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The Supreme Court held arguments Nov. 7 about whether a trademark owner's covenant not to sue, delivered after the rights holder had haled a defendant to federal court for trademark infringement, divests a federal district court of Article III jurisdiction over the defendant's counterclaim seeking a cancellation of the asserted mark (Already LLC d/b/a Yums v. Nike Inc., U.S., No. 11-982, oral arguments 11/7/12).
Though a trademark case, the court's decision could have far reaching implications in the broader intellectual property community, particularly if it adopts the bright line rule that unilateral covenants not to sue can never moot an ongoing case or controversy when the alleged infringer has filed a counterclaim seeking cancellation of a registered mark or a determination of patent invalidity.
The court, however, did not seem to be seriously considering such a broad ruling.
“The question is, is there any covenant that exists in the world that would make you feel secure?” Justice Elena Kagan asked petitioner's attorney. “And I suppose I'm having a little bit of difficulty with the answer, with an answer that says: No, there is no covenant that you can write that would make us feel secure.”
A few of the justices indicated that not only were they skeptical that a rights holder's covenant not sue can never moot an ongoing case or controversy, they were also dubious that the covenant in this case did not mitigate all injuries claimed by the petitioner. But, both courts below appeared to apply the incorrect standard for determining whether the case was mooted by the covenant, some justices noted. As a result, the arguments by the solicitor general--participating as amicus curiae in the oral argument--that the court should vacate and remand for application of the appropriate standard below, appeared to garner some support from the bench.
The dispute began when Nike Inc., a well-known designer and manufacturer of athletic shoes, designed and began distributing its Air Force 1 sneaker. Since then, Nike has issued more than 1,700 color variations of the Air Force 1.
Nike holds several U.S. trademark registrations related to the appearance of the Air Force 1.
Already LLC d/b/a Yums is a competing footwear maker. In 2009, Nike sued Yums, alleging that Yums's Sugar and Soulja Boy shoes infringed its trademark rights. Yums counterclaimed, seeking cancellation of one of Nike's trademark registrations.
In 2010, Nike presented a “covenant not to sue” to Yums, seeking to settle the dispute and agreeing not to pursue further trademark action against Yums. Yums argued that, despite the covenant, there was a persisting case or controversy. Judge Richard J. Sullivan of the U.S. District Court for the Southern District of New York dismissed Nike's claims with prejudice and dismissed Yums's counterclaims without prejudice.
On appeal, the U.S. Court of Appeals for the Second Circuit affirmed the lower court's conclusion that upon delivery of the covenant not to sue, the court was divested of subject matter jurisdiction under the case or controversy requirement of Article III of the U.S. Constitution (222 PTD, 11/17/11).
Yums then petitioned the Supreme Court for a writ of certiorari, arguing that there was a split among circuits and also that the Second Circuit's ruling was inconsistent with Supreme Court precedent (34 PTD, 2/22/12).
Furthermore, according to Yums, the Second Circuit's rule was in conflict with the public interest in challenges to the validity of registered trademarks.
“The alleged 'trademark' at issue is a shoe configuration that entered the public domain nearly 30 years ago,” the petition argued. “Whether the shoe configuration can rightly be deemed a 'trademark,' and as such protected against imitation in perpetuity, is a question in which 'the consuming public is deeply interested.' ”
In its brief in opposition, Nike disputed the claim of a circuit split. The Ninth Circuit decision that Yums alleged was in conflict with the Second Circuit was Bancroft and Masters Inc. v. Augusta National Inc. 223 F.3d 1082, 55 USPQ2d 1941 (9th Cir. 2000).
According to Yums, Bancroft “held that a promise not to assert a registered trademark against an accused infringer's existing activities did not divest the district court of Article III jurisdiction to hear the accused infringer's claim challenging the validity of the asserted mark.”
Nike countered that Bancroft, however, was based on a finding that “the offer of settlement in that case was 'incomplete and qualified.' ”
Nike further asserted that other courts had refused to follow Bancroft. This claim was disputed by Yums in its reply brief, which characterized Nike's brief as erroneously applying the standards of a declaratory judgment action to the matter.
The Supreme Court granted cert June 25 (122 PTD, 6/26/12), and on Oct. 15 it granted leave to the Office of the U.S. Solicitor General to participate as amicus curiae in the oral argument.
The government's amicus brief recommended that the court vacate the appeals court's decision and remand the matter for further proceedings.
According to the government's brief, the matter should be subject to the voluntary cessation doctrine, under which Nike would bear the burden of showing that it is “absolutely clear” that a dispute “could not be reasonably expected to recur.”
Michael J. Burstein of the Benjamin N. Cardozo School of Law, New York, authored a brief on behalf of 17 law professors in support of Yums. The Public Patent Foundation also filed an amicus brief in support of Yums.
The American Intellectual Property Law Association, the International Trademark Association, and Levi Strauss & Co. all filed amici briefs in support of Nike.
The Intellectual Property Owners Association filed an amicus curiae brief in support of neither party.
An issue that was stressed in many of the briefs was whether the courts below should have applied the traditional Article III standing analysis that governs the outset of a case, or if instead they should have looked to mootness jurisprudence for guidance.
Specifically, Yums and the solicitor general argued that this case actually concerns facts that make relevant one of the exceptions to the mootness doctrine: the voluntary cessation doctrine. Articulated in Friends of the Earth Inc. v. Laidlaw Environmental Services Inc., 528 U.S. 167 (2000), that doctrine, according to the government's brief, would require Nike to bear the burden of showing that it is “absolutely clear” that a dispute “could not be reasonably expected to recur.”
When Yums's attorney, James W. Dabney of Fried, Frank, Harris, Shriver & Jacobson, New York., began describing the heavy burden that Friends of the Earth places on a party asserting mootness, Justice Stephen G. Breyer cut him off to agree with him.
“You're right, that's the standard,” Breyer said.
Breyer later noted that neither of the opinions by the lower courts even mentioned Friends of the Earth, a factor that he suggested to Nike's attorney, Thomas C. Goldstein of Goldstein & Russell, Washington, D.C., seemed to weigh in favor of vacating and remanding.
Ginger B. Anders, assistant to the solicitor general, advocated in favor of just such a remedy.
The voluntary cessation doctrine “is both a way of determining whether the covenant has eliminated any concrete dispute between the parties and also a framework for the parties to use to negotiate the appropriate scope of the covenant,” she said.
In Nike's brief, it argued that the voluntary cessation doctrine was not applicable where the party asserting mootness has delivered an enforceable promise to not continue engaging in the complained of behavior vis-à-vis the non-moving party. Here, Nike has promised through its covenant to not assert any infringement action against Yums for any existing shoes or for any “colorable imitations” thereof. That enforceable covenant in fact counsels against the application of the voluntary cessation doctrine, Nike argued in its brief.
In oral arguments Goldstein reiterated the position that the doctrine was inapplicable, but he said that even if the court determined that it did control, Nike met the standard below.
Yums argued that the covenant was insufficient to eliminate case or controversy standing because the mere existence of the registration was enough to scare off potential investors.
“The counterclaim in this case seeks to extinguish a source of cost, risk, and official restraint on what footwear products the petitioner can and cannot legally sell,” Dabney said. “These are classic forms of injury in fact.”
Moreover, the fact that Yums has already been sued once for infringement makes the company hesistant to release new lines shoes of shoes that may, in Nike's view, infringe the registered mark.
“Once bitten, twice shy,” Dabney said two times during the argument.
The only way for Yums to feel secure in bringing new shoes to market is if it can cancel the registration, he said. But this is where he encountered substantial push back from a number of the justices.
In addition to Kagan's skepticism, Chief Justice John G. Roberts Jr. also appeared doubtful and asked Dabney how he, as a lawyer, would draft a covenant that completely ameliorated any injury to Yums. Dabney responded that only a covenant that resulted in the cancellation of the trademark could accomplish the task.
Roberts seemed taken aback by this answer.
“I thought it was a practice that was not unprecedented for parties to grant covenants of this sort,” Robert said. “You're saying this is unheard of; nobody can do this?”
Dabney said in fact the practice dated back to 1995 and thus is a “recent, controversial practice that has never been embraced by this court at all.”
The government disagreed with Dabney's characterization, and Anders said, “A trademark holder can moot a declaratory judgment action seeking to invalidate a trademark by offering the plaintiff a sufficiently broad covenant not to sue.”
The question of whether a particular covenant does in fact moot an action will often depend on the covenant's breadth, and specifically its application to future activities, Anders said. Where a covenant does not cover future activities, a plaintiff could defeat mootness simply by alleging that it intends to make a new product that is not covered by the covenant, she said.
Yums in fact introduced an affidavit to the trial court in which its president said that the company intended to continue to make new lines of shoes. The affidavit did not, however, state an intention to imitate Nike's registered mark.
Anders suggested that on remand Nike should have to prove that Yums's business development plans do not involve any activity that falls outside the scope of the covenant. Nike could do this through discovery, Anders said. She then told Justice Anthony M. Kennedy that this discovery could include taking depositions from Yums's executives in order to ascertain their business plans.
“So Nike has an advantage over Already that no other manufacturers had. It can demand what its future plans are,” Kennedy pointed out.
Goldstein disagreed that Nike would receive any competitive advantage if Yums disclosed its business plans through discovery.
“In every single patent or trademark invalidity case, after this court's decision in MedImmune, the party alleging invalidity in order to show its standing has to say, we intend to make a product that is regarded as potentially infringing,” Goldstein said, referring to MedImmune Inc. v. Genentech Inc., 549 U.S. 118, 81 USPQ2d 1225 (2007) (06 PTD, 1/10/07). In these cases, secrecy is maintained through protective orders, he said.
Kagan asked Goldstein if the covenant prevented Yums from manufacturing an exact replica of Nike's mark. He said that it did.
Moreover, Goldstein suggested that if Yums's president had stated in his affidavit that the company intended to make counterfeit Air Force 1 shoes then there would be a case or controversy and Nike's motion to dismiss would have been denied. But, under those circumstances Goldstein suggested that Nike would be hesitant to deliver the covenant in the first place “because you can't give a covenant not to sue over a counterfeit because you are in real risk of being deemed to have abandoned the mark,” he said.
The covenant in this case did moot the controversy because there is nothing in the record to suggest that Yums has any plans to engage in activity that falls outside of the covenant, Goldstein argued.
“The reason they are not saying that they want to make … a copy of the Air Force 1 is that they don't want to make a copy of the Air Force 1,” Goldstein said.
Thus, there is no reason to remand the case because Nike has demonstrated mootness even under the heightened voluntary cessation standard, he said.
When Dabney faced the court on rebuttal he was asked repeatedly by Justice Sonia M. Sotomayor if Yums intended to make an exact replica of the Nike shoe. Dabney seemed reluctant to answer in the affirmative saying, after pressed, only that he believes that if the registration is cancelled it is likely that Yums will bring a shoe to market.
Kennedy found this answer lacking.
“How are you hurt then?,” he asked. If Yums loses this action and later decides to make an exact replica of the shoe then it can always file a cancellation proceeding before the Patent and Trademark Office's Trademark Trial and Appeal Board, Kennedy said.
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