TBT: Nike's Covenant Not to Sue

In case you missed it, this past January, the Supreme Court unanimously decided Nike v. Already, LLC, a trademark infringement lawsuit stemming from the design of Nike's classic Air Force 1 shoe. Nike has been producing the shoe since 1982, and holds several federal trademark registrations for the shoe’s distinctive design. The lawsuit came about in July 2009, when Nike filed suit against Already for selling shoes (via its subsidiary Yums Shoes) that it alleged were confusingly similar to the Air Force 1. In November 2009, Already counterclaimed, requesting cancellation of Nike’s trademark on the basis that it interfered with its ability to continue selling its shoes.

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Four months later, Nike provided Already with a “Covenant Not to Sue,” promising not to sue Already or any affiliated entities for any trademark or unfair competition claim based on Already’s existing footwear designs or any future designs that are a “colorable imitation” of Already’s current products. Nike then dropped its trademark infringement claim, and asked the Southern District of New York (SDNY) to dismiss the case, including Already’s counterclaim on the ground that the Covenant Not to Sue eliminated the necessary subject matter jurisdiction and thus, the case. Already consented to the dismissal of Nike’s claims, but refused to dismiss its counterclaim and argued that its counterclaim gave rise to an ongoing case or controversy for the purposes of Article III of the Constitution. The SDNY disagreed and dismissed the case for lack of jurisdiction. The Second Circuit affirmed, holding that the counterclaim alone did not create a case or controversy before the court; therefore the court did not have subject matter jurisdiction over the claim. In determining whether a covenant not to sue "eliminates a justiciable case or controversy," the Second Circuit held that courts should look to the totality of the circumstances, and three factors are  instructive: "(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.

So, the question before the Supreme Court was this: Did Already’s counterclaim create a controversy sufficient to grant the District Court subject matter jurisdiction? The answer: A unanimous NO, according to Chief Justice John G. Roberts, Jr.'s decision, which affirmed the Court of Appeals. The Supreme Court held that Nike’s Covenant Not to Sue made the case moot (moot = when the issues presented in a case are no longer "live" or the parties lack a legally cognizable interest in the outcome), as Nike met its burden to show that it “could not reasonably be expected” to resume trademark enforcement action against Already. Moreover, the language of the covenant was broad enough that the Court could not conceive of a shoe that would fall outside of its scope.

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However, in addition to arguing that its counterclaim created proper jurisdiction, Already alleged that the lower courts' rulings were not in line with the underlying policy of trademark law. Already claimed that by dismissing the case, the Court was enabling Nike to enforce invalid trademarks against any competitor by continually issuing Covenants Not to Sue. As for how this relates to all small business alike, Already asserted in its motion that if a rare company could go up against a large company in court (aka had the resources to do so), the court should not  dismiss the lawsuit at the request of the rights holder, as instead of encouraging innovation (the theory behind the IP laws in the U.S.), this would stifle creativity and essentially give the rights holder more power than was intended under the Lanham Act. The Court didn't exactly buy this argument. For instance, the Court held that Nike has an incentive not to continually issue Covenants Not to Sue because allowing many competitors to use Nike’s trademarks, or confusingly similar ones, could lessen the strength of Nike’s mark, a death knell for trademark owners.

So, what does this actually mean? Well, a few things. Here are a couple. One - Covenants not to sue, as a whole, are all good, assuming the language is carefully and broadly drafted. Two - It is likely quite difficult for the owner of a trademark to unilaterally end a challenge to the validity of its mark. Minus a settlement agreement, the trademark owner will have to win at trial or issue a covenant not to sue.