Nike’s Covenant Not To Sue Destroys Declaratory Judgment Counterclaim

The U.S. Supreme Court has held that defendant’s claim of trademark invalidity of Nike’s registered AIR FORCE 1 sneakers was moot due to Nike’s covenant not to sue defendant Already with respect to Already’s existing footwear and any “colorable imitations” in the future.  Already, LLC d/b/a Yums v. Nike, Inc., Case No. 11-982 (January 9, 2013) (available here).   Nike filed suit against Already for Already’s sneaker designs “Soulja Boys.”  You can see a side-by-side comparison of the two products in the PDF (Already v. Nike-pictures).

Already filed a counterclaim, alleging that Nike’s trademark for AIR FORCE 1 was invalid and seeking a declaratory judgment that the mark was invalid under federal or New York State law.

Eight months after initiating the lawsuit, Nike sent Already a “Covenant Not to Sue,” which stated that Nike would not sue Already or any of its affiliates for any trademark or unfair competition claim based upon Already’s existing designs or future designs that are “colorable imitations” of Already’s current product line.  Nike then moved to dismiss its claims, thereby conforming with the covenant, and moved to dismiss Already’s counterclaim.  The District Court dismissed Already’s counterclaim, and the Second Circuit affirmed on appeal.

A case is moot when the issue in dispute is “no longer embedded in any actual controversy about the plaintiff’s particular legal rights.”  Alvarez v. Smith, 58 U.S. 87, 92 (2009).  In examining Nike’s covenant not to sue, the Supreme Court noted that the simple act of ending the unlawful conduct is not enough to moot a case.  Instead, the Court applied the voluntary cessation test, in which Nike had the burden of showing that “it is absolutely clear the allegedly wrongful behavior could not reasonably be expected to recur.”  Friends of the Earth, Inc. V. Laidlaw Environmental Services (TOC), Inc., 528 U.S. 167, 190 (2000).

With these standards in mind, the Supreme Court examined Nike’s covenant not to sue to assess whether Nike would have a potential claim of trademark or unfair competition against Already in the future.  The Supreme Court quoted the covenant:

“[Nike] unconditionally and irrevocably covenants to refrain from making any claim(s) or demand(s)… against Already or any of its… related business entities… [including] distributors… and employees of such entities and all customers… on account of any possible cause of action based on or involving trademark infringement, unfair competition, or dilution, under state or federal law… relating to the NIKE Mark based on the appearance of any of Already’s current and/or previous footwear product designs, and any colorable imitations thereof, regardless of whether that footwear is produced… or otherwise used in commerce before or after the Effective Date of this Covenant.”  Slip Opinion p. 6.

In applying the voluntary cessation test, the Supreme Court found that Nike’s covenant was unconditional and irrevocable, partially because Already had failed to provide any proof of any current or future shoe design that would violate Nike’s trademark and also fall outside of the covenant.  “If such a shoe exists… [i]t sits as far as we can tell, on a shelf between Dorothy’s ruby slippers and Perseus’s winged sandals.”  Already, at 7.

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