March 2013 Issue
Civil Cases
Already, LLC v. Nike, Inc.,
133 S. Ct. 721 (Jan. 9, 2013)
CASE SUMMARY
FACTS
Nike, Inc. (“Nike”) sued Already, LLC (“Already”) in the U.S. District Court for the Southern District of New York, alleging that Already infringed Nike’s registered trade-dress rights in the design of its “Air Force 1” athletic shoes. Already counterclaimed for cancellation of Nike’s “Air Force 1” trade-dress registration. In response, Nike issued a covenant not to sue, promising to not challenge Already’s existing line of shoes or any “colorable imitations thereof.” Nike then moved to voluntarily dismiss its own claims with prejudice, and to dismiss Already’s counterclaim for cancellation as moot. The district court granted Nike’s motions to dismiss and, on appeal, the Second Circuit affirmed.
ANALYSIS
In a unanimous decision, the Supreme Court affirmed the Second Circuit, holding that the case was moot.
The Court applied the “voluntary-cessation doctrine,” which governs whether a defendant may moot a claim through voluntary compliance. The doctrine’s purpose is to guard against the possibility that a defendant may resume its wrongful conduct after the case has been declared moot, and the defendant “bears the formidable burden of showing that it is absolutely clear the allegedly wrongful behavior could not reasonably be expected to recur.” The Supreme Court found that the doctrine applied because Nike sought to moot Already’s counterclaim through voluntary agreement to not enforce its “Air Force 1” trade-dress rights against Already’s shoes.
Applying the voluntary-cessation doctrine, the Court looked to the terms of Nike’s covenant not to sue to determine whether Nike’s allegedly wrongful behavior (i.e., enforcement of its trade-dress rights against Already) could be reasonably expected to recur:
“[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 or 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.”Already, LLC, 133 S. Ct. at 728.
The Court stated that Nike met its “formidable burden.” Specifically, the Court observed that the covenant: (1) is unconditional and irrevocable; (2) prohibited any claim or any demand; (3) protected Already and its distributors and customers; and (4) covered not only Already’s previous and current lines of shoes, but also any “colorable imitations thereof.”
The burden then shifted to Already to show that it “engage[d] in or had sufficiently concrete plans to engage in activities not covered by the covenant,” i.e., an infringing shoe that was not a “colorable imitation” of its existing shoe designs. The Court found that Already failed to show any such plans, despite a number of opportunities to do so at each stage of the litigation, including when specifically prompted at oral argument before the Court.
The Court rejected Already’s “basic policy objection” regarding alleged unfair advantages enjoyed by trademark “bullies” who could interrupt a defendant’s business, supply chain, and capital flow through questionable infringement lawsuits, only to moot such cases “in the rare case where the little guy fights back.” Although the Court showed some sympathy towards Already’s concerns in dicta and in Justice Kennedy’s concurring opinion noted below, it nonetheless held that such “sweeping” policy arguments fell short of supporting Article III standing.
Notably, the Court warned future trademark litigants regarding the potential long-term pitfalls in relying on a covenant not to sue to escape unfavorable judgments. In particular, it noted that covenants not to sue “may be a risky long-term strategy for a trademark holder,” citing potential loss of rights through “naked licensing” or failure to police. The Court also noted that the Lanham Act safeguards against abusive litigation practices by providing an award of attorneys’ fees in exceptional cases.
Finally, Justice Kennedy wrote a concurring opinion joined by three other Justices, which underscored the “formidable burden” faced by litigants under the voluntary-cessation doctrine. In short, the concurrence made a case for enhanced scrutiny by courts in cases where a trademark plaintiff attempts to dodge an invalidity counterclaim by mooting the case through a unilateral covenant not to sue:
If the holder of an alleged trademark can commence suit against a competitor; in midcourse file a covenant not to sue; and then require the competitor and its business network to engage in costly, satellite proceedings to demonstrate that future production or sales might still be compromised, it would seem that the trademark holder’s burden to show the case is moot may fall well short of being formidable.Justice Kennedy’s concurrence closed by noting that, given the lower courts’ broad reading of Nike’s covenant not to sue, Nike will be barred from suing Already in the future for “any shoe that is not an exact copy or counterfeit version of the Air Force 1 shoe.”
CONCLUSION
This case clarifies the burden-shifting framework applied under the voluntary-cessation doctrine, and highlights the high hurdle litigants face that seek to exit lawsuits through voluntary-compliance measures such as covenants not to sue. Additionally, this case highlights why trademark holders should exercise caution when considering covenants not to sue as a litigation-exit strategy. In particular, trademark owners should balance the potential risk of an unfavorable judgment in a particular lawsuit against the potential loss of rights resulting from a covenant not to sue.
