“Would Further Encourage Parties to Employ Litigation as a Weapon Against Their Competitors…”

That’s what Chief Justice Roberts in Monday’s unanimous opinion says a small shoe company’s arguments against the validity of trademarks of its giant competitor would do. ALREADY, LLC, DBA YUMS v. NIKE, INC., ( Slip Opinion, January 9, 2013), http://www.supremecourt.gov/opinions/12pdf/11-982_i425.pdf. The encouragement would come from accepting the argument by Already and its friends of court that despite not showing any particular risk of further injury, it should be free to challenge Nike’s trademarks as invalid because they aren’t really trademarks and the two companies compete against each other. You have to look at the facts to understand the sweeping argument.

Already didn’t attack Nike’s trademarks out of the blue. Nike first sued Already for trademark infringement, and Already counterclaimed that Nike’s marks were invalid. You have to read the Second Circuit opinion to learn why Nike said its Air Force 1 trademarks were infringed by Already’s Sugar and Soulja Boy trademarks. They’re so different, the Supreme Court opinion made me wonder how infringement was possible.

The Second Circuit explained. The trademarks are 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.” Nike alleged it sold millions of Air Force 1’s since 1982 in more than 1700 color combinations, and that Already’s shoes copied their (kaleidoscopic) look.

When Already put up a fight at the district court level, Nike unilaterally “delivered” a broad covenant not to sue Already further. There was a hearing and the court decided it no longer had a “case or controversy” before it, so the lawsuit was over. Art. III, Section 2, Clause 1 of our Constitution confines the federal judiciary’s jurisdiction to “Cases” and “Controversies,” and the Supreme Court ultimately decides what legal claims come within those words.

Already could not explain what particular trademark infringement lawsuit risks it faced from Nike once the covenant not to sue was given to them. It was left arguing, in effect, that it was entitled to be a kind of private attorney general seeking to rid the marketplace of Nike’s invalid trademarks. The Chief Justice wrote that these arguments “boil down to a basic policy objection that dismissing this case allows Nike to bully small innovators lawfully operating in the public domain.”

The Court rejected the arguments on practical and policy grounds that are barely developed. It says it is already risky for trademark owners to file too many lawsuits and issue covenants not to sue, because the trademarks could lose significance and even be cancelled. No instance of a serial covenant-not-to-sue deliverer losing trademark rights is cited, however, and you have to wonder if there have been any. The opinion also notes the risk that companies doing what Nike did will have to pay the defendant’s legal fees under the “exceptional cases” provision of the Lanham Act. But, I didn’t find that Already got a fee award.

Finally the opinion says that accepting Already’s argument means “larger companies with more resources will have standing to challenge the intellectual property portfolios of their more humble rivals—not because they are threatened by any particular patent or trademark, but simply because they are competitors in the same market.”

Which brings us to the “further encourage” quote in the title of this post. I take it to mean the Court understands perfectly well that this is happening anyway. Justice Kennedy’s concurring opinion shows more concern about the behavior.

Justice Kennedy wrote his opinion “to underscore that 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.”

He goes on that it “would be most unfair to allow the party who commences the suit to use its delivery of a covenant not to sue as an opportunity to force a competitor to expose its future business plans or to otherwise disadvantage the competitor and its business network, all in aid of deeming moot a suit the trademark holder itself chose to initiate.” He emphasizes that it was Nike’s, not Already’s, burden under the few cases on covenants to show the covenant not to sue ended any possible controversy. The courts below didn’t impose that burden, but that was not enough for reversal. In the end, Justice Kennedy joins the decision apparently because Already didn’t play its cards just right and overreached in its arguments.

If you are looking for a blueprint for how competitors can protect themselves against lawsuits followed by covenants like the one Nike filed here, you won’t find it. Excellent lawyers who typically represent large companies with substantial IP portfolios, however, are already writing that this decision is a blueprint for how to start infringement litigation and then end it with a neutered defendant and no decision on the merits of the IP allegedly infringed.  

The immediate returns from this decision suggest that it accomplishes what the Chief Justice wanted to avoid.

About Craig Pinkus

Craig Pinkus is a partner in the Intellectual Property Group. He also is a member of the Litigation and the Sports, Entertainment and Media Groups. He assists clients with a broad range of disputes and transactions involving all areas of intellectual property, entertainment, and other complex business arrangements. He has conducted trials and arbitrations throughout the United States and has argued appeals before the Seventh, Sixth and Federal Circuit Courts of Appeal, the Indiana appellate courts, and United States Supreme Court.
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