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U.S. Supreme Court Holds Covenant Not To Sue Moots Counterclaim For Trademark Cancellation

By Sarah Robertson, Susan Progoff, Fara Sunderji and Jena Tiernan of Dorsey & Whitney LLP

The United States Supreme Court in Already, LLC v. Nike, Inc., Appeal No. 11-892, 568 U.S. __, 2013 WL 85300 (January 9, 2013), held that a covenant not to enforce a trademark against a competitor's existing products and any future "colorable imitations" moots the competitor's action to have the trademark held invalid.
Nike designs, manufactures and sells a line of shoes under the trademark AIR FORCE. Already sells a line of competing shoes under the trademarks SOULJA BOYS and SUGARS. Nike brought suit for trademark and trade dress infringement, and Already counterclaimed to have Nike's trademark registration cancelled.

Eight months after Nike filed its complaint, and four months after Already counterclaimed, Nike issued a covenant not to sue, in which it "unconditionally and irrevocably" agreed not to make "any" claim or demand against Already or any of its related business entities, distributors, employees or customers for trademark infringement, unfair competition or dilution based on the appearance of "any of Already's current and/or previous footwear product designs, and any colorable imitations thereof. . ." After issuing the covenant not to sue, Nike dismissed its claims against Already with prejudice and moved to dismiss Already's counterclaim as moot. The district court dismissed the counterclaim, holding that because there was no evidence that Already sought to develop any shoes that would not be covered by the covenant, there was no longer a controversy to support declaratory judgment jurisdiction. The Second Circuit affirmed.

The Supreme Court affirmed the dismissal of Already's counterclaim. There must be an actual controversy at all stages of a litigation. Here, Nike dismissed its claims with prejudice and issued its covenant, which called into question the existence of any continuing case or controversy. The Court found that Nike's covenant is unconditional and irrevocable. It prohibits Nike from making any claim or demand. It extends to Already's distributors and customers. It covers existing designs and any colorable imitation. Further, because Nike has taken the position with the court that there is no prospect of any new shoe design that would potentially infringe its trademark and not fall within the scope of the covenant, Nike would be hard pressed to assert to the contrary in the future.

Already claimed that it would be harmed because (1) investors would be reluctant to invest so long as Nike is free to assert a trademark claim; (2) in view of Nike's decision to sue in the first place, Nike's trademarks will hang over Already's operations like a Damoclean sword; and (3) as one of Nike's competitors, Already inherently has standing to challenge Nike's trademarks. The Court found none of these injuries was sufficient to create Article III standing.

In a concurring opinion, Justice Kennedy clarified that the burden in this case was on Nike to show that the case was moot, not on Already to show that a justiciable controversy remained.

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