OUT OF REACH: COVENANT NOT TO SUE MOOTS SUBJECT MATTER JURISDICTION
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BAD FORCE THE FAITH OF COVENANTS OUT OF REACH: COVENANT NOT TO SUE MOOTS SUBJECT MATTER JURISDICTION 50 World Intellectual Property Review May/June 2013 www.worldipreview.com
THE FORCE OF COVENANTS
A sufficiently broad covenant
not to sue given to an accused
infringer may resolve the entirety
of a case between the parties,
as Robert Kenney and Katherine
Peden report.
In July 2009, Nike sued Already LLC, doing
business as Yums, in the US District Court for
the Southern District of New York for trademark
infringement, false designation of origin, unfair
competition and trademark dilution based on its
federally registered Nike trademark covering the
design of Nike’s Air Force 1 athletic shoe. Yums
filed a counterclaim for declaratory judgment
seeking to cancel Nike’s registration on the
grounds that it was not a trademark under 15
USC §1127 or under New York law.
www.worldipreview.com World Intellectual Property Review May/June 2013 51
THE FORCE OF COVENANTS
Subsequently, Nike delivered a ‘covenant not to actual case or controversy before it”, since “given
sue’ to Yums, stating that Nike would refrain the similarity of the Yums’ designs to the Nike
from pursuing action against Yums relating to “IT BECAME mark and the breadth of the covenant, it is hard
the Nike mark “based on the appearance of any of to imagine a scenario that would potentially
INCUMBENT
Yums’ current and/or previous footwear product infringe the Nike mark and yet not fall under
designs, and any colorable imitations thereof,
ON YUMS TO the covenant”.
regardless of whether that footwear is produced, INDICATE THAT IT
The question before the Supreme Court on the
distributed, offered for sale, advertised, sold or ENGAGES IN OR petition for certiorari was “Whether a federal
otherwise used in commerce before or after the
effective date of this covenant”.
HAS SUFFICIENTLY district court is divested of Article III jurisdiction
CONCRETE PLANS over a party’s challenge to the validity of a
After a hearing before the district court to federally registered trademark if the registrant
TO ENGAGE IN promises not to assert its mark against the party’s
determine whether the covenant divested
the court of subject matter jurisdiction, Nike ACTIVITIES THAT then-existing commercial activities.”
moved to voluntarily dismiss its infringement WOULD ARGUABLY
claims under Rule 41(a)(2) of the Federal Rules INFRINGE NIKE’S The factual record
of Civil Procedure as well as to dismiss Yums’ On November 7, 2012, the Supreme Court
counterclaim under Rule 12(b)(1.)
TRADEMARK.”
heard oral arguments on the issue. Much of the
questioning and resulting discussion focused
Subject matter jurisdiction would be lacking if
on the factual record before the court in
a cause of action is dismissed such that there
relation to Yums’ plans or intentions to develop
is no remaining cause of action or controversy
future products that fall outside of the scope
between the parties, because, pursuant to Article
of the covenant, namely, factor three of the
III, Section 2 of the Constitution, federal courts
MedImmune test.
only have subject matter jurisdiction over actual
“cases” or “controversies”. Due to the covenant, Ultimately, it was clear that the record contains
the court held that Yums’s declaratory judgment no indication that Yums intends to market any
action failed to create a “case or controversy” arguably infringing shoe that would fall outside
since a declaratory judgment claimant must the covenant, only a general statement that Yums
demonstrate “a substantial controversy, “is actively engaged in designing and bringing
between parties having adverse legal interests, out new footwear products”.
of sufficient immediacy and reality to warrant
the issuance of a declaratory judgment”. On Yums’ counsel also conceded that, because it had
these grounds, the district court dismissed asserted continued subject matter jurisdiction
the Yums counterclaim without prejudice, and based on a genuine threat by Nike to enforce its
Nike’s claims with prejudice. IP rights thereby inhibiting commercial activity,
it would not have had a sufficient basis to
On appeal, the US Court of Appeals for the establish Article III standing had Nike not filed
Second Circuit applied the US Supreme Court’s the underlying suit. Rather, Yums argued that,
2007 MedImmune Inc v Genentech Inc decision. because Nike had filed suit once, Yums’ fear of
The Second Circuit stated that: a recurring suit as well as the increased cost of
design in view of the Nike suit creates an Article
“In determining whether a covenant not to sue
III case or controversy.
eliminates a justiciable case or controversy in a
declaratory judgment action involving a trademark, Counsel for Nike argued that because the
district courts applying the MedImmune totality of covenant covered existing and past shoe designs
the circumstances test should especially consider, as well as future designs, which were colourable
in addition to other factors: imitations of existing designs, Yums could
claim no continuing injury. Alternatively, he
1. The language of the covenant; conceded that had Yums stated in the record that
2. Whether the covenant covers future, as it had specific intention to make a counterfeit
well as past, activity and products; and competing shoe, there would be continuing
Article III injury, since such a counterfeit
3. Evidence of intention or lack of intention, on product would not be covered by the scope of the
the part of the party asserting jurisdiction, covenant. So the focus turned squarely back to
to engage in new activity or to develop new the sufficiency of Yums’ statements in the record
potentially infringing products that arguably as to its future design intentions.
are not covered by the covenant.”
A further question remained, additionally, about
Applying those factors, the Second Circuit whether Nike had satisfied the very high burden,
agreed with the district court that “it had no set forth in the Supreme Court’s decision in
52 World Intellectual Property Review May/June 2013 www.worldipreview.comTHE FORCE OF COVENANTS
Friends of the Earth, Inc v Laidlaw Environmental The court noted that “once Nike demonstrated
Services (TOC), Inc, of showing that the covenant that the covenant encompasses all of Yums’
eliminated all potential injury to Yums, which allegedly unlawful conduct, it became
Nike had not specifically addressed. incumbent on Yums to indicate that it engages
in or has sufficiently concrete plans to engage
Finally, counsel for Nike and the US argued that
in activities that would arguably infringe Nike’s
because Yums could resort to filing a petition trademark yet not be covered by the covenant”.
for cancellation in the US Patent and Trademark Because Yums had failed to do so in the record, Robert Kenney has more than 25 years’
Office before the Trademark Trial and Appeal experience in trademark prosecution and
despite having every opportunity to do so, the
Board, where the threshold for standing is lower counselling. He specialises in helping clients
court found the case was moot without the need
than that for an Article III case or controversy, create and protect their trademarks, build
to remand as the covenant was clear and Yums’
dismissal of the counterclaim would not leave their brands, and make those trademarks and
evidence of intent complete. brands profitable. This deep experience allows
Yums without a potential remedy.
for efficiency in his practice, helping his clients
Therefore a sufficiently broad covenant not
The Supreme Court issued its decision on avoid litigation and offering higher value than
to sue provided by a trademark owner to an
January 9, 2013, affirming the Second Circuit’s many larger firms can provide.
accused infringer may resolve the entirety of a
decision holding that the case was moot case or controversy between the parties, thereby
because it lacked a “case” or “controversy”. divesting the federal courts of subject matter
Ultimately, the court found that Nike had met jurisdiction under Article III. Q
its “formidable burden” under Friends of the
Earth to show that it “could not reasonably
be expected to resume its enforcement
Robert Kenney is a partner at Birch, Stewart, Katherine Peden has been a member
efforts against Yums”. The court found that
Kolasch & Birch LLP. He can be contacted at: of the trademark department of Birch,
the breadth of Nike’s unconditional and
rjk@bskb.com Stewart, Kolasch & Birch since 2008. She
irrevocable covenant met the burden imposed practises federal trademark law including
by the voluntary cessation doctrine, which Katherine Peden is an associate at Birch, Stewart, clearance, prosecution, maintenance,
asks, “Could the allegedly wrongful behaviour Kolasch & Birch LLP. She can be contacted at: protection and inter partes matters.
reasonably be expected to recur?” katherine.m.peden@bskb.com
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