Sometimes, litigants are forced to reevaluate their strategy mid-course. Occasionally, a plaintiff in a pending trademark infringement action faces a cancellation counterclaim that poses a real threat to the plaintiff’s trademark. In that situation, to avoid the risk of cancellation or a declaration of invalidity, the plaintiff may want to voluntarily dismiss its claim and grant a covenant not to sue to the alleged infringer. A recent Supreme Court decision makes it clear that this is a viable tactic if the covenant is sufficiently broad.

On January 9, 2013, in Already, LLC dba YUMS v. Nike, Inc., No. 11-982, the U.S. Supreme Court unanimously affirmed a Second Circuit decision holding that Nike’s covenant not to enforce its “Air Force 1” registered trademark covering several of the shoe’s design elements against footwear competitor Already, LLC dba YUMS’ (“YUMS”) existing products and any future “colorable imitations” renders moot YUMS’ counterclaim to have the trademark declared invalid.

The YUMS decision is significant because it clarifies whether and when the voluntary cessation doctrine applies to a trademark owner’s unilateral issuance of covenant not to sue. Under the voluntary cessation doctrine, a defendant claiming that its voluntary compliance moots a case must show that it is absolutely clear the allegedly wrongful conduct could not reasonably be expected to recur.

In YUMS, the Court confirmed that the doctrine applies when a mark owner issues a covenant not to sue in conjunction with its voluntary dismissal of its infringement action. This divests the federal court of Article III jurisdiction over a counterclaim challenging the validity of the trademark owner’s mark. The decision also provides guidance on how to draft a covenant not to sue to meet the “formidable burden” borne by a party defending an invalidity action to demonstrate that such party could not reasonably be expected to resume enforcement efforts against its competitor challenging the pleaded mark’s validity.

Background

Since the early 1980s, when Nike designed its Air Force 1 sneaker, the model has sold millions. In July 2009, Nike sued YUMS in the U.S. District Court for the Southern District of New York for trademark infringement, trademark dilution, and related claims. Nike claimed to hold several federal trademark registrations for the shoe, including one that protects the stitching design, exterior panels, and relative position of these elements on the shoe. Nike claimed that YUMS infringed this registered trademark by selling shoes – including the models known as “Sugars” and “Soulja Boys” – confusingly similar to the Air Force 1 design.

In November 2009, YUMS counterclaimed for a declaratory judgment that the Nike stitching design did not function as a valid trademark, and to invalidate the registration.

In March 2010, Nike sent a letter to YUMS, stating that YUMS no longer infringed on Nike’s trademark “at a level sufficient to warrant the substantial time and expense of continued litigation.” The letter went further to promise that Nike would not raise against YUMS or YUMS’ affiliated entities any trademark or unfair competition claim based on any of YUMS’ existing footwear designs, or any future YUMS designs that constituted a “colorable imitation” of YUMS’ current products. Nike then moved to dismiss its claims with prejudice, and to dismiss YUMS’ counterclaim for lack of subject matter jurisdiction on the theory that the covenant had extinguished the case or controversy. YUMS opposed dismissal of its counterclaim.

The district court dismissed YUMS’ counterclaim without prejudice, finding that YUMS bore the burden of establishing that the court had subject matter jurisdiction over YUMS’ declaratory relief counterclaim. The court also found that, given that Nike’s broad covenant applied to future colorable imitations of YUMS’ current footwear, and given the absence of any evidence that YUMS was developing any shoes not covered by the covenant, there was no longer a “substantial controversy . . . of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.” Nike, Inc. v. Already, LLC d/b/a Yums, No. 09 Civ 6366, 2011 WL 310321, at *6-7 (2011).

The Second Circuit affirmed. It held that, in determining whether a covenant not to sue eliminates a justiciable case or controversy, courts should look to the totality of the circumstances. Applying this analysis to Nike’s covenant, and noting that the covenant covers past and future sales of both existing and colorable imitations, the Second Circuit found it hard to conceive of a shoe that would infringe Nike’s Air Force 1 stitching design trademark – yet not fall within the covenant. Nike, Inc. v. Already, LLC d/b/a Yums, 663 F.3d 89, 97 (2d Cir. 2011).

The Supreme Court’s Decision

In a unanimous decision, the Supreme Court affirmed the Second Circuit’s ruling, holding that Nike’s covenant not to sue rendered moot YUMS’ invalidity claim. The Court explained that the voluntary cessation doctrine applies. To prevent a defendant from engaging in unlawful conduct, stopping when sued to have the case declared moot, and then picking up where it left off, “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.” (Quoting Friends of the Earth, Inc. v. Laidlaw Envtl. Services (TOC), Inc., 528 U.S. 167, 190 (2000), emphasis added.) Thus, Nike had the burden of proving it could not reasonably be expected to resume enforcing its Air Force 1 trademark against YUMS.

The Court found that the breadth of Nike’s covenant sufficiently met this burden because the covenant (a) is unconditional and irrevocable; (b) prohibits Nike from making any claim or demand; (c) protects both YUMS and its distributors and customers; and (d) covers not only YUMS’ current or previous footwear designs, but also colorable imitations thereof. The Court also emphasized the fact that YUMS had not represented, at any stage of the litigation, that it had concrete plans to design or market a shoe that arguably infringes Nike’s registered mark and would not be covered by the covenant. Thus, the Court concluded the controversy must be moot.

To support Article III standing, YUMS had proffered three theories: (a) as long as Nike could assert its trademark, investors would be apprehensive about investing in YUMS; (b) dismissing the case would allow Nike to bully small innovators; and (c) as a Nike competitor, it inherently has standing to challenge Nike’s intellectual property. The Supreme Court rejected each as irrelevant to the standing issue.

Justice Kennedy wrote a concurring opinion, joined by Justices Thomas, Alito and Sotomayor, to underscore the point that courts should not view covenants not to sue as an automatic means for a party that first sued a competitor for trademark infringement to avoid the risk of an adverse decision by abandoning the suit. Indeed, Justice Kennedy further cautioned that courts should carefully consider the consequences of deeming a suit moot based on a covenant not to sue, and then proceed with caution before ruling that such a covenant can be used to terminate litigation. Justice Kennedy added, “The formidable burden to show the case is moot ought to require the 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.”

Implications of the Decision

The YUMS decision confirms that holders of registered trademarks who sue for infringement can unilaterally issue a broad covenant not to sue the alleged infringer while voluntarily dismissing its infringement action with prejudice, and that this will divest the district court of jurisdiction over a declaratory judgment claim or cancellation counterclaim. Successful use of this tactic permits the trademark holder, in essence, to live to fight another day against other competitors that might be interested in challenging its mark.

Be mindful that this strategy is not necessarily a silver bullet permitting a trademark owner to end litigation to avoid potential adverse consequences. A covenant not to sue must be sufficiently broad and clearly signal that the mark owner cannot reasonably be expected to later enforce its mark against the alleged infringer. To illustrate further:

  • The covenant should state that it applies to future colorable imitations of the opponent’s existing products, or language to similar effect.
  • The covenant should not contain any conditions or qualified promises.
  • The trademark holder also should ensure that its opponent does not have plans to design or market a product that arguably infringes the relevant mark – but would not be covered by the covenant.

Where a trademark owner’s covenant fails to satisfy the high standard, the trademark owner could find itself in a very unpleasant situation whereby its infringement claims are dismissed, but the challenge to the validity of its mark remains.

The YUMS decision also potentially has wide-ranging implications for litigation of other forms of intellectual property. Patentees bringing infringement actions sometimes voluntarily terminate those actions and grant a covenant not to sue an alleged infringer to avoid exposing themselves to the infringer’s challenges that the patent at issue is invalid or unenforceable. The Supreme Court’s decision in YUMS appears to affirm the viability of this tactic in the patent arena, where invalidity counterclaims are common. Indeed, the Federal Circuit previously has held that a sufficiently broad covenant not to sue for patent infringement divests the trial court of subject matter jurisdiction over a declaratory judgment claim that the patent is invalid, even where the covenant, on its face, does not cover later-developed products.

The Supreme Court’s decision in YUMS, however, suggests that to moot a declaratory judgment claim for trademark cancellation, a covenant not to sue must encompass an alleged infringer’s products that have not yet been developed or commercialized. Potentially, this analysis could be extended to covenants not to sue an alleged patent infringer who asserts a counterclaim for invalidity of a patent.

If an intellectual property rights holder pursues trademark or patent infringement litigation, and it appears that the alleged infringer will be able to produce evidence that could put the viability of the holder’s intellectual property at risk, then the rights holder may be able to employ the tactic Nike used. It could be tough pill to swallow, but it may be worthwhile to avoid a potential finding of invalidity.

Before employing this tactic, however, a plaintiff should carefully consider the effects of granting a covenant not to sue. Three potential downsides of this strategy include:

  1. Fully immunizing a company, typically a competitor, from suit under the relevant intellectual property for present and future products. Thus, the perceived infringer should not be causing egregious business or legal harm to the IP rights holder, or be foreseen as being in a position to do so in the future.
  2. Allowing a company to use potentially similar intellectual property, particularly in the public venue of a court proceeding, that could dilute the plaintiff’s rights.
  3. Emboldening third-party companies, which could include competitors and perhaps companies in the knockoff business, to use the same or very similar intellectual property as the plaintiff, under the presumption (whether right or wrong) that the plaintiff will not aggressively enforce its rights against those companies. Competitors could also view the plaintiff’s voluntarily dismissal of its claim and issuance of a covenant not to sue as an indication that the defendant’s counterclaim challenging the plaintiff’s mark had merit.