Supreme Court Already v Nike decision: voluntary abandonment is not without pitfalls

In a decision that some commentators have suggested may have significant implications for settlements in all US IP cases, the US Supreme Court has held that a broadly worded covenant not to sue can be sufficient to moot an underlying case or controversy, thereby removing the basis for jurisdiction for a court to decide counterclaims seeking to invalidate a trademark. As a result, under the appropriate circumstances, a trademark holder-plaintiff may extricate itself from a trademark infringement case where the defendant has responded to the infringement allegation with a challenge to the plaintiff’s asserted mark. Nonetheless, the Already v Nike decision is not one that should give trademark (or, potentially, other IP rights) owners any real sense of security that walking away from an infringement suit is easily done or that it does not come with significant consequences.

The Already v Nike decision grew out of a trademark infringement suit filed by Nike accusing several of Already’s shoes of infringing the trade dress of Nike’s Air Force 1 shoe. After Nike initiated the action, Already counterclaimed seeking a declaration that Nike’s asserted trademark was invalid. Several months after the counterclaim was filed, Nike unilaterally issued a covenant not to sue, and sought to dismiss the action, including Already’s counterclaims. The district court, finding that, in light of the covenant, there was no longer a justiciable controversy with respect to Already’s accused shoes, dismissed the action, including Already’s counterclaim. Already appealed and the appeals court affirmed, reasoning that, under the broad language of Nike’s covenant, Already could not show any continuing injury and thus that there was no controversy remaining for the court to decide. Already thereafter appealed to the Supreme Court, arguing that, irrespective of whether Nike’s threat of infringement had been eliminated, Already nonetheless had the right to a determination that the trademark associated with Nike’s Air Force 1 shoes was invalid.

The Supreme Court, in a unanimous opinion authored by Chief Justice Roberts, agreed with the district court and the court of appeals, namely, that the broad language of Nike’s covenant had eliminated any reasonable expectation that Already could again be sued by Nike over its use of a trademark that somehow infringed the AIR FORCE 1 mark, and thus that Already had no standing to maintain its counterclaim seeking to invalidate Nike’s mark. The court began by explaining that the US Constitution grants courts the right to decide cases and controversies. Absent a genuine case or controversy, there is no basis for a court to entertain a legal question.  In order to establish a case or controversy, the party seeking the court’s intervention must demonstrate 'standing' - namely, that there is some “personal injury fairly traceable to the [accused party’s] allegedly wrongful conduct [which is] likely to be redressed by the requested relief”. Importantly, the actual controversy must exist not only at the time the action is commenced, but must exist “through ‘all stages’ of the litigation”  (citation omitted); absent the continuing controversy, the case becomes moot.

Focusing on the language of the covenant, the court pointed out that Nike had “unconditionally and irrevocably” agreed to refrain from making any claims against Already or any related business (including its distributors and retailers) based on any possible cause of action related to Nike's AIR FORCE 1 trademark as used on, or in connection with, any current Already product, any past product or any future product, including any colourable imitation thereof. Nike’s apparent goal, which the court agreed Nike had achieved, was to forever remove any threat to Already that it might be subject to suit over its use of a trademark that was in any way similar to the AIR FORCE 1 mark. As a result, Nike pulled the rug out from under Already’s attempt to invalidate the trademark – without the possibility of ever being sued again by Nike, Already was not being threatened, and thus there was no controversy to serve as the foundation for the court’s jurisdiction.

The court was careful to explain that voluntarily abandoning a case, as Nike did, is not as simple as merely walking away. Indeed, if a party subject to a claim (in this case, Nike, because its trademark was being challenged) could simply promise to forego the accused activity, then there would be nothing to stop such a party from stopping today and starting up again tomorrow, thereby occasioning further legal action. Rather, the important point is that the party seeking to walk away bears the burden of establishing that its covenant or promise must eliminate any possibility of a future threat. Here, given the broad language of the covenant, the court found that it did. Indeed, the court agreed with the lower courts that “it is hard to imagine a scenario that would potentially infringe [Nike’s trademark] and yet not fall under the covenant”. 

Having determined that Nike had satisfied its burden, the court looked to Already’s arguments as to why the covenant was insufficient to eliminate the threat of future suit by Nike and, accordingly, why the invalidation counterclaim should proceed. Neither the lower courts nor the Supreme Court were persuaded, essentially because Already could point to no possible future action that would fall outside of the covenant. The court was heavily influenced by the fact that, despite multiple opportunities to do so, Already could not (or would not) specify any plans to make shoes that would be capable of giving rise to a trademark infringement claim by Nike based on the AIR FORCE 1 trademark.

The court was also careful to explain that a voluntary abandonment of the type orchestrated by Nike is not without its pitfalls. For example, putting aside the fact that the party receiving the covenant will thereafter be free to produce products that essentially infringe the other side’s trademark, the strength of the mark will be undermined because of that unlicensed and otherwise unsanctioned use. Nonetheless, in the appropriate circumstance, agreeing never to assert the mark (or, potentially, some other type of IP right) may be the most appropriate way to accomplish a trademark owner’s goals. This strategy, however, should not be employed without carefully considering the long-term impact of such a decision, or without precisely drafting the language of the covenant to ensure that no threat of future litigation could arguably be found to remain.

Timothy J Kelly, Fitzpatrick Cella Harper & Scinto, New York