Controversy Requirement Debated Before Supreme Court In Trademark Case

WASHINGTON, D.C. - (Mealey's) 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 Nov. 7 (Already LLC d/b/a YUMS v. Nike Inc., No. 11-982, U.S. Sup.). 

(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.

Injunction, Destruction 

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."

Petition Filed 

Nike prevailed, with the District Court dismissing 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 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 [2007]) [enhanced version available to lexis.com subscribers]. 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. 

Balanced Rule 

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 manufacturer."  

Not Settled 

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.

Divided Argument 

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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