On January 9, 2013, the US Supreme Court unanimously affirmed a holding that an appropriately worded covenant not to sue for trademark infringement moots a competitor’s action to have the trademark declared invalid. In Already, LLC v. Nike Inc., Nike sued Already for trademark infringement and Already counterclaimed for invalidity of the trademark. Eight months after filing the complaint, Nike delivered a “Covenant Not to Sue” to Already. Nike then promptly moved to dismiss its claims with prejudice and to dismiss Already’s counterclaims of invalidity without prejudice on the ground the covenant extinguished the case or controversy. The district court granted the dismissal and the Court of Appeals for the Second Circuit affirmed the dismissal.
On appeal to the Supreme Court, the facts were reviewed under the voluntary cessation doctrine in connection with Article III declaratory judgment standing. This doctrine holds that a defendant cannot automatically moot a case simply by ending its unlawful conduct once sued. City of Mesquite v. Aladdin’s Castle, Inc., U.S. 283, 289 (1982). Instead, the defendant claiming 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 (TOC), Inc., 528 U.S. 167, 190 (2000). The Supreme Court determined that “it was Nike’s burden to show that it ‘could not reasonably be expected’ to resume its enforcement efforts against Already.” Already, LLC v. Nike Inc., Slip Op., p. 5. The Supreme Court proceeded to analyze Nike’s covenant and stated:
The breadth of this covenant suffices to meet the burden imposed by the voluntary cessation test. 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.
Id., p. 6. Having found the covenant to be adequate to render the case moot, the Supreme Court then went on to dismiss Already’s counterarguments. According to the Supreme Court, these arguments amounted to basic policy objections that dismissing the case allows Nike to bully small innovators lawfully operating in the public domain. Id., p. 13.
Already argued that the case is not moot because Already will continue to suffer injury because investors will be apprehensive about investing in Already as long as Nike remains free to assert the trademark. The Supreme Court answered that once it is absolutely clear that the challenged conduct cannot reasonably be expected to recur, the fact that some individuals may still be apprehensive about investing does not result in the type of concrete and actual injury necessary to give rise to a case or controversy. Id., p. 10.
Already also argued that it will continue to be injured because Nike’s trademarks will hang over Already’s operations like a Damoclean sword causing Already to be hesitant in its business. The Supreme Court dismissed this injury stating “[g]iven our conclusion that Nike has met its burden of demonstrating there is no reasonable risk that Already will be sued again, there no reason for Already to be shy.” Id., p. 11. Already further argued that “[n]o covenant, no matter how broad can eradicate the effects” of a registered but invalid trademark on competitors. Id., pp. 11-12. The Supreme Court responded that this would create a boundless theory of standing based on when a competitor benefits from something alleged to be unlawful. Id., p. 12. Such a sweeping theory has never been held to satisfy the type of concrete and actual injury necessary to give rise to a case or controversy. Id. Furthermore, such a theory would lower the bar for everyone thereby freeing larger competitors to challenge the intellectual property portfolios of smaller competitors and encourage litigation as a weapon instead of a mechanism of last resort. Id., p. 13. The Supreme Court concluded that the only legally cognizant injury to Already was the steps taken by Nike to enforce its trademark and that the breadth of the covenant extinguished that injury as not reasonably being expected to recur.
The Supreme Court’s decision can be read as affirming longstanding Federal Circuit precedent relating to patents. In 1995, the Federal Circuit decided Super Sack Mfg. Corp. v. Chase Packaging Corp., 57 F.3d 1054. In the Super Sack case, the Federal Circuit affirmed the dismissal with prejudice of a declaratory judgment counterclaim for patent invalidity and non-infringement after the patentee granted a covenant not to sue for patent infringement based on the competitor’s past or present products in the marketplace. Since 1995, this Super Sack precedent has been relied upon many times by courts, including the Federal Circuit, to “sack” litigation seeking declarations of invalidity or non-infringement of a patent. The Supreme Court in the Already case supports this precedent. Further, these cases underscore that a litigant should consider a covenant not to sue as one option for unilaterally terminating litigation that seeks to invalidate patents or trademarks.