478, 481 (1982).
Defendants cannot, however, automatically moot a case by ending its unlawful conduct once sued. To prevent this outcome, the voluntary cessation doctrine demands that “a defendant claiming that its voluntary compliance moots a case bears the formidable burden of showing that it is absolutely clear the allegedly wrongful behavior could not reasonably be expected to recur.” Friends of the Earth, Inc. v. Laidlaw Environmental Services, Inc., 528 U.S. 167, 190 (2000).
Under this standard, Nike had the burden to show that it could not reasonably be expected to resume its enforcement efforts against Already. The Court found that the breadth of the covenant met this burden. “The covenant is unconditional and irrevocable. Beyond simply prohibiting Nike from filing suit, it prohibits Nike from making any claim or any demand. It reaches beyond Already to protect Already’s distributors and customers. And it covers not just current or previous designs, but any colorable imitations.” Like the lower courts, the Court could not find any evidence that Already planned to produce a shoe that infringed but did not fall within the covenant, nor did the Court think that such a shoe could even exist. Thus, the Court found that Nike had met its burden.
The burden shifted to Already to prove that “it engages in or has sufficiently concrete plans to engage in activities not covered by the covenant.” The Court noted that Already had every incentive and opportunity to do so in the district court and before the Second Circuit, but asserted no concrete plans to engage in conduct not covered by the covenant that would otherwise give Nike a reason to reassert its trademark claim. Thus, the Court declared that “we can conclude the case is moot because the challenged conduct cannot reasonably be expected to occur.”
Court Rejects Standing on Already’s Alternative Theories of Continued Injury
Separately, Already argued against mootness by proffering three alternative theories of Article III injuries. The Court rejected all three:
First, the litigation with Nike caused hesitation among Already’s current and potential investors. Some were dissuaded from investing, and others would invest only if Already won the lawsuit invalidating Nike’s trademark. The Court, however, declared that once it is “absolutely clear” that challenged conduct cannot reasonably be expected to recur, as is here, “the fact that some individuals 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.” (internal quotations omitted).
Second, Already argued that the threat of future litigation hampered its ability to continue its business. But the Court declared that it had never granted standing to a plaintiff to pursue declaratory relief merely on the basis of being sued once before. The Court admonished Already, saying that “there is no reason for Already to be so shy” because it is the only one of Nike’s competitors with an enforceable covenant.
Third, Already contended that as a “participant in the field,” it had standing to challenge Nike’s trademark. Already warned that if Nike was able to moot the case, it would set a precedent for larger companies “to register and brandish invalid trademarks to intimidate smaller competitors, avoiding judicial review by issuing covenants in the rare case where the little guy fights back.” The Court disagreed with this “broad theory” of standing, saying that to accept Already’s theory would cut both ways – larger companies would have standing to sue smaller ones based solely on “participant in the field” standing and could use trademark litigation as a weapon.
The Court characterized Already’s only legally cognizable injury as Nike’s steps to enforce its trademark, which the Court said was “now gone, and…cannot reasonably be expected to recur.” As none of Already’s alternative theories were accepted by the Court, the case was declared “clearly moot.” The Court rejected the Solicitor General’s request for a remand, saying that Already had every chance, but failed to offer evidence that it planned to create a shoe that would infringe but would fall outside the scope of the covenant.
Concurring Opinion: Future Cases May Invite More Scrutiny
Justice Kennedy wrote the concurring opinion, joined by Justices Thomas, Alito, and Sotomayor. Justice Kennedy used the concurrence to warn trademark holders that future cases involving covenants not to sue may be examined with more scrutiny.
The concurring justices were concerned that charges of trademark infringement can be disruptive to a manufacturer in its relations to its distributors, customers, and investors. Such disruptions may be “an indication that the market itself anticipates that a new line of products could be outside the covenant not to sue yet still within a zone of alleged infringement.”
Due to this concern, the justices proposed that the “formidable burden” of the voluntary cessation test require a trademark holder “at the outset, to make a substantial showing that the business of the competitor 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 concurring justices were concerned that it would be unfair to allow the trademark holder to issue a covenant and then use mootness proceedings to force a competitor to expose its future business plans.
In this case, the Justice Kennedy agreed with the Court that further proceedings were unnecessary due to Already’s litigation stance and the fact that Nike would be bound by the broad interpretation of the covenant as interpreted by the district court. Thus, he joined the opinion and judgment of the Court.
The Supreme Court’s decision in Already gives trademark holders more guidance on the use of covenants not to sue in holding off potential trademark counterclaims. Trademark holders and their counsel should note how a broadly-worded covenant that encompasses all potential claims and parties may be effective in passing the voluntary cessation doctrine, as long as concerns highlighted by the concurring opinion are also satisfied. Trademark holders and participants in the field generally should contact experienced trademark counsel to see how Already may affect your ability to protect your valuable intellectual property.
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