What Did We Learn From Already v. Nike?

 Trademark disputes rarely make their way up to the Supreme Court, and after the court granted cert in Already v. Nike, many wondered what made this case so special. The answer to that question may be that the case was special precisely because it had much more to do with constitutional law than it did with trademark law. As a result, the decision itself offers more guidance on constitutional issues such as Article III standing than it does on pure trademark issues. Still, the decision contains valuable guidance on some issues that pop up frequently in trademark practice.   

The case was decided Jan. 9 and, at face value, the court’s unanimous decision that Nike’s unilateral covenant not to sue divested the district court of jurisdiction over Already’s counterclaim seems to embolden would-be trademark bullies ( Already L.L.C. d/b/a Yums v. Nike Inc.,  U.S., No. 11-982, 1/9/13). However, a concurring opinion written on behalf of four justices potentially makes it not altogether a complete victory for rights holders. The concurrence notes that being sued for trademark infringement can have profound economic implications for the defendants, and it urges courts to exercise discretion before mooting cases in similar circumstances.

The case began after Nike filed a trademark infringing suit against Already L.L.C. d/b/a Yums in which it alleged that two lines of Already shoes infringed Nike’s registered trademark for the design of Nike’s popular Air Force 1 shoe. Air Force 1

 In addition to arguing that its shoes did not infringe, Already also filed a counterclaim seeking a cancellation of the registered mark. Nike then delivered to Already a covenant not to sue in which it promised that it would not sue for trademark infringement with respect to the existing two lines of shoes, of for any future “colorable imitations” thereof.

 Nike then dropped its trademark infringement claim, and asked the Southern District of New York to dismiss the case for lack of jurisdiction. Already argued that its counterclaim gave rise to an ongoing case or controversy that satisfied the jurisdictional requirements of Article III of the Constitution. The district court disagreed and dismissed the case for lack of jurisdiction. The Second Circuit affirmed.

Already urged the Supreme Court to reverse. One of Already’s arguments was based in procedure: it argued that the lower courts had applied the incorrect mootness standard and thus it urged a remand for application of the appropriate standing test—the voluntary cessation doctrine. Interestingly enough this argument, which was also made by the Office of the U.S. Solicitor General, was accepted by the Supreme Court. Up to a point, at least. The court acknowledged that neither of the lower courts had even mentioned the voluntary cessation doctrine. And while that doctrine undoubtedly controlled this case, the high court said that the failure of the lower courts to cite the doctrine by name was immaterial.

“[T]he analysis in their opinions addressed the same questions we have addressed today under that standard,” the court said, concluding that it would be pointless to remand the case.

 Trademark Bullying  

Already also argued that the lower courts’ decisions were contrary to public policy. Allowing Nike to tap out of a fight that it has started, notwithstanding the counterclaim, only encourages rights holders to engage in overzealous enforcement of their trademarks, Already argued. Most small businesses will be easily scared off when a gigantic company such as Nike accuses them of trademark infringement, Already said. But, in the few instances when a small company pulls together the resources to challenge a trademark infringement claim in court—by seeking a cancellation of the trademark at issue—the court should not then dismiss the lawsuit at the request of the rights holder, Already argued. Far from encouraging innovation—the purpose underlying the country’s IP system—these practices actually stifle creativity and in fact effectively give the rights holder more government-backed power than was intended under the Lanham Act, Already argued in its brief.

Although the Supreme Court declined to rule in favor of Already based solely on this policy reason, in the unanimous decision written by Chief Justice John G. Roberts Jr. the court demonstrated that it was in fact keenly aware of how trademark bullies can harm their smaller competitors. However, the court said that an adoption of Already’s position would in fact give these bullies more, not less, power. The court said:

Accepting Already’s theory may benefit the small com­petitor in this case. But lowering the gates for one party lowers the gates for all. As a result, larger companies with more resources will have standing to challenge the intel­lectual property portfolios of their more humble rivals—not because they are threatened by any particular patent or trademark, but simply because they are competitors in the same market. This would further encourage parties to employ litigation as a weapon against their competitors rather than as a last resort for settling disputes.

This passage tacitly acknowledges some of the dangers associated with trademark bullies. A concurrence written by Justice Anthony M. Kennedy, however, goes even further. The concurrence, joined by three justices in addition to Kennedy, said:

Courts should be well aware that charges of trademark infringement can be disruptive to the good business relations between the manufacturer alleged to have been an infringer and its distributors, retailers, and investors. The mere pendency of litigation can mean that other actors in the marketplace may be reluctant to have future dealings with the alleged infringer. Nike appears to have been well aware of that dynamic in this case.

Kennedy agreed that in this case Nike had demonstrated that its covenant not to sue was sufficiently broad so as to eliminate the likelihood that it could in the future sue Already for infringing its Air Force 1 mark. But, “In later cases careful consideration must be given to the consequences of using a covenant not to sue as the basis for a motion to dismiss as moot,” Kennedy said.

  No Stated Intention to Infringe 

The court placed particular importance on the fact that throughout the litigation Already never said that it wanted to create a new shoe that would fall outside of the covenant, and yet could possibly be considered infringing. That is, Already would not, and did not, suggest that it wanted to create a line of shoes that would undoubtedly infringe the Air Force 1 mark in a way not covered by the covenant. If it had proffered such evidence then even Nike’s attorney admitted that there would have been an existing case or controversy, and thus the case would not have been moot.  For its part, the court said that the covenant made it highly unlikely that Already could introduce a shoe that on one hand is a colorable imitation of its own designs, and on the other hand somehow falls beyond the scope of the covenant so as to invite infringement litigation. In a light-hearted passage the court said:

If such a shoe exists, the parties have not pointed to it, there is no evidence that Already has dreamt of it, and we cannot conceive of it. It sits, as far as we can tell, on a shelf between Dorothy's ruby slippers and Perseus's winged sandals.

What Have We Learned?  

For rights holders, it seems clear that unilateral covenants will continue to be an available option for parties seeking a swift end to sticky litigation. However, the court’s determination that the voluntary cessation doctrine applies, and the concurrence’s insistence that the party that initiated the suit in the first place bear the heavy burden of demonstrating mootness, means that these covenants must be carefully, and broadly drafted.

For companies like Already the lessons are not so clear. Although the public policy argument failed to carry the day, both of the court’s opinions demonstrated an awareness of the negative effects of trademark bullying, and the concurrence went to great lengths to stress that a trademark owner that has brought a claim in the first place had a heavy burden of demonstrating that a subsequent covenant not to sue mooted the case. The court found Nike’s covenant unassailable in this case, but the threshold has clearly been raised for future cases involving similar circumstances.

In this case, Already presumably had its own strategic reasons for declining to state that it wanted to infringe Nike’s trademark. However, it seems clear that had the company claimed that it intended to introducing a line of shoes that without question would have infringed the Air Force 1 mark—in a manner not protected by the covenant—then its counterclaim would not have been moot. Therefore, a second takeaway for smaller companies is that if they truly want an opportunity to cancel a rights holder’s mark in federal court—as opposed to through the Patent and Trademark Office’s Trademark Trial and Appeal Board—then they may, after receiving a covenant not to sue, need to explicitly state a desire to infringe.  A rights holder should be hesitant to grant a potential infringer free rein to copy its mark, as that would compromise its enforcement efforts against third parties. Thus, a stated intention to infringe would, in facts similar to the ones of this case, likely force a rights holder to try to defend its trademark in federal court.

These lessons learned are not groundbreaking. But perhaps that is a good thing given how infrequently the Supreme Court takes an interest in trademark law. The decision does offer some guidance, and it also does not completely alter the playing field for IP practitioners—an outcome that many (though certainly not all) are hoping for when the high court weighs the patent eligibility of claims on human DNA later this term in Association for Molecular Pathology v.  Myriad Genetics Inc.