Supreme Court Holds Covenant Not To Sue Moots Counterclaim For Invalidity

In a unanimous decision issued in Already, LLC d/b/a/ Yums v. Nike (No. 11-982, January 9, 2013), the Supreme Court held that a plaintiff's dismissal of a trademark infringement case, combined with a broad covenant not to assert any claims against the accused products or "colorable imitations" thereof, moots the defendant's counterclaim for trademark invalidity. The decision may encourage plaintiffs to assert infringement claims on questionable trademarks, secure in the knowledge that they can escape strong challenges to validity by abandoning the claims thereafter. However, a concurring opinion by four justices urges courts to be skeptical of such a tactic.

The case began in 2009 with Nike's claim that Already's "Sugars" and "Soulja Boys" athletic shoes infringed and diluted Nike's registered design trademark for its "Air Force 1" shoes. Already counterclaimed for a declaration that the Nike mark was invalid and for cancellation of the registration.

Four months after the counterclaim was filed, Nike delivered to Already a "covenant not to sue" and moved to dismiss its own complaint and Already's counterclaim with prejudice. Already opposed dismissal of the counterclaim, asserting that it was not mooted by the dismissal of the infringement action. Already lost in both the district court and in the Second Circuit, 663 F.3d 89 (2d Cir. 2011). Today, in an opinion by Chief Justice Roberts, the Supreme Court affirmed.

Key to the decision was the breadth of the covenant. In it, 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 ... on account of any possible cause of action based on or involving trademark infringement, unfair competition or dilution ... relating to the NIKE mark based upon the appearance of any of Already's current and/or previous footwear product designs, and any colorable imitations thereof..." (emphasis added in opinion).

Thus, said the Court, the covenant is unconditional and irrevocable; prohibits claims or demands of any kind (not just lawsuits); protects Already's distributors and customers; and covers not just current or previous designs, but any "colorable imitation" sold in the future. The latter condition caused the Second Circuit to find that "it is hard to imagine a scenario that would potentially infringe [Nike's trademark] and yet not fall under the covenant," 663 F.3d at 97...