Covenants Not to Sue v. Counterclaims to Invalidate: You Can’t Fire Me, I Quit

Hayden W. Gregory

©2013. Published in Landslide, Vol. 5, No. 3, January/February 2013, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

On November 7th, the U.S. Supreme Court heard oral arguments in Already, LLC d/b/a Yums v. Nike, Inc. As stated in Already’s successful petition for certiorari, the question presented is:

Is a federal district court 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?

This question arises in the context of a suit for infringement, followed by the defendant’s counterclaims for declaratory judgment of invalidity, followed by the plaintiff’s promise not to continue the suit and an assertion that the promise removes any case or controversy that might provide any jurisdictional basis for the declaratory judgment action. While the case in question arises under trademark law, the issues involved occur much more frequently in patent litigation, and there seems to be widespread agreement that the court’s disposition of the case and the issues it presents will apply to patent cases as well as to trademark, and with greater frequency and effect. Concern has been expressed in judicial circles that patent and trademark owners may be offering up promises or covenants not to continue a suit as a strategy to bail out of litigation that is going badly, with a good portion of the bad appearing in the form of a counterclaim mounting a robust attack upon the validity of the patent or mark. By terminating their own suits, patent owners hope to thereby cut off the jurisdictional oxygen that sustains the derivative counterclaims that threaten their patents, and rulings of federal courts have largely sustained those hopes. However, there are signs that this may be changing. At the very least, the burden of persuasion regarding whether a pledge not to sue defeats declaratory judgment jurisdiction may be shifting. Perhaps a seminal event in this regard is Judge Dyk’s dissent in the July 2007 decision of the Federal Circuit in Benitec Australia v. Nucleonics.

In the opening lines of his dissent, Judge Dyk stated that if the declaratory judgment action had been filed by a plaintiff as an original action instead of as a defendant’s response to a suit for infringement, he would have agreed with the majority opinion that the required case or controversy had not been established, and presumably also with the majority’s ruling that the party moving for declaratory judgment carries the burden of showing an existing justiciable controversy. Dyk noted the existence of “a strong public interest in permitting accused infringers to challenge invalid or unenforceable patents,” and that the Declaratory Judgment Act plays an important role in facilitating such challenges by preventing patent holders from threatening enforcement while avoiding litigation that might render the patent invalid or unenforceable.

In Benitec, the majority held that after dismissal of the plaintiff’s suit for infringement, defendant Nucleonics had the burden of persuasion on the existence of a case or controversy to support the declaratory judgment action, just as it did when it filed the counterclaim. This burden included a showing that it had produced or prepared to produce a product that would be the target of an infringement suit by Benitec. Judge Dyk’s dissent relied upon a Supreme Court ruling that once declaratory jurisdiction has been established, the burden shifts to the party seeking to divest the court of jurisdiction to prove that a case or controversy no longer exists.1

The Nike v. Already Litigation

The litigation in question began in July 2009, when Nike filed suit against Already/Yums, alleging trademark infringement, false designation of origin, unfair competition, trademark dilution under federal law, and related claims under New York law. The suit relates to a shoe called the Air Force 1, which Nike developed in 1982 and which has since enjoyed annual sales in the millions of pairs. The complaint alleged that the Air Force 1 shoe has a distinctive appearance for which Nike owns several federal trademark registrations, including the “’905 Registration” for “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 suit alleged that Yums was selling footwear bearing a confusingly similar imitation of the Air Force 1 shoe.

Four months after the Nike suit was filed, Already filed counterclaims for declaratory judgment seeking cancellation of the ’905 registration under provisions of the Lanham Act, 15 U.S.C. § 1119, which authorizes a district court to take various actions regarding a trademark registration, including cancellation, “in any action involving a registered mark.”

Four months after Yum’s counterclaims, Nike delivered a “Covenant Not to Sue” to Yums. The covenant stated that Yums’ actions “no longer infringe or dilute the NIKE Mark at a level sufficient to warrant the substantial time and expense of continued litigation,” and that Nike would prosecute no trademark-related action against Yums “based on the appearance of any of [Yums]’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.”

Following a district court hearing to determine if Nike’s covenant deprived the court of jurisdiction of Yums’ counterclaims, Nike moved pursuant to Federal Rule of Civil Procedure 41(a)(2) to dismiss its own claims against Yums, as well as Yums’ counterclaims. Yums opposed dismissal of the counterclaims, alleging that the counterclaims created an independent controversy under the Declaratory Judgment Act.

The district court dismissed Nike’s claims and Already’s counterclaims, ruling that, in view of Nike’s covenant not to sue, the counterclaims failed to create a justiciable case or controversy.

On appeal to the Second Circuit, Already argued that the district court erred in dismissing its counterclaims under Rule 41(a)(2) for lack of Article III jurisdiction, in view of express language in the Rule providing that a claim may be dismissed at the request of a plaintiff and over the objection of a defendant only if the defendant’s counterclaim “can remain pending for independent adjudication.” The Circuit Court disposed of this seemingly applicable statutory barrier to dismissal of the counterclaims by declaring that, under the circumstances of this case, “Rule 41(a)(2) is irrelevant.” In the court’s view, it is irrelevant because “another event independently deprives the district court of an Article III case or controversy involving the defendant’s counterclaims.” That event was the delivery of the covenant not to sue to Yums.

Supreme Court Oral Argument

It is probably unwise to speculate on the disposition of an appeal to the Supreme Court based on the oral argument and the questions and views advanced by the Justices, as well as the representations and responses of counsel. Federal district and appellate courts have shown a strong tendency to find covenants not to sue and other actions that terminate a plaintiff’s suit for infringement to also extinguish federal jurisdiction of counterclaims challenging validity. However, based on the November 7th oral argument, it seems unlikely that going forward patent owners and trademark registrants will have such an easy time knocking out counterclaims challenging validity based on actions taken to terminate their own suits for infringement.

Many district court and court of appeals decisions do not appear to be particularly demanding that in order to defeat declaratory judgment jurisdictions, covenants or other promises not to sue must comprehensively rule out practically all prospects for suit against the defendant in question based on the patent or trademark in question. By way of contrast, the Justices spent most of the one-hour oral debate focusing on the precise terms of the covenant, and in exploring circumstances in which the defendant would still be liable to suit, in which event declaratory judgment jurisdiction would continue.

The litigating posture of counsel for the two parties could not have been more contrasting. Counsel for the petitioner, Already, refused to identify specific conduct that his client might engage in that would subject Yums to suit by Nike for trademark-related violations despite the covenant not to sue. Noting that the covenant protected Yums from suit “based on the appearance of any of [Yums]’s current and/or previous footwear product designs, and any colorable imitations thereof,” and that the covenant extended to future as well as past conduct, counsel was asked to identify the injury that Yums faced that was not protected by the covenant. In various forms, the consistent response was that the injury was the continued existence of the trademark, and only its “eradication” would suffice.2

Several justices in turn pressed Already’s counsel to answer the flip side of the same question: If this covenant is ineffective, how would you have changed it to provide the level of protection you say is required? When these questions failed to produce a direct answer, the Chief Justice interceded to demand a yes or no answer to the question: “Can you write a covenant that says something other than the trademark is totally invalidated?”

The response was “No,” followed by explanation that the continued registration of the mark is itself the injury, and that the respondent “is trying to hang on to government action that disadvantages its competitors.”

Nike counsel Tom Goldstein offered a much more conciliatory analysis and proposed grounds for deciding the case, beginning with opening remarks that called for a balanced rule under which a covenant not to sue will not always eliminate the other side’s injury. More specifically, he agreed that if Yums had credibly asserted that it intended to produce and market a shoe that copied and counterfeited the Nike design, there would be a continuing Article III injury, because such an all-encompassing covenant might constitute abandonment of the mark, and that Nike would never issue such a covenant.

Goldstein also acknowledged that under the circumstances of the case, the burden of proof might appropriately be placed on Nike to establish that Already was threatened with no Article III injury not covered by the covenant, and that Nike could meet this burden by depositions and other discovery methods challenging Already’s assertions of injury. While the Solicitor General on behalf of the government urged the court to remand the case for further consideration by courts below, Goldstein argued that it is unnecessary to remand since Nike had already met its burden of proof, in that: (1) it executed a covenant that covered all past designs of Yums shoes, and any future colorable imitations; and (2) the record shows that the district court found that despite an opportunity to do so, Yums has not asserted any intention to market a shoe that would infringe the mark and fall outside the covenant.

The judicial winds that carry the jurisprudence regarding the convergence of covenants not to sue and counterclaims to invalidate patents or trademarks implicated in those covenants seem to be blowing in the direction of a middle ground solution, such as called for in Judge Dyk’s dissent in Benitec Australia. We may see the Article III status of a declaratory judgment sought by a defendant to invalidate the alleged infringed patent determined by rules different than those governing an initial request by a plaintiff.

Dismissal for lack of Article III jurisdiction may be more difficult to obtain, in that the covenants will be more closely scrutinized to insure that they adequately protect from further suit a defendant who has moved to invalidate the allegedly infringed patent, including from suits involving future products as well as for products that were the subject of the infringement suit. The burden of proof may be placed on the party moving to dismiss the declaratory judgment counterclaim, rather than on the counterclaiming party. However, it appears highly unlikely that the winds of change will reach the intensity prayed for by the petitioner in Already v. Nike, who asks for a rule that a covenant not to sue cannot extinguish Article III jurisdiction of an action to cancel a patent or trademark so long as the patent or mark has life. Such a rule would seem to mean that a covenant not to sue could never defeat Article III jurisdiction of the counterclaim seeking invalidation of the patent or trademark, since exercise of that jurisdiction would be a prerequisite to invalidation.


1. Cardinal Chem. Co. v. Morton Int’l, Inc., 508 U.S. 83, 98. The Supreme Court rejected a Federal Circuit practice of routinely holding that a finding of noninfringement moots a declaratory counterclaim for invalidity. In this case, the district court had ruled on the counterclaim and held the patent invalid, which ruling the Federal Circuit reversed on grounds that the district court’s finding of noninfringement mooted the counterclaim. The Supreme court reversed, reasoning that while the initial burden of establishing declaratory judgment jurisdiction rests on the party seeking a declaratory judgment, “once that burden has been met courts are entitled to presume, absent further information, that jurisdiction continues. If a party to an appeal suggests that the controversy has, since the rendering of judgment below, become moot, that party bears the burden of coming forward with the subsequent events that have produced that alleged result.” The court called attention to the value to all parties of a definitive determination of the validity of a patent. In this case, this value was demonstrated by the fact that the patent owner also opposed dismissal of the counterclaim challenging the validity of its own patent.

2. In his opening remarks at the oral argument, counsel for Yums characterized the issues before the court: “The Article III question in this case turns on resolution of two issues: First, whether loss of freedom to operate on the part of a direct competitor qualifies as Article III injury in fact; and second, what party bears the burden of proof of facts that are contended by it to render a claim moot.”

Hayden W. Gregory is legislative consultant for the ABA Section of Intellectual Property Law in Washington, D.C.