Nike, Inc., sued Already, LLC d/b/a Yums, for selling shoes that allegedly infringed on Nike’s trademark covering the Air Force 1 shoe line. Yums counterclaimed to cancel Nike’s trademark. Shortly after Yums’s counterclaim, Nike dropped its claim and promised Yums that Nike would not assert its trademark against any of Yums’s current or previous products. The district court dismissed Yums’s counterclaim and the court of appeals affirmed the dismissal. Yums argues that a controversy remains after Nike’s promise not to sue because Nike’s trademark continues to hinder Yums’s ability to compete in the athletic footwear business. Nike argues that a court cannot hear a trademark claim without a controversy, and that Nike’s promise not to sue eliminated any controversy involving the Air Force 1 trademark. The Supreme Court’s decision here may determine whether intellectual property owners can drop infringement actions without having to defend counterclaims challenging their intellectual property rights. This decision may have a significant impact on intellectual property litigation and on the risks associated with commencing an infringement action.
Questions as Framed for the Court by the Parties
Does a federal district court lose jurisdiction over a trademark cancellation claim after the trademark holder terminates any infringement actions and promises not to assert its trademark against the party seeking the trademark’s cancellation?
In July 2009, Nike, Inc. sued Already, LLC, d/b/a Yums (“Yums”) in the United States District Court for the Southern District of New York for trademark infringement, trademark dilution, and other related claims. Nike claimed that it designed a shoe in 1982 called the Air Force 1, which sold millions of pairs each year. Nike claimed to hold several federal trademark registrations for the shoe, including U.S. Trademark Registration Number 3,451,905 (the “‘905 Registration”). Nike argued that the ‘905 Registration protected the stitching design, the exterior panels, and the relative position of these elements on the shoe. Nike claimed that Yums infringed on the ‘905 Registration by selling shoes that were confusingly similar to the Air Force 1 shoe.
In November 2009, Yums counterclaimed for a declaratory judgment that the ‘905 Registration was not a “trademark” under 15 U.S.C. § 1127 and to invalidate the ‘905 Registration under 15 U.S.C. § 1119.
In March 2010, Nike sent a letter to Yums stating that Yums did not infringe on Nike’s trademark and that Nike would not pursue legal action relating to any of Yums’s current or previous footwear. Yums still wanted to litigate its claim to invalidate the ‘905 Registration.
The district court held a hearing to determine whether it still had jurisdiction over Yums’s counterclaims. Yums argued that the court had jurisdiction because the counterclaims created an independent controversy about whether Nike’s trademark violated Yums’s rights. Nike moved to dismiss Yums’s counterclaims for lack of subject matter jurisdiction and to dismiss its own claims voluntarily. Yums argued that the court should dismiss Nike’s claims under summary judgment, which would allow Yums’s counterclaims to proceed. The court determined that it no longer had jurisdiction over Yums’s counterclaims, and dismissed Nike’s claims with prejudice and Yums’s counterclaims without prejudice.
Yums appealed to the United States Court of Appeals for the Second Circuit. The Second Circuit affirmed, holding that Nike’s promise deprived the district court of an Article III case or controversy involving Yums’s claims, and thus, divested the court of jurisdiction over the claims. The court applied the Supreme Court’s totality of the circumstances test from MedImmune, Inc. v. Genentech, Inc., and held that district courts should consider three factors when determining whether a promise not to sue eliminates a case or controversy in a trademark cancellation action: (1) the language of the promise, (2) whether the promise covers past and future activity and products, and (3) whether there is evidence that the party asserting jurisdiction intends to develop new products not covered by the promise. Applying the factors, the Second Circuit found that there was no case or controversy.
On June 25, 2012, the Supreme Court granted certiorari to determine whether, after initiating an infringement action, a trademark holder’s promise not to sue divests a district court of jurisdiction over the defendant’s counterclaim seeking to cancel the trademark.
The Supreme Court’s decision in this case will likely influence the business decisions of both intellectual property rights holders and their competitors. Further, the decision here may affect the ways in which the public can guard itself against invalid grants of intellectual property protection.
Business Effects on Rights Holders and Competitors
Yums contends that Nike’s ‘905 Registration continues to restrain Yums’s ability to compete in the athletic footwear business. Yums argues that the ‘905 Registration allows Nike to block Yums from creating new shoes with a shoe configuration covered by the ‘905 Registration. Moreover, Yums claims that the ‘905 Registration hinders Yums’s ability to attract investors and become more competitive in the industry. Thus, Yums claims to have a strong interest in having a court declare that the shoe configuration covered by the ‘905 Registration be placed in the public domain.
Nike argues that accepting Yums’s position would open a floodgate of intellectual property litigation. Nike contends that allowing claims like those asserted by Yums in this case would permit any shoemaker to challenge the validity of every competitor’s trademarks without any showing of a direct effect on the shoemaker’s business. Nike further warns that the Court’s decision will influence how easily potential litigants can challenge the validity of other registered intellectual property protections, such as patents or copyrights. Thus, Nike argues that accepting Yums’s position could lead to extortive litigation involving all intellectual property.
Protecting the Public against Invalid Intellectual Property Claims
Various intellectual property professors (“IP Professors”) argue that the public suffers when producers gain improper grants of intellectual property protection. The IP Professors note that the Supreme Court has recognized the free competition of ideas as a sound policy. Yums argues that the ability to challenge intellectual property is consistent with this policy. Yums claims that patents and trademarks are monopolies that restrict the marketplace of ideas. Yums further suggests that the United States Patent and Trademark Office (“PTO”) frequently grants invalid patents and trademarks. Thus, Yums contends that courts are essential for hearing challenges to intellectual property and ensuring that only valid intellectual property receives protection. The Public Patent Foundation further argues that court challenges to intellectual property rights provides the public a method to eliminate invalid registrations and protect the public from assertions of intellectual property rights undeserving of protection.
Nike asserts that litigants, and the public, already have an alternative mechanism to cancel trademarks through PTO proceedings. Nike claims that the mechanics and adversarial nature of a PTO proceeding are similar to civil litigation in federal court. Thus, Nike argues that Yums and potential litigants do have a procedure for challenging the validity of trademarks. Further, the American Intellectual Property Law Association (AIPLA) argues that a lower bar for courts hearing disputes in cases like this could allow rights holders to inflate artificially the value of their intellectual property, which would not serve the public interest. The AIPLA asserts that rights holders could collude with alleged infringers to settle the infringement action with a license in exchange for continuing the cancellation action to create the perception that courts have tested the intellectual property and thus increase its value.
The Intellectual Property Owners Association (IPO) urges a middle approach by which courts determine the existence of an actual case or controversy by considering whether a promise not to sue actually resolved all then-existing infringement allegations. The IPO explains that this approach would be fact-specific and would require a close examination of the language of the promise. 4. The IPO argues that this approach would avoid two extremes: permitting intellectual property owners to eliminate jurisdiction entirely by issuing narrow promises, and forcing intellectual property owners to forgo all future enforcement of their rights against future infringing conduct by a defendant. Here, the IPO takes no position on the interpretation of the Nike promise not to sue, and thus, supports neither party.
A federal court can hear a matter only if the matter qualifies as a “case or controversy” under Article III of the Constitution. Here, the United States District Court for the Southern District of New York and United States Court of Appeals for the Second Circuit held that they could not hear Yums’s counterclaim against Nike because no “substantial controversy” remained between the parties once Nike promised not to sue Yums for infringement.
Yums argues that even though Nike abandoned its infringement claim and promised not to sue, a case or controversy exists with respect to Yums’s counterclaim because there is still a question of whether Nike’s ‘905 Registration is valid. Nike counters that because Yums has not identified any actual, non-hypothetical injury caused by conflict with Nike’s registration, the federal court lacks authority to hear Yums’s counterclaim.
Mootness and Standing to Bring Counterclaims
Yums asserts that the dismissal with prejudice of Nike’s infringement claim does not dispose of Yums’s valid counterclaim because the counterclaim pushes the parties’ dispute beyond the single claim in the infringement suit, as was the case in Altvater v. Freeman. Yums contends that Nike abandoning its infringement claim does not render Yums’s counterclaim moot because Yums’s counterclaim challenges the validity of Nike’s state and federal trademark law rights under its ‘905 Registration.
Nike distinguishes Altvater from this case because there, an ongoing dispute maintained the controversy where the patent holder enforced its rights against additional products of the other party and required that party to pay ongoing royalties. Here, Nike argues that the validity of its ‘905 Registration is no longer a controversy because Yums’s ongoing obligations to Nike do not depend on a finding of the registration’s validity.
Yums asserts that it has Article III standing to maintain its counterclaims based on the Court’s reasoning in MedImmune, Inc. v. Genentech, Inc. Yums reads that case to uphold a plaintiff’s Article III standing to maintain an action that satisfied the elements of injury, causation, and redressability. Yums argues that it has an even stronger case than the MedImmune plaintiff had because Yums asserts a right to relief that is independent from Nike’s infringement claim and because the declaratory and injunctive relief it seeks has greater merit than Nike’s original claim seeking merely putative relief.
In contrast, Nike reads MedImmune to support its argument that Yums lacks Article III standing. According to Nike, Yums must demonstrate not only an injury but also that the injury is non-speculative. Moreover, Nike argues that where the acts necessary to inflict an injury are within a party’s own control, the Court will not grant standing unless that party can demonstrate how its intentions will lead to future injury. Nike contends that because Yums has not named anything “concrete” that it cannot do or that it would do differently after successful litigation, Yums lacks standing to bring its counterclaim.
Burden of Proof under Voluntary Cessation Doctrine
Yums asserts two reasons why Nike bears the burden of proof to show that the federal court lacks authority to try Yums’s counterclaim. First, Yums claims, Nike did not renounce its infringement claims when it promised not to sue for infringement of current and past Yums products. Second, Yums claims that it continues, despite the promise, to feel negative effects of Nike’s ‘905 Registration. Yums contends that under the voluntary cessation doctrine, a plaintiff that voluntarily abandons its claims must prove that no controversy remains because courts do not want to leave a defendant able to resume the behavior that led to the lawsuit in the first place. Yums argues that because Nike has abandoned its infringement claim but still holds the registration that limits Yums’s ability to make and sell shoes, Nike has not met the high burden of proving mootness that applies in voluntary cessation cases.
Further, Yums argues that even beyond voluntary cessation cases, case law shows that a party moving for dismissal bears the burden of establishing mootness. Yums asserts that because the Court has held that a case does not become moot so long “[a]s the parties have a concrete interest, however small, in the outcome of the litigation,” Yums’s own counterclaim has not been rendered moot. Here, Yums believes that it has a significant interest in the outcome of litigation with Nike. Yums explains that it is commercially and procedurally disadvantaged as long as Nike’s ‘905 Registration remains effective. Yums states that investors and retailers do not want to do business with Yums when Nike threatens an infringement lawsuit. Further, Yums contends that that in litigation against Nike, it must overcome the ‘905 Registration as prima facie evidence of the validity of Nike’s trademark. For these reasons, Yums contends that “a judgment ordering cancellation of the ‘905 Registration and declaring invalid” Nike’s trademark rights would “offer meaningful relief.”
Nike, in response, argues that the voluntary cessation doctrine does not apply. According to Nike, voluntary cessation makes it difficult for a plaintiff to prove mootness because courts are concerned that dismissing a case for mootness will enable a defendant to return to its alleged injurious conduct. Nike argues that the doctrine is thereby aligned with, not excepted from, the principle that Article III permits federal courts to hear only actual cases or controversies. Nike notes that the Court has held the doctrine does not apply where “the ‘conduct’ that petitioners fear will resume is the pursuit of federal litigation,” because there is no longer a reason for the doctrine’s application. In such a case, a court’s dismissal with prejudice prevents the conduct from resuming. Nike reasons that because its promise not to sue is judicially enforceable and accompanied by a dismissal with prejudice of its claim against Yums, Nike cannot challenge Yums’s sale of products falling within the promise’s broad scope. Thus, the voluntary cessation doctrine is unnecessary and does not apply.
Further, Nike asserts that even if voluntary cessation applies, the burden of proof does not matter because Yums has not established standing to pursue its counterclaim. According to Nike, there is no risk that it will resume its alleged injurious conduct of enforcing its ‘905 Registration because the promise not to sue broadly prohibits enforcement. Nike notes that “the burden of proof is irrelevant” under voluntary cessation because Yums, which has not indicated plans to produce a shoe that both infringes upon Nike’s trademark and falls outside the reach of the promise not to sue, has not demonstrated that it has sustained any injury to merit standing.
Federal Role in Trademark Law
Yums argues that by finding Article III jurisdiction, the Court upholds “the strong federal policy favoring the full and free use of ideas in the public domain.” Conversely, denying jurisdiction would limit courts from presiding over claims that challenge the validity of trademark registrations. Yums asserts that if the Court denies jurisdiction, Nike will be able to maintain a “scarecrow” registration perpetually by securing an invalid registration, using it to deter competition, and guarding it from challenges by abandoning litigation whenever its validity is questioned.
Nike responds that Yums wrongly predicts that a company might maintain an invalid registration by strategically using promises not to sue. Instead, Nike notes, a formal process enables a party to cancel a registration if the party believes the registration will cause the party damage. Moreover, Nike asserts that using such promises to end challenges to validity are not effective because once a trademark is too widely used, the trademark may lose federal protection. Additionally, Nike argues that Yums has not shown that the federal trademark register contains many invalid registrations, and therefore should not be able to advocate for broader judicial challenges to unsubstantiated claims of invalid registration issuances.
The Supreme Court will determine whether a federal court may hear Yums’s counterclaim that challenges the validity of Nike’s trademark registration after Nike has withdrawn its original trademark infringement claim and promised not to sue Yums for infringements on prior or existing products on the Air Force 1 trademark. Yums argues that its counterclaim remains a case or controversy deserving of federal court attention because the issue of the validity of Nike’s trademark registration is independent from Nike’s original claim of infringement and that Nike, not Yums, carries the burden of proving that the case is moot. Nike counters that Yums lacks standing to litigate its counterclaim in federal court because it has not demonstrated that there is any actual risk of injury to Yums now that the court has dismissed Nike’s infringement claim and Nike has issued a broad promise not to sue that eliminates Yums’s exposure to infringement litigation. This case has broad implications for intellectual property law, with respect to whether parties bringing infringement actions can terminate those actions without exposing themselves to challenges to their state and federal intellectual property rights.
- Philip J. Graves and Patrick W. Kelly, Potential Ramifications of Already v. Nike (Sept. 6, 2012).
- Dennis Crouch, Supreme Court Looks to Take Trademark Standing Case Following Covenant-not-to-Sue, (Apr. 16, 2012).