Eric E. Bensen on The Supreme Court's Decision Respecting the Impact of a Covenant Not to Sue on a Defendant's Standing to Seek a Declaratory Judgment of Trademark Invalidity

Eric E. Bensen on The Supreme Court's Decision Respecting the Impact of a Covenant Not to Sue on a Defendant's Standing to Seek a Declaratory Judgment of Trademark Invalidity

Can a trademark owner avoid a declaratory judgment that its mark is invalid by granting an accused infringer a covenant not to sue and seeking dismissal of the action? In Already, LLC v. Nike, Inc. [enhanced version available to lexis.com subscribers], the U.S. Supreme Court answered that question. This commentary provides analysis of the case and its implications.

Excerpt:

Arguments on Certiorari

     The question for the Court was whether a federal court is divested of Article III jurisdiction over a party's challenge to the validity of a federally registered trademark if the registrant promises not to assert its mark against the party's then-existing commercial activities.

     Already argued that because the district court had jurisdiction over the declaratory judgment claims when those claims were brought, Nike, to have the case dismissed, had to meet a "stringent burden" of proving that it was "absolutely clear" that Already would not be adversely affected by a future claim based on Nike's claim of trademark ownership. In Already's view, Nike failed to meet that burden because the continued existence of the Nike mark would lend credence to Nike's past claim of infringement, which, in turn, would adversely affect Already's ability to attract investment and to compete in the marketplace.

     Already also argued that there is a strong public interest in permitting an accused infringer to challenge the validity of the asserted intellectual property right and that the district court's decision essentially limits the authority of federal courts to hear such challenges. As characterized by Already, the district court's decision permits a mark owner to assert an invalid claim in federal court and, if it appears that the mark will be exposed as invalid, dismiss the litigation thereby maintaining the registration as a "scarecrow" to discourage other competitors.

     Nike argued that the case presented no justiciable controversy because Already never alleged that it desired to produce a shoe that might be regarded as infringing and yet not within the scope of the covenant not to sue. The declarations from potential investors submitted by Already, Nike noted, were found by both the district court and the Second Circuit to be speculative and not based on a correct understanding of the protections afforded by the covenant not to sue.

     Nike argued against the Court's adopting a new rule giving competitors standing to challenge trademarks. It rejected as "fanciful" Already's assertion that in the absence of such a rule, a mark owner like Nike could maintain a truly harmful invalid mark in perpetuity through strategic use of covenants not to sue. Nike also observed that if a broad covenant not to sue were not sufficient to fully resolve a trademark litigation, plaintiffs would have little incentive to voluntarily dismiss their own claims.

The Court's Decision

     In a unanimous opinion authored by Justice Roberts, the Court agreed with Already that the burden was on Nike to establish that there was no longer a case or controversy, but agreed with Nike that Nike had met that burden.

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