Supreme Court Sides With Nike in Trademark Dispute

The U.S. Supreme Court recently sided with Nike in a closely watched trademark dispute involving a covenant not to sue. The Court concluded that such an agreement moots a competitor’s counterclaims of invalidity. However, it was also quick to point out that a party claiming that its voluntary cessation of unlawful conduct renders case moot bears “formidable burden” of showing that it is absolutely clear that alleged unlawful behavior “could not reasonably be expected” to recur.

The Facts of the Case

The legal dispute began when Nike alleged that two of Already, LLC’s athletic shoes—“Sugars” and “Soulja Boys”—violated Nike’s trademark for its Air Force 1 sneakers. Already denied the allegations and filed a counterclaim challenging the validity of Nike’s trademark. While the suit was pending, Nike issued a “Covenant Not to Sue,” promising not to raise any trademark or unfair competition claims against Already or any affiliated entity based on Already’s existing footwear designs, or any future Already designs that constituted a “colorable imitation” of Already’s current products.

Thereafter, Nike sought to dismiss Already’s invalidity counterclaim based on the argument that the covenant had extinguished the case or controversy. The district court dismissed the claim after finding that “there was no longer a substantial controversy…of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.” The Second Circuit affirmed.

The Supreme Court’s Decision

In reaching its decision, the Supreme Court relied on the doctrine of “voluntary cessation.” It holds that a defendant cannot automatically moot a case simply by ending its unlawful conduct once sued. Rather, “a defendant claiming that its voluntary compliance moots a case bears the formidable burden of showing that it is absolutely clear the allegedly wrongful behavior could not reasonably be expected to recur.” Friends of the Earth, Inc. v. Laidlaw Environmental Services (TOC), Inc., 528 U.S. 167, 190 (2000).

In apply the doctrine to facts of the case, the majority noted that Nike’s covenant is unconditional and irrevocable, prohibits plaintiff from making any claim or any demand, protects defendant’s distributors and customers as well as defendant itself, and covers current shoe designs, previous designs, and “any colorable imitations thereof.” It further highlighted that Already had not asserted any intent to engage in activities outside the scope of the covenant that would expose it to prospect of infringement liability. “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,” the majority wrote.

The Court further rejected Already’s arguments against dismissal. “A policy objection that dismissing case will allow plaintiff to bully small innovators lawfully operating in public domain cannot compel adoption of defendant’s broad standing theory,” the Court concluded.

Overall, the decision is good news for trademark registrants because it signals that covenants not to sue can still be used to dismiss an invalidity claim. However, the Supreme Court has arguably raised the bar by articulating a high burden of proof for mooting these actions.

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