Pattishall IP Blog

January 11, 2013

Air Force 1 trade dress dispute held moot – Nike wins at Supreme Court, but at what cost?

Filed under: Litigation, Trade Dress, Uncategorized — Tags: , , , , — Pattishall, McAuliffe, Newbury, Hilliard & Geraldson LLP @ 10:41 am

UW low res

by Uli Widmaier

A sues B for infringing its registered mark.  B counterclaims for cancellation of A’s registration.  A executes a comprehensive covenant not to sue B in the future for using any colorable imitation of A’s mark, and moves to dismiss the lawsuit with prejudice.  B, intent on pursuing its counterclaim, opposes the motion.  The district court holds that the case is moot, and grants A’s motion.  The Court of Appeals affirms, as does the Supreme Court.  Case over.

This is the short version of Already, LLC, v. Nike, Inc., decided unanimously by the Supreme Court on January 13, 2013.  See — U.S. –, No. 11-982 (U.S. January 9, 2013).  To put some meat on the factual bones:  Nike was the plaintiff, Already was the defendant, the mark was the trade dress of Nike’s famous Air Force 1 shoe, for which Nike has a federal registration.  Already sold shoes that Nike felt infringed the Air Force 1 trade dress.  Nike sued, Already counterclaimed.  Nike then reconsidered, successfully mooting the case via a unilateral covenant not to sue.  “The covenant promised that Nike would not raise against Already or any affiliated entity any trademark or unfair competition claim based on any of Already’s existing footwear designs, or any future Already designs that constituted a “colorable imitation” of Already’s current products.”  Already, slip op. at 2.

The Supreme Court’s decision clarifies (to a degree) the burden for showing the existence or absence of an actual controversy where a plaintiff seeks to moot a defendant’s counterclaim via a unilateral covenant not to sue.  But its importance lies just as much, if not more, in the barriers the Court erects against future uses of covenants not to sue, and in the insight it provides into the Justices’ thinking about trademarks and about basic competitive fairness.

The opinion was written by Chief Justice Roberts.  Justice Kennedy wrote a concurrence, which Justices Thomas, Alito, and Sotomayor joined.

I.    The Holding:  Burdens and Burden-Shifting

Both the district court and the Second Circuit held that, once Nike had executed the covenant not to sue, the burden was on Already to show that the case had not become moot.  Slip op., Kennedy concurrence at 1.  This was “wrong.”  Id.  “Under our precedents, it was Nike’s burden to show that it could not reasonably be expected to resume its enforcement efforts against Already.”  Slip op. at 5, quoting Friends of the Earth, Inc., v. Laidlaw Environmental Services (TOC), Inc., 528 U.S. 167, 190 (2000) (quotation marks omitted).  In other words, the “voluntary cessation doctrine” articulated in Friends of the Earth applies to Nike, who in this situation was the party who voluntarily ceased the allegedly wrongful conduct (i.e. a lawsuit based on an allegedly invalid registration) .  Id. at 5-6.  This burden imposed on Nike by the doctrine is a “formidable” one.  Id. at 6.

Nike carried its burden.  “The breadth of this covenant suffices to meet the burden imposed by the voluntary cessation test.”  Id.  The burden then shifted to Already “to indicate that it engages in or has sufficiently concrete plans to engage in activities not covered by the covenant.”  Id. at 8.  As the Court repeatedly noted, Already had utterly and consistently failed to make any such showing.  “[A] every stage of the proceedings . . . , Already steadfastly refused to suggest that it has any plans to create any arguably infringing shoe that does not unambiguously fall within the scope of the covenant – this despite every incentive, opportunity, and invitation to do so.”  Id. at 14.

To summarize the black-letter holding of the case: in a case where the plaintiff sues for infringement, the defendant counterclaims for cancellation, and the plaintiff then issues a covenant not to sue in order to have the suit dismissed as moot, the plaintiff must meet the “formidable burden” of showing that it could not reasonably be expected to resume its enforcement efforts against the defendant.  The burden then shifts to the defendant to indicate that it engages in or has sufficiently concrete plans to engage in activities not covered by the covenant.  If the defendant cannot do so (as in the case at bar), the suit is moot.

II.     The Concurrence:  Fairness Concerns and Market Effects

In his concurrence, Justice Kennedy indicates his agreement with the Court’s holding as well as the burden-shifting structure set up by the Court.  His concurrence emphasizes the heaviness of the plaintiff’s burden, and the difficulty of meeting it.  “This brief, separate concurrence is written to underscore that covenants like the one Nike filed here ought not to be taken as an automatic means for the party who first charged a competitor with trademark infringement suddenly to abandon the suit without incurring the risk of an ensuing adverse adjudication.”  Slip op., Kennedy concurrence at 2.

Justice Kennedy’s concern is with notions of basic fairness in commercial dealings: “It would be most unfair to allow the party who commences the suit to use its delivery of a covenant not to sue as an opportunity to force a competitor to expose its future business plans or to otherwise disadvantage the competitor and its business network, all in aid of deeming moot a suit the trademark holder itself chose to initiate.”  Slip op., Kennedy concurrence at 3.  Justice Kennedy puts the real-world effects of trademark infringement lawsuits squarely at issue:  “Courts should be well aware that charges of trademark infringement can be disruptive to the good business relations between the manufacturer alleged to have been an infringer and its distributors, retailers, and investors.  The mere pendency of litigation can mean that other actors in the marketplace may be reluctant to have future dealings with the alleged infringer.  Nike appears to have been well aware of that dynamic in this case.”  Id. at 2.

According to Justice Kennedy’s concurrence, therefore, the plaintiff’s burden of proof extends far beyond merely presenting a comprehensive covenant not to sue.  He lists a complex set of empirical criteria that courts ought to take into account in assessing whether a plaintiff has carried its burden of showing the case is moot:

Any demonstrated reluctance by investors, distributors, and retailers to maintain good relations with the alleged infringer might, in an appropriate case, be an indication that the market itself anticipates that a new line of products could be outside the covenant not to sue yet still within a zone of alleged infringement.  And, as noted at the outset, it is the trademark holder who has the burden to show that this is not the case.  It is not the burden of the alleged infringer to prove that the covenant not to sue is inadequate to protect its current and future products from a trademark enforcement action.

In later cases careful consideration must be given to the consequences of using a covenant not to sue as the basis for a motion to dismiss as moot.  If the holder of an alleged trademark can commence suit against a competitor; in midcourse file a covenant not to sue; and then require the competitor and its business network to engage in costly, satellite proceedings to demonstrate that future production or sales might still be compromised, it would seem that the trademark holder’s burden to show the case is moot may fall well short of being formidable.  The very suit the trademark holder initiated and later seeks to declare moot may still cause disruption and costs to the competition.  The formidable burden to show the case is moot ought to require the trademark holder, at the outset, to make a substantial showing that the business of the competitor and its supply network will not be disrupted or weakened by satellite litigation over mootness or by any threat latent in the terms of the covenant itself.

Id. at 3 (emphasis added).  The concurrence’s concern with the fairness of using covenants not to sue to end lawsuits is palpable:  “Courts should proceed with caution before ruling that [covenants not to sue] can be used to terminate litigation. An insistence on the proper allocation of the formidable burden on the party asserting mootness is one way to ensure that covenants are not automatic mechanisms for trademark holders to use courts to intimidate competitors without, at the same time, assuming the risk that their trademark will be found invalid and unenforceable.”  Id. (emphasis added).

The burden on the plaintiff imposed by the concurrence goes well beyond anything specified by the Court’s opinion.  It remains to be seen whether the lower courts will heed Justice Kennedy’s urgent plea to treat covenants not to sue with disfavor.

III.     Sabotaging the Covenant-Not-To-Sue Strategy

This is not to say that, unlike Justice Kennedy, the Court’s opinion looks with favor on plaintiffs’ use of covenants not to sue to back out of a lawsuit.  Quite the contrary.  As a matter of black-letter law, the Court declines to broaden its theory of standing based on Already’s “policy objection that dismissing this case allows Nike to bully small innovators lawfully operating in the public domain.”  Slip op. at 13.  However, the Court appears receptive to Already’s concern nevertheless, using dicta to sabotage the feasibility of the covenant-not-to-sue strategy:

First of all, granting covenants not to sue may be a risky long-term strategy for a trademark holder. See, e.g., 3 J. McCarthy, Trademarks & Unfair Competition §18:48, p. 18–112 (4th ed. 2012) (“[U]ncontrolled and ‘naked’ licensing can result in such a loss of significance of a trademark that a federal registration should be cancelled”); Sun Banks of Fla., Inc. v. Sun Fed. Sav. & Loan Assn., 651 F. 2d 311, 316 (CA5 1981) (finding that “extensive third-party use of the [mark was] impressive evidence that there would be no likelihood of confusion”). In addition, the Lanham Act provides some check on abusive litigation practices by providing for an award of attorney’s fees in “exceptional cases.” 15 U. S. C. §1117(a); cf., e.g., Gwaltney of Smithfield, Ltd. v. Chesapeake Bay Foundation, Inc., 484 U. S. 49, 67, n. 6 (1987) (explaining that an award of litigation costs can protect “from the suddenly repentant defendant”).

Id.  This paragraph contributes nothing to the holding of the case.  But for practical purposes, it may make covenants not to sue unusable for trademark infringement plaintiffs.  Any advantage to the plaintiff from using a covenant would be lost if the covenant were deemed a naked license, as the Supreme Court suggests, since (as the Court points out) naked licenses invalidate trademarks.  Likewise, if the use of covenants can lead to a finding of no likelihood of confusion and expose the plaintiff to liability for the defendant’s attorney’s fees under 15 U.S.C. Sec. 1117(a), the attractiveness of this strategy for plaintiffs would seem to be much reduced.

IV.     Conclusion – Handle With Care!

While Nike prevailed in this case, its victory – and that of any future plaintiff who makes use of a covenant not to sue to moot the lawsuit – may well by Pyrrhic or worse.  According to the Supreme Court, the covenant itself may be deemed a naked license and be fatal to the plaintiff’s mark; it may undermine future efforts to prove likelihood of confusion; and it may expose the plaintiff to liability for the defendant’s attorney’s fees.  According to Justice Kennedy’s concurrence, to obtain a finding of mootness a future plaintiff must “make a substantial showing that the business of the competitor and its supply network will not be disrupted or weakened by satellite litigation over mootness or by any threat latent in the terms of the covenant itself.”  Such a showing may be impossible to make for all practical purposes.

In short, plaintiffs should think twice before following in Nike’s footsteps.  Thanks to the Supreme Court’s efforts, the strategy pursued by Nike may backfire badly.

*  *  *

Uli Widmaier is a partner with Pattishall, McAuliffe, Newbury, Hilliard & Geraldson LLP, a leading intellectual property law firm based in Chicago, Illinois.  Pattishall McAuliffe represents both plaintiffs and defendants in trademark, copyright, and unfair competition trials and appeals. The firm advises its clients on a broad range of domestic and international intellectual property matters, including brand protection, Internet, and e-commerce issues.  Uli’s practice focuses on domestic and international trademark, copyright, trade dress and Internet law and litigation.

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