Contracting Away a Controversy: Nike v. Already LLC

Nike's Mark

The mark at issue relates to Nike's popular “Air Force 1″ line of shoes, which were first sold in 1982. The shoe line has become one of Nike's most popular styles, with well over 1,000 different variations of the shoe being produced and sold around the world. The shoe has become so popular that it has been mentioned and referenced in numerous pop culture works, including songs and videos.

In order to protect the shoe's design, in 2006 Nike filed a trademark application for certain aspects of its design. The design covers “the design of the stitching on the exterior of the shoe, the design of the material panels that form the exterior body of the shoe, the design of the wavy panel on the top of the shoe that encompasses the eyelets for the shoe laces, the design of the vertical ridge pattern on the sides of the sole of the shoe, and the relative position of these elements to each other.” The registration issued on June 24, 2008 as U.S. Trademark Registration No. 3,451,905 (the “'905 Registration”).

Nike used the '905 Registration to protest other shoe manufacturers' production and distribution of shoes similar to Air Force 1s. Nike was largely successful in this effort, getting a number of shoe manufacturers to cease and desist from such activities. None of the accused infringers, however, challenged Nike's rights in the '905 Registration.

Nike v. Already LLC

Already LLC (doing business under the Yums trade name) produced and distributed shoes similar to Air Force 1s. Nike highlighted two Already shoes in particular, the “Soulja Boy Tell Em Signature” and the “Sugar.” In early 2009, Nike sent Already a protest letter demanding that Already cease producing and selling the “Soulja Boy” shoe (the Sugar shoe was not yet in the market). Already refused, and on July 16, 2009 Nike filed a complaint in the U.S. District Court for the Southern District of New York. The complaint alleged trademark infringement, unfair competition, and dilution under the Lanham Act, common law trademark infringement and unfair competition, and related state claims. All three counts under the Lanham Act were based at least somewhat on the rights contained in the '905 Registration, and a copy of the '905 Registration was attached to the complaint.

Already's answer to the complaint not only denied Nike's claims, it also asserted counterclaims seeking an order that Nike's trademark rights in the Air Force 1 shoe were invalid, and cancellation of the '905 Registration.

A few months into discovery, Nike abruptly sent an executed “Covenant Not to Sue” to Already. On the basis of that covenant, Nike petitioned the court to allow Nike to voluntarily dismiss its claims against Already, and to dismiss Already's counterclaims on the basis that Already no longer had standing, since an actual controversy no longer existed.

As summarized by the Second Circuit, the covenant gave Nike's reasoning for executing the covenant as follows (the “NIKE Mark” consists, generally, of the design in the '905 Registration):

NIKE has recently learned that Already's actions complained of in the Complaint no longer infringe or dilute the NIKE Mark at a level sufficient to warrant the substantial time and expense of continued litigation and NIKE wishes to conserve resources relating to its enforcement of the NIKE Mark.

And the covenant stated that Nike would:

refrain from making any claim(s) or demand(s), or from commencing, causing, or permitting to be prosecuted any action in law or equity, against Already or any of its [successors or related entities and their customers], on account of any possible cause of action based on or involving trademark infringement, unfair competition, or dilution, under state or federal law in the United Sates [sic] 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, distributed, offered for sale, advertised, sold, or otherwise used in commerce before or after the Effective Date of this Covenant.

The district court, after a hearing, granted Nike's request and dismissed all of the claims. It held that whether or not there was an actual controversy depended on what Nike's covenant covered. It noted that the S.D.N.Y. has held prior covenants not to sue not broad enough to remove a court's jurisdiction, where the covenant “does not extend to future sales” and where the recipient of the covenant “had taken meaningful preparatory steps toward developing new or updated products not covered by the covenant not to sue.”

In contrast, the court held that neither of those cases was true in this dispute. Nike's covenant covered the sale of Already's current designs “before or after the Effective Date of this Covenant” and extended not only to Already's current designs, but also to “any colorable imitations thereof.” Additionally, the court noted that Already had not even alleged that it was currently working on a shoe design that would not be covered by the covenant.

In ruling for Nike, the court also quickly dismissed Already's allegation that the mere existence of the '905 Registration was a continuing harm to Already, because it scared off investors from wanting to work with, or invest in, Already and its products. The court held the evidence in support of these arguments ' affidavits from potential investors ' was too tenuous to create an actual controversy.

Already appealed to the Second Circuit.

The Second Circuit's Decision

The Second Circuit held that the Supreme Court's decision in MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007) controlled, and that its “totality of the circumstances” test should be applied when determining whether a covenant not to sue eliminates a justiciable case or controversy in a declaratory judgment action involving a trademark. The court held that:

[D]istrict courts applying the MedImmune totality of the circumstances test should especially consider, in addition to other factors: (1) the language of the covenant, (2) whether the covenant covers future, as well as past, activity and products, and (3) 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.

Using those three factors, the Second Circuit upheld the district court's dismissal of Already's counterclaims. First, it held that the language of the covenant was very broad, covering every conceivable action that Nike could bring against Already's products. Second, the covenant covered the future sale of current designs, as well as “colorable imitations” of current designs. The court noted that because Already's “Soulja Boy” shoe was so similar to the '905 Registration, because the covenant covers colorable imitations of current shoes it was “hard to imagine a scenario that would potentially infringe the '905 mark and yet not fall under the Covenant.” Finally, it held that Already had not even asserted that it had “any intention” to market a shoe not covered by the covenant. The court also quickly dismissed Already's argument that the Lanham Act provides for an independent basis of jurisdiction, regardless of a controversy. In doing so, the court noted that the Lanham Act did provide a way for Already to contest Nike's registration ' namely, a cancellation proceeding before the Trademark Trial and Appeals Board.

Before the Supreme Court

Already petitioned for a writ of certiorari, and on June 25, 2012 the Supreme Court granted the petition. The question presented is:

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.

In its brief, Already made three general arguments. First, it argued that the two lower courts erred in placing the burden on Already to prove there was an actual controversy between the parties. Already argued that, while normally the party asserting jurisdiction has the burden of proof, in cases involving “post-commencement mootness,” the burden is on the party asserting mootness. Second, it renewed its argument that there was still an actual controversy between the parties. Already argued that the very existence of the '905 Registration harmed it, as it led others to believe that Already was an infringer; the registration will eventually obtain incontestable status, causing further damage to Already; and the covenant does not cover all new Already designs, so there is still a fear that Nike will attempt to enforce the '905 Registration against Already in the future. Finally, Already made a public policy argument, arguing that there is a strong public interest in challenging invalid intellectual property rights, and therefore the Court should allow lower courts to hear counterclaims contesting the validity of a trademark.

Nike's brief argued that the case was rather simple ' where a covenant not to sue “covers any dispute that could reasonably be expected to arise between the parties in the future,” there was no Article III jurisdiction. In support of this, it made three arguments. First, that a justiciable controversy only exists where there is a concrete harm or threat of harm, and all of Already's alleged harms were hypothetical. Nike noted that while Already claims the covenant does not cover future shoe designs, Already had never asserted it was creating such a shoe, or even proffered a suggestion as to the type of shoe that would not be covered by the covenant. Second, Nike argued that there is not a different standard for “post-commencement mootness,” and the cases Already cited were voluntary cessation cases, where a party ceased its actions but retained a right to re-commence the activity later. Nike argued that its actions here were different, because the covenant not to sue was binding on Nike. Finally, Nike argued that Already's public policy argument would drastically change longstanding doctrines and had no support in precedent.

Finally, the Justice Department argued, as amicus curiae, in support of Already's position that the “post-commencement mootness” standard applied to cases where covenants not to sue were executed after litigation had commenced.

The oral argument was held on Nov. 7, 2012. According to media reports, the justices were skeptical of both parties' arguments. Several justices seemed not to accept Already's argument that the covenant did not cover future activity, asking Already's counsel to describe a covenant that would satisfy Already. Other justices noted that they were uncomfortable with Nike's suggestion that Already had to make its future business plans known in order to established a controversy, noting that giving away future plans to a competitor would be a commercial disadvantage.

Aaron Johnson is an associate at Kenyon & Kenyon LLP, based in its New York office. His practice focuses on trademark law, copyright law, mask work registrations, and anti-counterfeiting.

In a case that could have important ramifications for trademark owners, as well as owners of other intellectual property and infringing defendants, the U.S. Supreme Court on Nov. 7, 2012, heard oral argument in the case of Already LLC v. Nike, Inc. The case revolves around under what circumstances a covenant not to sue can defeat jurisdiction.

The facts of the case involve the not-uncommon situation of a large trademark owner (in this case, Nike) suing a much smaller rival (in this case, Already LLC) for trademark infringement based on allegedly tenuous trademark rights. Once Already indicated that it was willing to challenge not just the alleged infringement but also Nike's rights in the mark, Nike attempted to remove the court's ability to hear the case by executing a covenant not to sue. The question for the Supreme Court is whether Nike's covenant removed the court's jurisdiction by eliminating any actual controversy between the parties.

If the Supreme Court upholds Nike's actions as removing a court's jurisdiction, trademark owners may feel they can take greater risks when asserting their rights against smaller rivals, as they could always resort to a covenant not to sue if their trademark rights are challenged. Conversely, if the Supreme Court rules the court still maintains jurisdiction to hear Already's counterclaims, trademark owners will likely be much more hesitant to assert trademark infringement claims based on weak marks.

Nike's Mark

The mark at issue relates to Nike's popular “Air Force 1″ line of shoes, which were first sold in 1982. The shoe line has become one of Nike's most popular styles, with well over 1,000 different variations of the shoe being produced and sold around the world. The shoe has become so popular that it has been mentioned and referenced in numerous pop culture works, including songs and videos.

In order to protect the shoe's design, in 2006 Nike filed a trademark application for certain aspects of its design. The design covers “the design of the stitching on the exterior of the shoe, the design of the material panels that form the exterior body of the shoe, the design of the wavy panel on the top of the shoe that encompasses the eyelets for the shoe laces, the design of the vertical ridge pattern on the sides of the sole of the shoe, and the relative position of these elements to each other.” The registration issued on June 24, 2008 as U.S. Trademark Registration No. 3,451,905 (the “'905 Registration”).

Nike used the '905 Registration to protest other shoe manufacturers' production and distribution of shoes similar to Air Force 1s. Nike was largely successful in this effort, getting a number of shoe manufacturers to cease and desist from such activities. None of the accused infringers, however, challenged Nike's rights in the '905 Registration.

Nike v. Already LLC

Already LLC (doing business under the Yums trade name) produced and distributed shoes similar to Air Force 1s. Nike highlighted two Already shoes in particular, the “Soulja Boy Tell Em Signature” and the “Sugar.” In early 2009, Nike sent Already a protest letter demanding that Already cease producing and selling the “Soulja Boy” shoe (the Sugar shoe was not yet in the market). Already refused, and on July 16, 2009 Nike filed a complaint in the U.S. District Court for the Southern District of New York. The complaint alleged trademark infringement, unfair competition, and dilution under the Lanham Act, common law trademark infringement and unfair competition, and related state claims. All three counts under the Lanham Act were based at least somewhat on the rights contained in the '905 Registration, and a copy of the '905 Registration was attached to the complaint.

Already's answer to the complaint not only denied Nike's claims, it also asserted counterclaims seeking an order that Nike's trademark rights in the Air Force 1 shoe were invalid, and cancellation of the '905 Registration.

A few months into discovery, Nike abruptly sent an executed “Covenant Not to Sue” to Already. On the basis of that covenant, Nike petitioned the court to allow Nike to voluntarily dismiss its claims against Already, and to dismiss Already's counterclaims on the basis that Already no longer had standing, since an actual controversy no longer existed.

As summarized by the Second Circuit, the covenant gave Nike's reasoning for executing the covenant as follows (the “NIKE Mark” consists, generally, of the design in the '905 Registration):

NIKE has recently learned that Already's actions complained of in the Complaint no longer infringe or dilute the NIKE Mark at a level sufficient to warrant the substantial time and expense of continued litigation and NIKE wishes to conserve resources relating to its enforcement of the NIKE Mark.

And the covenant stated that Nike would:

refrain from making any claim(s) or demand(s), or from commencing, causing, or permitting to be prosecuted any action in law or equity, against Already or any of its [successors or related entities and their customers], on account of any possible cause of action based on or involving trademark infringement, unfair competition, or dilution, under state or federal law in the United Sates [sic] 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, distributed, offered for sale, advertised, sold, or otherwise used in commerce before or after the Effective Date of this Covenant.

The district court, after a hearing, granted Nike's request and dismissed all of the claims. It held that whether or not there was an actual controversy depended on what Nike's covenant covered. It noted that the S.D.N.Y. has held prior covenants not to sue not broad enough to remove a court's jurisdiction, where the covenant “does not extend to future sales” and where the recipient of the covenant “had taken meaningful preparatory steps toward developing new or updated products not covered by the covenant not to sue.”

In contrast, the court held that neither of those cases was true in this dispute. Nike's covenant covered the sale of Already's current designs “before or after the Effective Date of this Covenant” and extended not only to Already's current designs, but also to “any colorable imitations thereof.” Additionally, the court noted that Already had not even alleged that it was currently working on a shoe design that would not be covered by the covenant.

In ruling for Nike, the court also quickly dismissed Already's allegation that the mere existence of the '905 Registration was a continuing harm to Already, because it scared off investors from wanting to work with, or invest in, Already and its products. The court held the evidence in support of these arguments ' affidavits from potential investors ' was too tenuous to create an actual controversy.

Already appealed to the Second Circuit.

The Second Circuit's Decision

The Second Circuit held that the Supreme Court's decision in MedImmune, Inc. v. Genentech, Inc. , 549 U.S. 118 (2007) controlled, and that its “totality of the circumstances” test should be applied when determining whether a covenant not to sue eliminates a justiciable case or controversy in a declaratory judgment action involving a trademark. The court held that:

[D]istrict courts applying the MedImmune totality of the circumstances test should especially consider, in addition to other factors: (1) the language of the covenant, (2) whether the covenant covers future, as well as past, activity and products, and (3) 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.

Using those three factors, the Second Circuit upheld the district court's dismissal of Already's counterclaims. First, it held that the language of the covenant was very broad, covering every conceivable action that Nike could bring against Already's products. Second, the covenant covered the future sale of current designs, as well as “colorable imitations” of current designs. The court noted that because Already's “Soulja Boy” shoe was so similar to the '905 Registration, because the covenant covers colorable imitations of current shoes it was “hard to imagine a scenario that would potentially infringe the '905 mark and yet not fall under the Covenant.” Finally, it held that Already had not even asserted that it had “any intention” to market a shoe not covered by the covenant. The court also quickly dismissed Already's argument that the Lanham Act provides for an independent basis of jurisdiction, regardless of a controversy. In doing so, the court noted that the Lanham Act did provide a way for Already to contest Nike's registration ' namely, a cancellation proceeding before the Trademark Trial and Appeals Board.

Before the Supreme Court

Already petitioned for a writ of certiorari, and on June 25, 2012 the Supreme Court granted the petition. The question presented is:

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.

In its brief, Already made three general arguments. First, it argued that the two lower courts erred in placing the burden on Already to prove there was an actual controversy between the parties. Already argued that, while normally the party asserting jurisdiction has the burden of proof, in cases involving “post-commencement mootness,” the burden is on the party asserting mootness. Second, it renewed its argument that there was still an actual controversy between the parties. Already argued that the very existence of the '905 Registration harmed it, as it led others to believe that Already was an infringer; the registration will eventually obtain incontestable status, causing further damage to Already; and the covenant does not cover all new Already designs, so there is still a fear that Nike will attempt to enforce the '905 Registration against Already in the future. Finally, Already made a public policy argument, arguing that there is a strong public interest in challenging invalid intellectual property rights, and therefore the Court should allow lower courts to hear counterclaims contesting the validity of a trademark.

Nike's brief argued that the case was rather simple ' where a covenant not to sue “covers any dispute that could reasonably be expected to arise between the parties in the future,” there was no Article III jurisdiction. In support of this, it made three arguments. First, that a justiciable controversy only exists where there is a concrete harm or threat of harm, and all of Already's alleged harms were hypothetical. Nike noted that while Already claims the covenant does not cover future shoe designs, Already had never asserted it was creating such a shoe, or even proffered a suggestion as to the type of shoe that would not be covered by the covenant. Second, Nike argued that there is not a different standard for “post-commencement mootness,” and the cases Already cited were voluntary cessation cases, where a party ceased its actions but retained a right to re-commence the activity later. Nike argued that its actions here were different, because the covenant not to sue was binding on Nike. Finally, Nike argued that Already's public policy argument would drastically change longstanding doctrines and had no support in precedent.

Finally, the Justice Department argued, as amicus curiae, in support of Already's position that the “post-commencement mootness” standard applied to cases where covenants not to sue were executed after litigation had commenced.

The oral argument was held on Nov. 7, 2012. According to media reports, the justices were skeptical of both parties' arguments. Several justices seemed not to accept Already's argument that the covenant did not cover future activity, asking Already's counsel to describe a covenant that would satisfy Already. Other justices noted that they were uncomfortable with Nike's suggestion that Already had to make its future business plans known in order to established a controversy, noting that giving away future plans to a competitor would be a commercial disadvantage.

Aaron Johnson is an associate at Kenyon & Kenyon LLP, based in its New York office. His practice focuses on trademark law, copyright law, mask work registrations, and anti-counterfeiting.