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