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Supreme Court Affirms: Trademark Case Mooted By Covenant Not To Sue

WASHINGTON, D.C. - (Mealey's) The Second Circuit U.S. Court of Appeals properly rejected trademark counterclaims levied against Nike Inc. where a covenant not to sue entered into by the counterclaimant extinguished any justiciable controversy between the two, the U.S. Supreme Court held Jan. 9 (Already LLC d/b/a YUMS v. Nike Inc., No. 11-982, U.S. Sup.).

(Decision available. Document #16-130122-006Z.

In a unanimous ruling authored by Chief Justice John Roberts, the court rejected plaintiff Already LLC, d/b/a YUMS (Already)'s claim that dismissing the case allows Nike to "bully small innovators lawfully operating in the public domain."

"This concern cannot compel us to adopt Already's broad theory of standing," the Supreme Court said.

"Already's only legally cognizable injury - the fact that Nike took steps to enforce its trademark - is now goneand, given the breadth of the covenant, cannot reasonably be expected to recur. There being no other basis on whichto find a live controversy, the case is clearly moot," the Supreme Court added.

Declaration Sought

Alreadymarkets and sells sneakers. In 2009, Nike sued Already in the U.S. District Court for the Southern District of New York, alleging willful trademark infringement and dilution in connection with Already's "Soulja Boy" sneaker. According to Nike, the Already shoe infringed upon Nike's "Air Force 1" sneaker design, for which Nike had 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. Furthermore, because Nike said that because Already's infringement was willful and Already had acted in bad faith, Nike sought an award of enhanced profits and damages, punitive damages, costs and attorney fees.Already 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 Already had not infringed. Already also sought an order canceling Nike's registration pursuant to 15 U.S. Code Section 1119.

In March 2010, Nike sent Already a covenant not to sue, reasserting its ownership of the relevant registration and its allegations that Already 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 Already. Nike then moved to dismiss its complaint and to dismiss ALC's counterclaims for lack of subject matter jurisdiction. Already 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 Already's counterclaims for lack of subject matter jurisdiction under Article III and denying ALC's motion for attorney fees. Already 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 Supreme Court in MedImmune Inc. v. Genentech Inc.(549 U.S. 118 [2007] [enhanced version available to 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 Already and rejected Already's assertion that Nike's litigation continued to have an "injurious" effect in that Already would be harmed by a potential loss of investors fearing future lawsuits.

In February 2012, Already filed a petition for certiorari with the Supreme Court, which granted the request in June. Oral arguments were held in November.

Alternative Theories

Affirming, the Supreme Court applied the voluntary cessation doctrine to the covenant not to sue and deemed the document sufficient. "The covenant is unconditional and irrevocable," Justice Roberts noted, adding that "beyond simply prohibiting Nike from filing suit, it prohibits Nike from making any claim or any demand." Furthermore, the covenant "reaches beyond Already to protect Already's distributors and customers" and "covers not just current or previous designs, but any colorable imitations," the Supreme Court held.

"We agreewith the Court of Appeals that 'it is hard to imagine ascenario that would potentially infringe [Nike's trade­mark] and yet not fall under the Covenant.' Nike, having taken the position in court that there is no prospect of such a shoe, would be hard pressed to assert the contrary down the road. . . . If such a shoe exists, the parties have not pointed to it, there is no evidence that Already has dreamt of it, and we cannot conceive of it. It sits, as far as we can tell, on a shelf between Dorothy's ruby slippers and Perseus's winged sandals," the court held.

Regarding Already's "alternative" theories of Article III injury - including that Nike remains free to assert its trademark, thereby weakening Already's position with potential investors, and that as a direct competitor Already has "inherent" standing to challenge Nike's intellectual property - the Supreme Court was not persuaded. "The problem for Already is that none of these injuries suffices to support Article III standing," it held, for "although the voluntary cessation standard requires the defendant to show that the challenged behavior cannot reasonably be expected to recur, we have never held that the doctrine . . . allows the plaintiff to rely on theories of Article III injury that would fail to establish standing in the first place."

'Basic Policy Objection'

The Supreme Court later addressed Already's "basic policy objection" that endorsement of the Second Circuit's holding would serve only to strengthen Nike's position in the marketplace. Disagreeing, the high court found that the granting of covenants not to sue is actually a "risky long-term strategy for a trademark holder." In addition, "the Lanham Act provides some check on abusive litigation practices by providing for an award of attorney's fees in 'exceptional case,'" the court noted.

"Accepting Already's theory may benefit the small com­petitor in this case. But lowering the gates for one partylowers the gates for all. As a result, larger companies with more resources will have standing to challenge the intel­lectual property portfolios of their more humble rivals - not because they are threatened by any particular patent or trademark, but simply because they are competitors in the same market. This would further encourage parties toemploy litigation as a weapon against their competitorsrather than as a last resort for settling disputes," the Supreme Court concluded.

Remand Unnecessary

Finally, the Supreme Court rejected the solicitor general's call for the case to be remanded for further proceedings. "Such a remand would serve no purpose," the court said, because "the scope of the covenant is clear."

Justice Anthony Kennedy wrote a concurrence, which was joined by Justices Clarence Thomas, Samuel Alito and Sonia Sotomayor.

Already is represented by James W. 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. Thomas C. 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 represent Nike. Ginger D. Anders of the U.S. Department of Justice in Washington represents the government.

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