In connection with a trade dress infringement action by Nike, Inc. against another shoe company, Already, LLC, involving Nike’s federally registered trade dress for a certain shoe design, the U.S. Supreme Court decided an important issue regarding the scope and ramifications of covenants not to sue.
In this case, an issue arose as to the ability of a defendant to maintain counterclaims in an existing proceeding, particularly counterclaims for trademark cancellation, when a plaintiff enters a broad covenant not to sue in connection with a voluntary dismissal. Here, following plaintiff Nike’s voluntary dismissal in view of entering a broadly constructed covenant not to sue, Already, LLC took a position that it still had the right to continue seeking cancellation of Nike’s federal trademark registration that formed a basis for Nike’s suit. Thus, the Supreme Court framed the question as follows: whether a covenant not to enforce a trademark against a competitor’s existing products and any future “colorable imitations” moots the competitor’s actions to have the trademark declared invalid.
In its January 9, 2013 opinion, the Supreme Court unanimously affirmed the lower courts’ rulings using a slightly different standard than the lower courts used, holding that Already’s case was moot in view of the “voluntary cessation doctrine.” Under this standard, it was Nike’s burden to prove that it could not reasonably be expected to resume its enforcement efforts against Already, LLC such that there no longer existed a case or controversy. The Court held that Nike had indeed met this burden, in view of its unconditional and irrevocable covenant not to sue Already, LLC.
In a concurring opinion, Justice Kennedy reiterated that Nike had to meet a “formidable burden” under the doctrine of voluntary cessation to show that it was absolutely clear that “the allegedly wrongful behavior could not reasonably be expected to recur,” meaning that Already had no reasonable anticipation of a future trademark infringement claim from Nike regarding the types of shoes at issue.
As a note of caution, it is conceivable that the same facts that allowed Nike to avail itself of the voluntary cessation doctrine can also potentially limit future enforcement prospects with regard to third parties. Furthermore, as generally noted in the opinion and also by Justice Kennedy in the concurring opinion, courts should proceed with caution when ruling on this issue, to ensure that such covenants are not used as “automatic mechanisms for trademark holders to use courts to intimidate competitors without, at the same time, assuming the risk that the trademark will be found invalid and unenforceable.”