Counterclaim May Be Avoided by Covenant Not to Sue
By Christina M. Jordan, Litigation News Associate Editor – May 13, 2013

The U.S. Supreme Court held that a plaintiff’s broad covenant not to sue a competitor extinguishes a case or controversy. The Court noted that such a broad covenant not to sue eliminated standing for the competitor to have a trademark declared invalid. Already, LLC v. Nike, Inc.

Broad Covenant Not to Sue
In Already, LLC v. Nike, Inc., Nike filed a lawsuit against shoe manufacturer Already, LLC, claiming that Already sold shoes that diluted and infringed Nike’s trademark for a line of shoes called Air Force 1. Already denied the allegations and filed a counterclaim and supporting affidavits, alleging that Nike’s Air Force 1 trademark was invalid and was adversely affecting its business and dissuading investors.

Nike reconsidered its original claim and the potential consequences of the allegations made in the counterclaim and decided to dismiss its claims. Nike could not dismiss the lawsuit with the counterclaim pending, and instead filed a broadly worded covenant not to sue, promising not to raise any trademark claims based on any existing or future products that constitute a colorable imitation of Air Force 1. Nike then moved to dismiss its own claims, as well as Already’s counterclaim, on the ground that the covenant not to sue mooted the case. The lower court and appellate court agreed and dismissed Already’s counterclaim, and Already appealed to the Supreme Court for review.

The Supreme Court analyzed whether a “case or controversy” still existed after Nike filed its covenant not to sue, and ultimately found no such dispute survived. Thus, it held Already did not have standing to continue with its claim and that the case was moot. In affirming the appellate court’s decision, the Supreme Court held the standard was whether Already had any “reasonable anticipation of a future trademark infringement claim from Nike” after submission of the covenant not to sue. Because Nike had satisfied its burden to show that the covenant was sufficiently broad, there was no possibility of future claims against Already for any “colorable imitations” of Nike’s shoes. Thus, the covenant required dismissal of the counterclaim.

“Nike wrote a very good, broad covenant that really did take into account every eventuality in terms of future lawsuits that they might bring,” says Erick C. Howard, San Francisco, cochair of the Trademarks Subcommittee of the ABA Section of Litigation’s Intellectual Property Litigation Committee. “Nike’s covenant not to sue covered the products that were at issue in the case, and it covered products that colorably would look like the Already products at issue in the case. I think that was the real key for the Court,” adds Howard.

Risks of Broad Covenants Not to Sue
Notably, although the Court affirmed the dismissal in this case, it warned other companies that “granting covenants not to sue may be a risky long-term strategy” for companies as covenants could decrease the strength of the trademark. The real issue that you get into is where you have naked licensing of the mark. You are allowing other parties to use your mark that you claim to be valid without any bounds. You are potentially giving up your rights to that trademark, because you have this covenant that says you are never going to sue,” says Howard. “One of the tests used in determining infringement and likelihood of confusion is whether or not the trademark owner has allowed the marks to be nakedly licensed,” he adds.

“I think Nike entered into the covenant not to sue because they were concerned about the scope of their mark,” says Joan K. Archer, Kansas City, MO, cochair of the Trademarks Subcommittee of the Section of Litigation’s Intellectual Property Litigation Committee. “Nike thought that their trademark would be vulnerable to cancellation, because there are so many others in the marketplace imitating them.”

“If you are looking at any competitor that could have an effect on you in the marketplace, you would not pursue this strategy,” says Howard. “I think that Nike did this in this case because they made the calculation that Already is a very small player. But you never know what would happen in the future with a competitor who has more power,” he adds.

Benefits of Covenants Not to Sue
There are circumstances in trademark law where companies might benefit from covenants not to sue without diminishing the strength of their trademark. “When reasonable business people who own trademark registrations start to get close to each other in terms of their design,” Archer notes, “one practical way to avoid spending a lot of money on legal services, which would cause the price of the product to go up considerably, is to sit down in a practical manner and, from a business standpoint, say ‘here is our space and here is your space, and we agree not to invade each other’s space.’”

There might be circumstances where a covenant not to sue might make sense. “You might have consent agreements that are narrower that allow competitors to use a same or similar mark. That is not a concession that the mark is not valid. The covenant not to sue does not necessarily mean that the mark is weak,” says Howard.

Competitors Do Not Inherently Have Standing
One of the issues raised by Already in the case was whether Already, as a competitor, inherently had standing to make sure that Nike and other trademark holders do not have invalid trademarks. The Court rejected such a theory, finding that they “have never accepted such a boundless theory of standing” and that such a theory “would further encourage parties to employ litigation as a weapon against their competitors rather than as a last resort for settling disputes.”

If the Court had bought Already’s argument, it would have been a “significant threat” to the concept of standing, notes Howard. “What you are looking for in terms of bringing a lawsuit is whether someone suffered an injury. There is no injury suffered simply because you are a competitor,” he observes.

Keywords: intellectual property, trademark, covenant not to sue, standing

 
Related Resources
Asking for Friendly Advice Can Create a Conflict
Co-Client Relationship Between Insurer and Insured Not Automatic