Mooting Declaratory Judgment Actions through Covenants Not to Sue after Already, LLC v. Nike, Inc.

Vol. 6 No. 4

By

Matthew K. Blackburn is the managing partner of Locke Lord LLP in San Francisco, California. He is a patent lawyer who advises clients on patent litigation. He can be reached at mblackburn@lockelord.com.

The Supreme Court’s recent trademark decision, Already, LLC v. Nike, Inc.,1 overturned over 20 years of Federal Circuit precedent. Since at least 1991, accused infringers have had to show that a covenant not to sue did not moot ongoing litigation. After Already, the intellectual property owner (not the accused infringer) has a formidable burden to show mootness under the voluntary cessation doctrine. It must be “absolutely clear” that the dispute is unlikely to recur. This trademark decision may have a significant impact on patent litigation. Partial covenants not to sue (not extending to withdrawn or unasserted patent claims) may no longer moot declaratory judgment actions.

Background Legal Principles

Actual Cases, Controversies, and Declaratory Judgment Actions

Federal judicial power is limited and extends only to cases and controversies.2 Courts do not issue advisory opinions. “A federal court has no authority ‘to give opinions upon moot questions or abstract propositions, or to declare principles or rules of law which cannot affect the matter in issue in the case before it.’”3 When ongoing litigation becomes moot—meaning it no longer presents a “live” controversy to which a court can provide meaningful relief—a court must dismiss it for lack of justiciability.4

Declaratory judgment actions, like all other causes of action, must satisfy the cases and controversies requirement.5 If a dispute is “definite and concrete, touching the legal relations of parties having adverse legal interests,” then a declaratory judgment action (or counterclaim) can satisfy Article III’s case or controversy requirement.6 The question is whether “there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.”7 Thus, the declaratory judgment plaintiff ordinarily has the burden of establishing the existence of an actual case or controversy in order to have standing.8

The voluntary cessation doctrine is an exception and places the burden on the declaratory judgment defendant. “[A] defendant claiming that its voluntary compliance moots a case bears the formidable burden of showing that it is absolutely clear the allegedly wrongful behavior could not reasonably be expected to recur.”9 Thus, under the voluntary cessation doctrine, the party asserting mootness bears the “‘heavy burden of persua[ding]’ the court that the challenged conduct cannot reasonably be expected to start up again.”10

Covenants Not to Sue

Voluntary cessation arises in the IP context when an IP owner provides a covenant not to sue in order to end litigation prematurely. A covenant not to sue is simply a promise by one party not to sue to enforce a right of action against another party. Issuing an appropriate covenant not to sue to the accused infringer can divest a trial court of jurisdiction over a declaratory judgment action or counterclaim.11

In each patent case addressed by the Federal Circuit involving a covenant not to sue, it has placed the burden on the party seeking the declaratory judgment to show that the ongoing dispute was not mooted.12 In Super Sack, the Federal Circuit allowed a patent owner to avoid inequitable conduct charges by providing a covenant not to sue. The patent owner “unconditionally agree[d] not to sue [the defendant] for infringement as to any claim of the patents-in-suit based upon the products currently manufactured and sold by [the defendant].”13 Because of the covenant, the accused infringer had no reason for concern that it would be sued on the same patents for the same products already made or sold.14

Even after MedImmune liberalized the standard for initiating a declaratory judgment action,15 the Federal Circuit has continued to place the burden on the accused infringer to establish a live controversy in the face of post-complaint events. For example, in Benitec Australia, Ltd. v. Nucleonics, Inc., the Federal Circuit applied the MedImmune standard and found that the accused infringer had not met its burden to establish declaratory judgment jurisdiction.16 A covenant “not to sue [the defendant] for patent infringement arising from activities and/or products occurring on or before the date [of dismissal by the trial court]” divested the court’s jurisdiction to hear the declaratory judgment counterclaims because the defendant “failed to show that its future plans meet the immediacy and reality requirement of MedImmune.”17

Benitec was a split panel decision, however. Judge Dyk’s dissent criticized the panel majority’s decision for improperly placing the burden on the accused infringer. Once there was an actual controversy at the beginning of the case, the burden should be shifted to the IP owner to show that any declaratory judgment counterclaims were moot by later events.18 The IP owner had to show there was no possibility of a controversy over the same issues in the future.

Supreme Court Overturns Federal Circuit Precedent: Already, LLC v. Nike, Inc.

The Supreme Court’s decision in Already v. Nike calls into question an IP owner’s ability to confine unilaterally the claims at issue in litigation. This can have an impact on patent assertion entity (PAE) litigation and case strategy more generally as explained below.

District Court and Second Circuit Proceedings

Nike began the trademark litigation against Already, LLC d/b/a Yums (Yums).19 Nike’s trademark registration was for an athletic shoe design that was intended to protect the allegedly distinctive appearance of Nike’s Air Force 1 shoe. Yums sold two of its own shoe lines, under the trade names “Sugars” and “Soulja Boys,” which Nike claimed were infringements of its trademark registration. Yums responded by filing declaratory judgment counterclaims challenging the validity of the Air Force 1 trademark.

Eight months later, Nike changed course and provided to Yums a covenant not to sue. According to Nike, Yums’s actions “no longer infringe or dilute the NIKE Mark at a level sufficient to warrant the substantial time and expense of continued litigation.”20 The covenant promised that Nike would not assert against Yums or Yums-affiliated entities any action involving trademark infringement, unfair competition, or dilution related to the Air Force 1 trademark based on any of Yums’s current or previous footwear product designs and “any colorable imitations thereof.”21

Then Nike moved to dismiss the suit (including both Nike’s claims and Yums’s declaratory judgment counterclaims) because the covenant had extinguished the case or controversy, and the district court thus lacked subject matter jurisdiction. Yums opposed, arguing that Nike had not shown that its voluntary cessation had mooted the case.22

The district court sided with Nike and dismissed Yums’s declaratory judgment counterclaims. “[B]ecause [Yums] sought ‘to invoke the Court’s declaratory judgment jurisdiction, it bears the burden of demonstrating that the Court has subject matter jurisdiction over its counterclaim[].’”23 Applying the MedImmune declaratory judgment standard, the court concluded that in light of the covenant, there was no “substantial controversy . . . of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.”24

The Second Circuit affirmed and held that the covenant not to sue had eliminated a justiciable case or controversy. Like the district court, the Second Circuit placed the burden on the declaratory judgment plaintiff to show that the covenant had not rendered the case moot.25

Supreme Court Proceedings

A unanimous Supreme Court decision (authored by Chief Justice Roberts) affirmed the Second Circuit’s judgment, but not its reasoning. The Court held that Nike—not Yums—bore the “formidable burden” of establishing that the covenant not to sue had mooted the case.26 It must be “absolutely clear the allegedly wrongful behavior could not reasonably be expected to recur.”27

The Court found that the scope of the particular covenant not to sue was broad enough to satisfy the voluntary cessation test. The covenant was unconditional and irrevocable. It extended to Yums’s distributors and customers. It covered current and previous designs as well as any future colorable imitations. Agreeing with the district court and the Second Circuit, the Court found it difficult to imagine a product that would both infringe Nike’s trademark and yet not fall under the covenant, stating, “If such a shoe exists, the parties have not pointed to it, there is no evidence that [Yums] has dreamt of it, and we cannot conceive of it.”28 Accordingly, the Court concluded that Nike had met its burden under the voluntary cessation doctrine to show that the case was moot, because “it is ‘absolutely clear’ that the [challenged conduct] cannot reasonably be expected to recur.”29 “[T]he whole point is that [Yums] is free to sell its shoes without any fear of a trademark claim.”30 Thus, Nike had succeeded in mooting Yums’s declaratory judgment counterclaim through its covenant not to sue.

Justice Kennedy wrote a brief concurrence (joined by Justices Thomas, Alito, and Sotomayor), highlighting the significant burden of the voluntary cessation doctrine. Nike (the IP owner) had the “formidable burden of showing that it is absolutely clear the allegedly wrongful behavior could not reasonably be expected to recur.”31 “The burden was not on [Yums] to show that a justiciable controversy remains.”32 The concurrence explained, “covenants like the one Nike filed here ought not to be taken as an automatic means for the party who first charged a competitor with trademark infringement suddenly to abandon the suit without incurring the risk of an ensuing adverse adjudication.”33 Urging courts to “proceed with caution” before terminating litigation based on a covenant not to sue, the concurrence argued:

An insistence on the proper allocation of the formidable burden on the party asserting mootness is one way to ensure that covenants are not automatic mechanisms for trademark holders to use courts to intimidate competitors without, at the same time, assuming the risk that their trademark will be found invalid and unenforceable.34

Implications of Already v. Nike on Patent Cases

Already v. Nike changed the law. IP owners now bear the “formidable burden” to show a covenant not to sue has mooted an ongoing suit. Already is not merely a trademark decision. Its implications are broad and its holding is applicable to patents as well as trademarks. In the Already decision itself, the Supreme Court harmonized a patent case (Altvater v. Freeman)35 and considered the impact of the parties’ arguments on companies “threatened by any particular patent or trademark.”36 This is consistent with the Supreme Court’s willingness to apply general legal principles across various IP forms.37 Moreover, as a matter of first principles, all federal court litigation is subject to Article III’s case or controversy requirement, and nothing in the Court’s reasoning is less applicable to patents than to trademarks.38

A number of district courts have begun to apply the heightened Already standard in the patent context. Often these courts have found that a covenant not to sue does not moot the declaratory judgment action. For example, in AstraZeneca LP v. Breath Ltd., the district court rejected an argument that a declaratory judgment counterclaim was mooted by a covenant not to sue.39 The patent owner provided a limited covenant to withdraw certain asserted claims after they were found likely to be proven invalid at the preliminary injunction stage.

The district court found that the patent owner had not met the “formidable burden” imposed by Already. The covenant: (1) did not state that it was unconditional and irrevocable; (2) did not cover the accused infringer’s suppliers, distributors, and customers; and (3) covered only the accused infringer’s originally filed Abbreviated New Drug Application (ANDA).40 Therefore, the district court held that the patent owner had “failed to show that it could not reasonably be expected to resume its enforcement efforts against [the accused infringer].”41

A number of other district courts have likewise questioned the scope of covenants not to sue when provided by patent owners in hopes of short-circuiting ongoing litigation.42 Patent owners are being held strictly to the formidable burden of showing that litigation is not reasonably likely to recur.

One open question relates to so-called partial covenants not to sue. These covenants embrace only a subset of claims within the asserted patents. Declaratory judgment jurisdiction is generally determined on a claim-by-claim basis where the declaratory judgment plaintiff is responding to an initial complaint asserting the infringement of less than all of the patent claims.43 After the Supreme Court’s Already decision, it is improbable that a patent owner will be able to show patent litigation cannot reasonably be expected to recur as to the withdrawn or unasserted claims. Being from the same patent, all of the claims relate to the same technology. The patent owner has previously argued that at least the withdrawn claims are relevant to the accused infringer’s product. Without a broad covenant not to sue, there is nothing to prevent the patent owner from “pick[ing] up where he left off, repeating this cycle” by asserting the remaining claims in a new litigation.44

No Federal Circuit precedent expressly holds that such a partial covenant not to sue divests a district court of its jurisdiction to hear declaratory judgment counterclaims as to the other patent claims. The closest precedent is Streck, Inc. v. Research & Diagnostic Systems, Inc.,45 which was issued before the Supreme Court’s Already decision. In Streck, the patent owner’s complaint alleged infringement of “one or more claims.”46 There was no covenant not to sue. Instead, the patent owner narrowed the asserted claims by identifying a limited number in the preliminary infringement contentions.47 On the eve of trial, the patent owner identified just nine claims for consideration. The Federal Circuit affirmed the district court’s determination that it lacks jurisdiction over a declaratory judgment counterclaim seeking to invalidate patent claims not included by the patent owner in its infringement allegations.48 In doing so, it relied on the counterclaimant having the burden to show a continuing case or controversy with respect to withdrawn or otherwise unasserted claims.49 That aspect of Streck was overturned or at the very least severely called into question by the Supreme Court’s Already decision.

It is good public policy to require IP owners to clear abandonment of infringement allegations by providing broad covenants not to sue. The broader the covenant, the more likely it is to reduce or eliminate the potential for relitigation going forward. Also, this may discourage PAEs from even threatening suits in the first place if it is difficult to stop declaratory judgment actions unilaterally. Some PAEs send out literally thousands of demand letters to different accused infringers. Just sending these letters imposes significant costs on potential accused infringers, who have to evaluate these claims and prepare for possible future litigation. Where the infringement allegations are marginal or the patent’s validity questionable, PAEs may avoid making the threat in the first place if the price for prematurely ending the litigation might be a broad covenant not to sue.

Nor will applying Already in this manner overly burden courts. Declaratory judgments are a discretionary remedy.50 Courts remain vested with discretion not to hear declaratory judgment action, if they choose.51 If a dispute appears too remote, a court can still decline to hear it.52

Conclusion

The Already v. Nike decision overturns over 20 years of Federal Circuit precedent. Intellectual property owners now have a formidable burden to show that an ongoing suit is moot in light of a covenant not to sue. Unless it is absolutely clear that the dispute is unlikely to recur, the declaratory judgment action can continue. This calls into question the utility of partial covenants not to sue. Covenants not extending to withdrawn or unasserted patent claims may no longer moot a broader declaratory judgment action.

Endnotes

1. 133 S. Ct. 721 (2013).

2. U.S. Const. art. III, § 2.

3. Church of Scientology of Cal. v. United States, 506 U.S. 9, 12 (1992) (quoting Mills v. Green, 159 U.S. 651, 653 (1895)).

4. Super Tire Eng’g Co. v. McCorkle, 416 U.S. 115, 122 (1974).

5. See 28 U.S.C. § 2201(a) (providing that a district court has jurisdiction over a declaratory judgment action only when there is an “actual controversy”).

6. MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 126–27 (2007) (quoting Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 240–41 (1937)).

7. Id. at 127 (quoting Md. Cas. Co. v. Pac. Coal & Oil Co., 312 U.S. 270, 273 (1941)).

8. Id.; Organic Seed Growers & Trade Ass’n v. Monsanto Co., 718 F.3d 1350, 1355, 1358–59 (Fed. Cir. 2013) (finding declaratory judgment plaintiffs lacked standing because they did not allege significant concrete steps to conduct infringing activity and patent owner unequivocally disclaimed any intent to sue).

9. Friends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc., 528 U.S. 167, 190 (2000) (citing United States v. Concentrated Phosphate Export Ass’n, 393 U.S. 199, 203 (1968)).

10. Id. at 189 (alteration in original) (quoting Concentrated Phosphate, 393 U.S. at 203).

11. See, e.g., Dow Jones & Co. v. Ablaise Ltd., 606 F.3d 1338, 1346 (Fed. Cir. 2010); Benitec Austl., Ltd. v. Nucleonics, Inc., 495 F.3d 1340, 1347–48 (Fed. Cir. 2007); Amana Refrigeration, Inc. v. Quadlux, Inc., 172 F.3d 852, 855–56 (Fed. Cir. 1999); Super Sack Mfg. Corp. v. Chase Packaging Corp., 57 F.3d 1054, 1058 (Fed. Cir. 1995); Spectronics Corp. v. H.B. Fuller Co., 940 F.2d 631, 633–34 (Fed. Cir. 1991).

12. See, e.g., Spectronics, 940 F.2d at 635 (“The burden is on Spectronics ‘to establish that jurisdiction over its declaratory judgment action existed at, and has continued since, the time the complaint was filed.’” (quoting Int’l Med. Prosthetics Research Assocs. v. Gore Enter. Holdings, Inc., 787 F.2d 572, 575 (Fed. Cir. 1986))); Super Sack, 57 F.3d at 1058 (same).

13. Super Sack, 57 F.3d at 1056 (emphasis omitted).

14. Id. at 1059 (“Because [the accused infringer] can have no reasonable apprehension that it will face an infringement suit on the ’796 and ’652 patents with respect to past and present products, it fails to satisfy the first part of our two-part test of justiciability.”).

15. In MedImmune, the Supreme Court did away with the Federal Circuit’s “reasonable apprehension” test for declaratory judgment jurisdiction, replacing it with a requirement for “a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.” MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 (2007).

16. Benitec, 495 F.3d at 1344.

17. Id. at 1343, 1348–49.

18. Id. at 1350 (Dyk, J., dissenting) (citing Cardinal Chem. Co. v. Morton Int’l, Inc., 508 U.S. 83, 98 (1993)).

19. Already, LLC v. Nike, Inc., 133 S. Ct. 721, 725 (2013).

20. Id.

21. Id. at 725, 728.

22. Id. at 725–26. Yums also attempted to show actual injunction through affidavits from prospective investors. According to the investors, the continued existence of the Nike trademark harmed Yums because the potential investors would not consider investing in the company unless the trademark was invalidated, and one potential investor said he believed that the covenant provided inadequate assurance that Nike could not assert its trademarks against Yums in the future over the sales of shoes similar to the Air Force 1. Yums also submitted an affidavit from one of its executives, asserting that Nike had intimidated retailers into refusing to carry Yums’s shoes. Id.

23. Id. at 726 (quoting Nike, Inc. v. Already, LLC, No. 09 Civ. 6366(RJS) (S.D.N.Y. Jan. 20, 2011)).

24. Id.

25. Id.

26. Id. at 727.

27. Id. (quoting Friends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc., 528 U.S. 167, 190 (2000)).

28. Id. at 728.

29. Id. at 729.

30. Id.

31. Id. at 733 (Kennedy, J., concurring) (quoting Friends of the Earth, 528 U.S. at 190).

32. Id.

33. Id.

34. Id. at 734.

35. 319 U.S. 359 (1943).

36. Already, 133 S. Ct. at 729, 732; see also Arkema Inc. v. Honeywell Int’l, Inc., 706 F.3d 1351, 1358 (Fed. Cir. 2013) (relying on Already for proposition that a plaintiff’s decision not to grant a covenant not to sue suggested that an “active and substantial controversy” existed between the parties).

37. See, e.g., eBay Inc. v. MercExchange, LLC, 547 U.S. 388, 393 (2006) (observing that its approach to patent injunctions is “consistent with our treatment of injunctions under the Copyright Act”).

38. See, e.g., Windsurfing Int’l Inc. v. AMF Inc., 828 F.2d 755, 757 (Fed. Cir. 1987) (noting that “declaratory judgment actions involving trademarks are analogous to those involving patents”).

39. No. 1:08-cv-01512, 2013 WL 2404167, *4 (D.N.J. May 31, 2013), aff’d in relevant part and rev’d in part on other grounds, Nos. 2013-1312, -1352, 2013 WL 5813759 (Fed. Cir. Oct. 30, 2013).

40. Id. at *3 (describing how the accused infringer represented that it had already amended its ANDA and therefore the current application was outside the covenant).

41. Id. at *4.

42. See, e.g., PerfectVision Mfg., Inc. v. PPC Broadband, Inc., No. 4:12-CV-0623-JHL, 2013 WL 2553507, *5 (E.D. Ark. June 10, 2013) (refusing to dismiss declaratory judgment action because patent owner’s “covenant not to sue is not unconditional and irrevocable”); Hitachi Koki Co. v. Techtronic Indus. Co., No. 1:09:3308-WSD, slip op. at 12 (N.D. Ga. Feb. 6, 2013) (refusing to dismiss declaratory judgment action because covenant not to sue did not apply to certain future products); FedEx Corporate Servs., Inc. v. Eclipse IP LLC, No. 1:13-cv-00275-AT, slip op. at 6–7 (N.D. Ga. 2013) (refusing to dismiss declaratory judgment action because covenant not to sue allows patent owner to sue accused infringer’s customers); ActiveVideo Networks, Inc. v. Trans Video Elecs., Ltd., No. C-13-1980, 2013 WL 5442360, at *9–10 (N.D. Cal. Sept. 30, 2013) (same).

43. See, e.g., Jervis B. Webb Co. v. S. Sys., Inc., 742 F.2d 1388, 1399 (Fed. Cir. 1984) (vacating portion of the district court’s holding regarding the invalidity of certain claims for lack of jurisdiction because patent owner had not asserted those claims).

44. See Already, LLC v. Nike, Inc., 133 S. Ct. 721, 727 (2013).

45. 665 F.3d 1269 (Fed. Cir. 2012).

46. Id. at 1284.

47. Id. This narrowing of the number of asserted claims as litigation proceeds is becoming more common. Many judicial districts have adopted local rules requiring patentees to select early on the claims that they will actually litigate. This narrowing creates withdrawn claims that, at least potentially, have not been the subject of a covenant not to sue.

48. Id. at 1281.

49. Id. at 1283.

50. 35 U.S.C. § 2201.

51. Cardinal Chem. Co. v. Morton Int’l, Inc., 508 U.S. 83, 95 n.17 (1993) (“[T]he Declaratory Judgment Act affords the district court some discretion in determining whether or not to exercise that jurisdiction, even when it has been established.”).

52. See, e.g., AstraZeneca LP v. Breath Ltd., No. 1:08-cv-01512, 2013 WL 2404167, *7 (D.N.J. May 31, 2013) (dismissing without prejudice for declaration of invalidity where claims were found not infringed).

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