On June 25, 2012 the U.S. Supreme Court agreed to hear the case of Already, LLC v. Nike, Inc. (no. 11-982) to reconcile a dispute between the Second and Ninth Circuits. What began three years ago as a trademark infringement case has evolved into what many would few as a “dry” case involving jurisdictional issues. Yet jurisdictional issues are critical to any lawsuit because a court must have jurisdiction to “hear” a lawsuit. Trademark and patent owners will be very much interested in the Supreme Court’s decision for the reasons discussed below.
In June 2008 Nike, Inc. was granted a registered mark for several “trade dress” product configuration features by the USPTO (reg. no. 3,451,905). In July 2009 Nike sued Already, LLC d/b/a Yums on several grounds including alleged trademark infringement of its registered trade dress and dilution of its registered mark. Already filed counterclaims for a declaratory judgment that Nike’s ‘905 registration was not a “trademark” under 15 U.S.C. § 1127 (i.e., was invalid) and cancellation of the mark. Several months later during the lawsuit discovery phase, Nike unilaterally “created” a broad Covenant Not to Sue (“Covenant”) and asked the district court to dismiss the case against Nike with prejudice and against Yums without prejudice.
Under the Federal Rules of Civil Procedure, an action may be dismissed at the Plaintiff’s request only by court order. If the defendant has filed counterclaims before the Plaintiff has filed its motion to dismiss, as in the Already case, the case may be dismissed in its entirety over the defendant’s objections only if the counterclaim can remain pending an independent adjudication. Fed. R. Civ. Pro. 41(a)(1). And, for a legal action to be justiciable, the matter must represent a case or controversy under Article III of the U.S. Constitution. The district court sided with Nike on jurisdictional grounds that the Nike’s Covenant Not to Sue eliminated the controversy which in turn meant that the Already’s counterclaims against Nike could not be pursued Article III.
The issue presented in the Already case represents an intermingling of the requirements of Rule 41(a)(1) and Article III. For example, did the district court’s dismissal of both Nike’s claims with prejudice and Already’s counterclaims without prejudice meet the requirements of Rule 41(a)(1)? Already certainly objected to the dismissal of its counterclaims. Allegations that a granted trademark should be cancelled via a declaratory judgment seemingly represent an independent adjudication on the merits. Yet the effect of the steps taken by Nike to obtain dismissal of the entire lawsuit via a broad covenant not to sue eliminated the justiciable case and controversy requirement for continuing the action under Article III according to the district court. As such, the court had no jurisdiction to adjudicate Already’s counterclaims.
Already appealed and the Second Circuit agreed with the district court. See Nike, Inc. v. Already, LLC, 663 F.3d 89 (2d Circuit 2011). In doing so, the Already Court relied on the U.S. Supreme Court’s decision in MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007) concerning the tests to be used in determining if Already’s declaratory judgment action could continue. The MedImmune case applied to a patent dispute where the High Court confirmed that “the totality of the circumstances test for declaratory judgment actions applied [as used in non- IP cases] applied in intellectual property cases.” Under Medline, the Second Circuit had to determine whether the adversity of legal interests that existed between Nike and Yums was real and substantial. Already at 91 citing Medline at 127. The Already Court also emphasized that the Supreme Court in Medline had “suggested that the threat of future litigation remains relevant determining whether an actual controversy exists.” Thus where a party could simply forestall litigation indefinitely by paying licensing fees would not necessarily eliminate a case or controversy. Already at 91 citing Medline at 128.
Although Medline was a patent infringement case, the Already Court noted that its own jurisprudence recognized that declaratory judgment actions involving patents were sufficiently “analogous” to those involving trademarks that ‘ “ principles applicable to declaratory judgment actions involving patents are generally applicable with respect to trademarks.” ’ Already at 93 citing Starter Corp. v. Converse, Inc. 84 F.3d 582, 596 (2d Cir. 1996).
As it turned out, the Already Court affirmed the lower court’s decision based on Nike’s broadly worded Covenant . The Covenant covered both present and future products where Nike “unconditionally” and permanently renounced its right to claim, demand, or ‘ “commence, cause, or permit to be prosecuted any action in law or in equity with respect to any shoe currently made by Yums and all colorable imitations thereof. ” ’ See Already at 93. The Already Court opined that this broad wording rendered threat of litigation remote or nonexistent even if Yums became a major competitive threat and therefore effectively ended the case or controversy. As the argument went, the invalidity issue was no longer a justiciable case or controversy under Article III.
Furthermore, Already’s declaratory judgment action could not be maintained as a separate action because it would not be able to demonstrate a “substantial controversy between the parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment” as required under Medline. That is, the Covenant basically stopped Already’s counterclaims in their tracks. See Already at 93.
Already had argued that Nike’s actions had tainted its relationship with potential investors who had withdrawn their investments for fear of litigation. Already also argued that the Covenant against constituted libel it because it “asserts Yums’ on-going de minimus infringement of Nike’s trademark.” See Already at 94. The Already Court discounted both arguments and noted that Already/Yums had not filed a counterclaim for libel. See Already at 94.
Already also argued that the Lanham Act provided an independent basis of federal and subject matter jurisdiction under 15 U.S.C. § 1119 separate and distinct from Article III. Section 1119 allows the court, in any action involving a registered mark, to determine the validity of the mark and cancel the mark in whole or in part. The Second Circuit disagreed and stated that the Act’s limiting phrase ‘ “ in any action involving a registered mark” ’ “plainly narrows the circumstances in which cancellation may be sought – namely in connection with” ‘ “a properly instituted and otherwise jurisdictionally supportable action involving a registered mark.” ’ Already at 94 citing Universal Sewing Mach. Co. v. Standard Sewing Equip. Corp., 185 F. Supp. 257, 260 (S.D.N.Y. 1960). That the Covenant ended the action meant that there was no longer any action involving the registered mark as required by the Lanham Act.
To date the courts have ruled against Already. Yet, quite apart from the jurisdictional issues involved, the fact that Nike was able to unilaterally put a stop to any proceedings which could have adversely affected its registered mark seems unfair. For example, Nike surely must have anticipated that Already could well contest the validity of its marks. Furthermore, Nike’s broad Covenant could in some way be viewed as an indication that Nike was “worried” that there was a reasonable chance that its ‘905 registration could be cancelled. Indeed, the Covenant is broadly worded to cover every possibility including any and all of Aready’s/Yums’ future successors in interests. Based on the Covenant’s broad coverage, the Second Circuit concluded that Already’s declaratory judgment and cancellation counterclaims could not be separately adjudicated based on case law and Medline’s “totality of the circumstances test.” In doing so, the Already court distinguished Nike’s Covenant from the covenant at issue in Bancroft & Masters, Inc. v. Augusta National, Inc., 223 F.3d 1082 (9th Cir. 2000). In Bancroft, the Ninth Circuit concluded that the promise not to sue did not end the actual controversy because it did not address future litigation. According to the Already Court, its sister circuit’s reference to §1119 as a separate way to request cancellation of the mark was therefore merely dictum. See Already at 94.
The Supreme Court’s decision will have important implications for patent and trademark owners if the High Court sides with Already. Why? Because an opinion which states that U.S. district courts have the jurisdiction under either Article III or § 1119 of the Lanham Act to hear trademark validity challenges brought as counterclaims in an infringement action even where Plaintiff (trademark owner) has agreed not to pursue infringement claims via a broad covenant not to sue may well eliminate a common Plaintiff defensive tactic. This means that it could be far more difficult to remove trademarks or patents from the realm of litigation once infringement lawsuits have been commenced.
Under these circumstances, a mark or patent owner who is considering bringing an infringement action will need to thoroughly consider the risk that any infringement action could result in a “validity” contest. This will likely involve a thorough review of owner’s prosecution file for the alleged “offending” trademark/patent to help identify any red flags. Such a risk analysis to clarify potential problems is of course a process which should always be undertaken for any lawsuit. But here, the Plaintiff may be risking a potentially economically devastating outcome if the patent or mark is invalidated let alone high legal fees.
On the other hand, registered marks and issued patents do of course enjoy the presumption of validity, so the defendant who would be able to continue adjudicating the merits of its “invalidation/cancellation” counterclaims would still have a major “legal hurdle” on its hands to overcome that presumption.
Stay tuned for a future blog on the Supreme Court’s opinion.
THE ABOVE IS NOT LEGAL ADVICE AND IS FOR INFORMATIONAL PURPOSES ONLY. IF YOU ARE CONTEMPLATING AN ACTION WHICH MAY HAVE LEGAL CONSEQUENCES, YOU SHOULD CONSULT WITH AN ATTORNEY OF YOUR CHOOSING.
