Supreme Court Allows IP Owners to Avoid Invalidity Claims with Broad Covenant Not to Sue
On January 9, 2013, the U.S. Supreme Court affirmed a ruling that a broad covenant not to sue a competitor for trademark infringement eliminated any future disputes between the subject companies and divested the courts of subject matter jurisdiction under the case or controversy requirement of Article III of the Constitution. Practically speaking, this decision provides guidance to patent and trademark owners on how to foreclose challenges to the invalidity of their intellectual property assets during litigation.
Nike Inc. (Nike) owns several trademark registrations related to the appearance of its “Air Force 1” sneaker and has issued more than 1,700 color variations of the shoe. In 2009, Nike sued Already L.L.C. d/b/a Yums (Yums) for trademark infringement and related claims, alleging that Yums’ “Sugar” and “Soulja Boy” shoes infringed Nike’s “Air Force 1” sneaker. Yums counterclaimed seeking cancellation of one of Nike’s trademark registrations, as well as declaratory judgment.
In 2010, Nike sought to settle the dispute by dropping the lawsuit and presenting Yums with a “covenant not to sue,” which would prevent Nike from pursuing “any possible cause of action based on or involving trademark infringement, unfair competition, or dilution” against Yums. Yums agreed to the covenant but maintained its counterclaims. The District Court dismissed both Nike’s claims and Yums’ counterclaims. The U.S. Court of Appeals affirmed, stating that upon delivery of the covenant not to sue, the court was divested of subject matter jurisdiction under the case or controversy requirement of Article III. Since the covenant alleviated the chance of a lawsuit ever arising between the parties, no controversy could ever exist, rendering the matter moot. Accordingly, Yums had no standing to sue.
Yums petitioned the Supreme Court for a writ of certiorari, which was granted. In the amicus brief, it was argued that the matter should be subject to the voluntary cessation doctrine, under which a case is not automatically considered moot if a defendant is acting wrongfully, but ceases to engage in such conduct just because litigation has been threatened or commenced. Nike would have to bear the burden of showing mootness - that it is “absolutely clear” that a dispute “could not be reasonably expected to recur.”
The Supreme Court determined that the voluntary cessation doctrine did apply and that Nike had the burden of showing that there was no reasonable expectation that a dispute could ever occur between the parties. The Supreme Court found that Nike met its burden. The broad language of the covenant not to sue clearly stated that it was unconditional and irrevocable. Moreover, the covenant specifically covered the activity that was the basis of the original lawsuit, namely, the continued sale of “colorable imitations,” as well as future “colorable imitations,” which diminished the possibility of Yums engaging in activities that would fall outside the “covenant not to sue.”
This reasoning shifted the burden to Yums to demonstrate that it had engaged in activities not covered by the covenant or had sufficiently concrete plans to do so in the future. Yums tried to establish ongoing injury by the mere presence of Nike’s registered mark, which could deter potential investors and make its own company hesitant to bring new products to market because of the threat of litigation. These arguments proved unpersuasive. Yums also argued that it had inherent standing to challenge Nike’s registered mark as a direct competitor of Nike. The Supreme Court disagreed and noted that allowing a party to challenge a trademark in federal court regardless of whether there was a case or controversy at stake, could give more power to potential “trademark bullies” in the marketplace.
Do not just do it! Although the Supreme Court’s ruling provides IP owners with guidance on drafting broad covenants not to sue that could protect them from IP validity challenges, it does not suggest that all covenants not to sue will insulate them from invalidity challenges or will necessarily avoid all litigation. In addition to the formidable burden of proving mootness, IP owners must show that the process of presenting the covenant at issue and dropping the lawsuit for mootness will not weaken or injure a defendant’s business.
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