The United States Supreme Court recently held that a trademark infringement plaintiff’s broadly worded covenant not to sue, issued after its competitor brought an invalidity counterclaim, mooted the counterclaim under the voluntary cessation doctrine. The Court found that the covenant was so broad that neither the Court nor, apparently, the defendant, could conceive of a product that would infringe the trademark yet not fall within the covenant. It therefore affirmed the District Court’s dismissal of the invalidity counterclaim.

In the case, Already, LLC dba YUMS v. Nike, Inc., 568 U.S. ____ (January 9, 2013), Nike filed a suit alleging that YUMS’s athletic shoes violated Nike’s Air Force 1 trademark. YUMS denied these allegations and filed a counterclaim challenging the validity of Nike’s trademark. Eight months after filing suit, and four months after YUMS counterclaimed, Nike, stating that “[YUMS]’s actions . . . no longer infringe or dilute the NIKE Mark at a level sufficient to warrant the substantial time and expense of litigation,” issued a very broadly worded “Covenant Not to Sue” covering YUMS’s existing products or any future “colorable imitations.” Nike then moved to dismiss its claims and the counterclaim on mootness grounds. The District Court dismissed Nike’s claims, and, over YUMS’s objection, the counterclaim as well. On appeal, the Second Circuit affirmed. The Supreme Court affirmed, holding that the case was moot under the voluntary cessation doctrine.

The Court’s decision likely has broad application to all intellectual property cases. It means that an IP rights holder can sue one of its competitors for infringement, and thereby inflict the burden and expense of litigation on its adversary, but then moot the case if the adversary fights back by counterclaiming for invalidity. In order to pursue this strategy, however, the rights holder must risk weakening its IP by issuing an extremely broad covenant not to sue, and may expose itself to a potential claim for attorneys’ fees.

After issuing the Covenant Not to Sue, Nike moved to dismiss on the ground that the covenant had extinguished the case or controversy. YUMS opposed dismissal of its counterclaim, arguing that Nike had not established that its voluntary cessation had mooted the case. In support, YUMS presented evidence that YUMS had plans to introduce new versions of its shoe lines into the market, that potential investors would not consider investing in YUMS until Nike’s trademark was invalidated, and that Nike had intimidated retailers into refusing to carry YUMS’s shoes. The District Court dismissed YUMS’s counterclaim on the ground that YUMS had the burden of showing that the court had jurisdiction over its declaratory judgment counterclaim, and had presented no evidence that YUMS sought to develop any shoes not covered by the covenant. Therefore, there was no longer a “substantial controversy . . . of sufficient immediacy and reality to warrant the issuance of a declaratory judgment” within the meaning of the Declaratory Judgment Act, 28 U.S.C. § 2201 et seq.

The Second Circuit affirmed, finding that because the covenant covers “both past sales and future sales of both existing products and colorable imitations,” it was hard to imagine a shoe that would infringe the Air Force 1 trademark yet not fall within the covenant. Because YUMS had not asserted any intention to market any such non-covered shoe, YUMS could not show any continuing injury. The Second Circuit held that no justiciable controversy remained.

The Supreme Court decided the case on the basis of Article III standing. Article III of the Constitution grants the federal judicial branch authority to adjudicate “Cases” and “Controversies.” Litigants must demonstrate “a personal injury fairly traceable to the defendant’s allegedly unlawful conduct and likely to be redressed by the requested relief,” in order to establish standing to sue or maintain a claim in federal court. The Court has recognized “that a defendant cannot automatically moot a case simply by ending its unlawful conduct once sued,” “[o]therwise, a defendant could . . . stop when sued to have the case declared moot, then pick up where he left off, repeating this cycle.” Thus, a defendant claiming that its voluntary cessation moots the case must show that it is “absolutely clear the allegedly wrongful behavior could not reasonably be expected to recur.”

The Court found that Nike’s Covenant met the burden imposed by the voluntary cessation test because it: (a) was unconditional and irrevocable; (b) prohibited any claims or demands; (c) reached YUMS’s distributors and customers; and (d) covered not just current or previous designs, but any “colorable imitations” produced or used in commerce after the effective date of the Covenant. The Court agreed with the Court of Appeals that it was hard to imagine a scenario that would potentially infringe Nike’s trademark, yet not fall under the Covenant. “If such a shoe exists, the parties have not pointed it out, there is no evidence that [YUMS] has dreamt of it, and we cannot conceive of it.” This, and YUMS’s failure to assert an intent to design or market a shoe that would expose it to any possibility of infringement liability, convinced the Court that it was “absolutely clear” that the activity could not reasonably be expected to recur.

Once this level of clarity was reached, the Court found that the fact that some individuals – the potential investors, for example – might base their decisions on speculation did not give rise to a “concrete” and “actual” injury as required for Article III standing. Further, even if Nike were harassing YUMS’s distributors or customers, YUMS failed to explain how invalidating Nike’s trademark would redress this conduct. The Court also rejected YUMS’s argument that it had standing as a competitor in the athletic shoe market to challenge Nike’s trademark. YUMS asserted that allowing Nike to moot the case unilaterally would encourage large companies like Nike to register invalid trademarks and intimidate smaller competitors, “avoiding judicial review by issuing covenants in the rare case where the little guy fights back.” The Court rejected this “boundless” theory of standing and pointed out that, although YUMS’s theory might aid the smaller party, “lowering the gates for one party lowers the gates for all.” Thus, YUMS’s theory would have provided standing to larger companies to challenge the trademarks of their smaller competitors, simply because they are competitors in the same market.

The most important lesson from the case may be found in the concurrence by Justice Kennedy (joined by Justices Thomas, Alito, and Sotomayor). Justice Kennedy warned that covenants not to sue should not be seen as an automatic “out” for a trademark holder facing an invalidity counterclaim. The trademark holder has the “formidable burden” to prove that it is “absolutely clear” that the assertion of trademark infringement is “not reasonably likely to recur.” Nike’s covenant was so broad that it was “inconceivable” that any of YUMS’s future products might fall outside the scope of the covenant. A covenant of this breadth will moot the case at issue, but, as the Court points out, only at the risk of weakening the trademark and exposing the holder to a possible claim for attorneys’ fees under the exceptional case doctrine of 15 U.S.C. § 1117(a).

The Court’s decision is available here.