WASHINGTON, D.C. - (Mealeys) The Second
Circuit U.S. Court of Appeals properly found standing lacking in a trademark
infringement case by virtue of a covenant not to sue, an attorney for Nike Inc.
told the U.S. Supreme Court yesterday (Already LLC d/b/a YUMS v. Nike Inc.,
No. 11-982, U.S. Sup.; See 7/2/12, Page 4).
(Transcript available. Document #16-121119-007T.)
"You should adopt the
following rule: And that is, if you have a covenant not to sue and it
covers everything that the other side alleges an intent to produce, then there
is no more injury," Thomas C. Goldstein argued before the high court.
Already LLC d/b/a YUMS (ALC)
markets and sells sneakers embodying the design of U.S. patent No. D584,040S under the
registered trademark "YUMS." In 2009, Nike sued ALC in the U.S. District
Court for the Southern District of New York, alleging willful trademark
infringement and dilution in connection with ALC's "Soulja Boy" sneaker.
According to Nike, the ALC shoe infringed upon Nike's "Air Force 1" sneaker
design, for which Nike has obtained federal trademark protection.
Nike sought an injunction and
an order directing the destruction of all infringing sneakers and advertising
materials related to the shoes, including on the Internet. Furthermore,
Nike said that because ALC's infringement was "intentional, willful, and
malicious" and ALC had acted in bad faith, Nike should be awarded enhanced
profits and damages, punitive damages, costs and attorney fees. ALC
counterclaimed, seeking a declaration that the sneaker design depicted in
Nike's registration was not a valid trademark under federal or New York state law and
that ALC had not infringed. ALC also sought an order canceling Nike's
registration pursuant to 15 U.S.
Code Section 1119.
In March 2010, Nike sent ALC
a "Covenant Not to Sue," reasserting its ownership of the relevant registration
and its allegations that ALC was an infringer of the same but stating that Nike
"unconditionally and irrevocably covenants to refrain from making any claim(s)
or demand(s)" against ALC. Nike then moved to dismiss its complaint and
to dismiss ALC's counterclaims for lack of subject matter jurisdiction.
ALC agreed to the dismissal of Nike's claims with prejudice but opposed
dismissal of its counterclaim, asserting that it had standing under Article III
of the U.S. Constitution to challenge the validity of Nike's mark because "the
mere existence of a trademark registration certificate can cause injury to a
person's business or property."
Nike prevailed, with the
District Court dismissing [enhanced version available to lexis.com subscribers] Nike's claims with prejudice and ALC's counterclaims
for lack of subject matter jurisdiction under Article III and denying ALC's
motion for attorney fees. ALC appealed to the Second Circuit U.S. Court
of Appeals, which affirmed [enhanced version available to lexis.com subscribers] in November 2011 after applying the "totality of the
circumstances" test set forth by the U.S. Supreme Court in MedImmune Inc. v. Genentech Inc. (549 U.S.
118  [enhanced version available to lexis.com subscribers]; See 1/22/07, Page 5). The Second Circuit said no
case or controversy exists between the parties as a result of Nike's promise
not to assert its trademark rights against ALC and rejected ALC's assertion
that Nike's litigation continued to have an "injurious" effect in that ALC
would be harmed by a potential loss of investors fearing future lawsuits.
ALC filed a petition for writ
of certiorari with the Supreme Court, saying the jurisdictional rule
endorsed by the Second Circuit "severely weakens the authority of federal
courts to police statutory limits on what can and cannot rightly be the subject
of perpetual trademark protection." In June 2012, the Supreme Court
granted the petition.
'Once Bitten, Twice Shy'
James W. Dabney, representing
ALC, argued that the Second Circuit should have addressed the validity of
Nike's registration because despite the covenant not to sue, his plaintiff is
"once bitten, twice shy" with regard to producing new shoe designs. The
argument appeared persuasive to Justice Antonin Scalia, who mused that ALC
"shouldn't be put through the trouble of figuring out whether the new shoes . .
. are close enough to the old one to be covered."
"And I would think that you
would add this as well, that for a competitor to demand that the other
competitor tell its plans, its marketing is - to say the least - patronizing
and probably quite injurious in and of itself," Justice Anthony Kennedy added.
Justice Ruth Bader Ginsburg
appeared less sympathetic, however, asking Dabney, "Are you saying that this
device of the unilateral covenant is no good unless it says that you will never
be sued for any shoe that you ever produce?"
"I'm saying that the
respondent bore the burden of proving that the covenant completely and
irrevocably eradicated all the facts," Dabney replied.
Goldstein urged the Supreme
Court to "adopt a rule that has balance to it."
"It has to be possible to
resolve one of these cases through a covenant not to sue of appropriate
breadth, but it also has to be the case that a covenant not to sue can't just
always eliminate the other side's injury. And so, it's going to depend on
the covenant and it's going to depend on what the other side says about its
plans," Goldstein said.
Justice Sonia Sotomayor
expressed concern, however, about the potential for an unfair burden placed
upon competitors going forward, who were once parties to a covenant not to
sue. "How do you deal with the point that's been discussed with your
adversary, they have to show you everything they intend to produce? What
entitles you to that showing?" she asked. In response, Goldstein noted
that in every case where trademark or patent invalidity has been alleged, a
protective order is entered, whereby a party "can designate its material so
that it's lawyers' eyes only."
Goldstein later argued that
"you can't evade an attempt to invalidate your trademark through a covenant not
to sue, because . . . you are in real risk of being deemed to have abandoned
the mark." Justice Ginsburg appeared skeptical, however, pointing out
that "this covenant would give [the right to copy] to only one
Agreeing that "it is not a
settled question in the law" and that "there is no case that has considered
this question," Goldstein nonetheless argued that "what a party claiming
abandonment would say is that we would have licensed [ALC] then to increase its
production and its distribution." Furthermore, according to Goldstein,
"you can't continually evade an attempt to invalidate your mark, because . . .
if you give a second one of these [covenants] out or a third one, you would be
abandoning the mark."
"[This is] how the case
should be resolved. You should say, yes, there can be other cases where
the covenant is too narrow; yes, there can be other cases where someone does
allege a desire to make a counterfeit. Those are different cases.
But do not, I suggest to you, remand when the facts have already been developed
in this case. If we lose on this record, we lose on this record.
But if we win on this record, we win on it because the record has been built in
this case and it is settled," Goldstein concluded.
In reserved time, Dabney
argued that forcing the petitioner to initiate new litigation against Nike
"would be fundamentally unfair."
"What we're seeking here is
simply judicial review. We're seeking the ability to obtain
extinguishment not just of the particular claims that this Plaintiff saw fit to
waive, but the much broader government-registered claim of right to exclude
competition in the sale of shoes," Dabney said.
Ginger D. Anders,
representing the U.S.
government, told the high court that parties entering into a covenant not to
sue must declare their intentions with regard to future products. "The
question is whether the dispute between the parties is reasonably likely to
recur, and if the plaintiff cannot point to anything that it's currently doing
or that it's planning to do," Anders said.
"A trademark holder can moot
a declaratory judgment action seeking to invalidate a trademark by offering the
plaintiff a sufficiently broad covenant not to sue. Whether the covenant
eliminates the controversy between the parties should be analyzed under the
voluntary cessation doctrine. The analysis that the government is
proposing is both a way of determining whether the covenant has eliminated any
concrete dispute between the parties and also a framework for the parties to
use to negotiate the appropriate scope of the covenant," Anders added.
ALC is represented by Dabney, Victoria J.B.
Doyle, Randy C. Eisensmith and Stephen S. Rabinowitz of Fried, Frank, Harris,
Shriver & Jacobson in New York and John F.
Duffy of the firm's Washington
office. Goldstein, Kevin K. Russell and Amy Howe of Goldstein &
Russell in Washington and Christopher J. Renk, Erik S. Maurer and Audra C.
Eidem Heinze of Banner & Witcoff in Chicago. Ginger D. Anders of the
U.S. Department of Justice in Washington
represents the government.
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