January 15, 2013
LES Insights
By John C. Paul; D. Brian Kacedon; Robert C. MacKichan III
Authored by D. Brian Kacedon, Robert C. MacKichan III, and John C. Paul
Article III of the U.S. Constitution requires an actual "case" or "controversy" before the judicial branch has authority to adjudicate a legal dispute. This requirement applies at all stages of litigation, and an ongoing dispute can become moot when there is no longer a live case or controversy. It is well settled, however, that a defendant cannot moot a case simply by ceasing its unlawful conduct once sued, leaving open the possibility that the defendant will resume its wrongful conduct after the case has been declared moot. Instead, a defendant claiming mootness by voluntary compliance "bears the formidable burden of showing that it is absolutely clear the allegedly wrongful behavior could not reasonably be expected to recur." Friends of the Earth, Inc. v. Laidlaw Environmental Services (TOC), Inc., 528 U.S. 167 (2000).
In the intellectual property arena, the issue of whether and how a party can render a dispute "moot" can arise when an entity who accuses another of infringing its intellectual property seeks to avoid having a court determine the validity of its intellectual property by withdrawing that infringement assertion and promising not to sue the other party again in the future. In such instances, the entity accused of infringement may wish to proceed with its case to invalidate the intellectual property not withstanding a promise not to sue because of a perceived cloud created by the continued existence of the allegedly invalid intellectual property. At the same time, the intellectual property owner may be able to assert that with a covenant in place there is no dispute for the court to decide. In Already, LLC v. Nike, Inc.,1 the Supreme Court addressed this issue in the context of a trademark-infringement plaintiff who dropped its suit and tried to moot the defendant's invalidity counterclaim by issuing a covenant not to sue.
In August 2009, Nike brought suit against Already, accusing Already's "Sugars" and "Soulja Boys" shoe lines of infringing Nike's trademark covering its popular "Air Force 1" shoe. Already denied infringement and filed a counterclaim alleging invalidity of the Air Force 1 mark. Eight months after filing its complaint, Nike issued a covenant not to sue, promising—quite broadly—not to raise any claim based on its Air Force 1 mark against Already's existing footwear designs or any future "colorable imitations":
[Nike] unconditionally and irrevocably covenants to refrain from making any claim(s) or demand(s) . . . against Already or any of its . . . related business entities . . . [including] distributors . . . and employees of such entities and all customers . . . on account of any possible cause of action based on or involving trademark infringement, unfair competition, or dilution, under state of federal law . . . relating to the NIKE Mark based on the appearance of any of Already's current and/or previous footwear product designs, and any colorable imitations thereof, regardless of whether that footwear is produced . . . or otherwise used in commerce before or after the Effective Date of this Covenant.
According to the covenant, Nike granted the covenant because "Already's actions . . . no longer infringe or dilute the NIKE Mark at a level sufficient to warrant the substantial time and expense of continued litigation."
Having issued the covenant, Nike moved to voluntarily dismiss its infringement claim with prejudice and to dismiss Already's invalidity counterclaim, arguing that the covenant had extinguished any case or controversy. Already opposed the dismissal of its invalidity counterclaim, arguing that there was still a live case based on evidence of (1) Already's future plans to introduce new versions of its shoe into the market; (2) reluctance of potential investors to invest in Already in light of Nike's valid mark and previous infringement suit, and (3) intimidation by Nike against retailers carrying or considering carrying Already's shoes. The district court found no justiciable controversy and dismissed Already's counterclaim. The Second Circuit affirmed.
The Supreme Court first held that the voluntary-cessation doctrine, which had not been expressly considered by the lower courts, controlled this case. According to the Court, both parties' claims were initially supported by Article III standing, and the existence of a continuing case or controversy was not called into question until Nike dismissed its claims and issued the covenant. Thus, the Court reasoned, the voluntary-cessation doctrine applied and Nike had the burden of showing that the allegedly wrongful behavior—Nike's enforcement efforts—could not reasonably be expected to recur. The Court rejected Nike's argument that the judicial enforceability of the covenant precluded application of the voluntary-cessation doctrine. Such a contention, the Court reasoned, was Nike's attempt to avoid its "formidable burden" by assuming away the issue of whether its allegedly wrongful behavior reasonably could not be expected to recur.
After establishing the applicability of the voluntary-cessation doctrine, the Court went on to consider whether Nike had met its burden. The Court looked solely to the covenant, finding that the "breadth of [the] covenant suffices to meet the burden imposed by the voluntary cessation test." The Court highlighted the breadth of Nike's covenant:
The covenant is unconditional and irrevocable. Beyond simply prohibiting Nike from filing suit, it prohibits Nike from making any claim or demand. It reaches beyond Already to protect Already's distributors and customers. And it covers not just current or previous designs, but any colorable imitations.
In finding the covenant sufficiently broad, the Court emphasized the difficulty of imagining a shoe that would both infringe Nike's trademark and fall outside the covenant. The Court also noted that Nike would be estopped from later taking the contrary legal position that such a shoe exists.
Since Nike met its burden by demonstrating that the covenant encompasses all its allegedly unlawful conduct, the Court explained that it was incumbent on Already to show sufficiently concrete plans to engage in activities not covered by the covenant. In the view of the Court, Already, although given several opportunities, never alleged plans to market infringing shoes that would even arguably fall outside the covenant. Those shoes, the Court colorfully explained, sit "on a shelf between Dorothy's ruby slippers and Perseus's winged sandals."
After finding Already's invalidity counterclaim moot, the Court considered Already's additional arguments for standing. First, the Court considered Already's evidence of lingering reluctance among certain investors to invest in Already. Already had presented affidavits from a handful of investors stating they would consider investing in Already only if Nike's trademark were invalidated. But the Court rejected this approach, pointing to its finding that it was reasonable to expect that Nike's enforcement efforts would not recur. Thus, the "conjectural or hypothetical" speculation of a few individuals "does not give rise to the sort of ‘concrete' and ‘actual' injury necessary to establish Article III standing." Similarly, the Court found, because the covenant extended protection to Already's retailers and customers, evidence of intimidation by Nike against retailers was irrelevant since invalidating Nike's mark would do nothing to address such harassment.
Next, the Court considered Already's argument that because of Nike's decision to sue in the first place, Nike's trademarks now have a particularly acute dampening effect on Already's operations. As put by Already's counsel at oral argument, "once bitten, twice shy." The Court rejected this argument, explaining that since Nike had demonstrated that there was no reasonable risk that Already would be sued again, "there is no reason for Already to be so shy." Rather, because Already was the only competitor with a covenant protecting it from litigation based on the Air Force 1 trademark, "Already is Nike's least injured competitor."
Finally, the Court considered Already's "sweeping argument" that it inherently had standing to challenge Nike's intellectual property as one of its competitors, and that by mooting the case, Nike subverted the role of the federal courts in the administration of the patent and trademark laws. The Court flatly rejected this argument, explaining that such a theory would allow standing to any market participant even in the absence of any threat of suit or possibility of infringement, and that the Court had "never accepted such a boundless theory of standing."
In sum, the Court described Already's fallback arguments as "a basic policy objection that dismissing this case allows Nike to bully small innovators lawfully operating in the public domain." In rejecting this view, the Court noted that granting covenants not to sue may be a risky long-term strategy possibly leading to a loss of rights in the mark. And the Court pointed out that, while granting standing may benefit the small competitor in this case, such a standard may "lower the gates" for larger companies to challenge the intellectual property of smaller rivals simply because they are in the same market.
The Court declared Already's case "clearly moot" and decided that a remand to consider the scope of the covenant and Already's business practices was unnecessary. The Court explained that the scope was clear and "Already's argument is not that the covenant could be drafted more broadly, but instead that no covenant would ever do." Regarding Already's business practices, the Court found that it had abundant opportunities to show plans to market a potentially infringing shoe that may fall outside the covenant.
Four justices joined a concurring opinion emphasizing the importance of the proper allocation of the burden on the party asserting mootness. They recognized the disruptive effects litigation can have on the business and supply network of an accused infringer. Thus, they reasoned that the burden of showing mootness should "require the trademark holder, at the outset, to make a substantial showing that the business of the competitor and its supply network will not be disrupted or weakened by satellite litigation over mootness or by any threat latent in the terms of the covenant." The concurring justices also pointed out that this would serve to prevent a competitor from filing suit and then issuing a covenant as a way to force a competitor to expose its future business plans. "An insistence on the proper allocation of the formidable burden on the party asserting mootness," the concurrence remarked, "is one way to ensure that covenants are not automatic mechanisms for trademark holders to use courts to intimidate competitors without, at the same time, assuming the risk that their trademark will be found invalid and unenforceable."
Already provides a blueprint for a trademark-infringement plaintiff to dismiss its infringement suit and avoid facing an invalidity counterclaim. The trade-off is the requirement to grant a broad covenant not to sue. The covenant in Already (1) was unconditional and irrevocable; (2) covered all types of claims and demands; (3) protected the defendant, related entities, suppliers, and customers; and (4) covered all conceivable instances of infringement. Now that it is clear that the "formidable burden" of the voluntary-cessation doctrine applies in these cases, a similarly broad covenant is likely necessary from parties trying to moot invalidity claims. As recognized by the Court, granting such broad covenants not to sue can be a risky long-term strategy. Adding to its significance, the framework of Already could apply to other kinds of intellectual-property suits.
1 The Supreme Court opinion can be found here.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
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