Supreme Court Ruling Upholds Covenants’ Power to Dismiss Invalidity Counterclaims

Los Angeles, CA (Law Firm Newswire) April 1, 2014 – The Supreme Court recently ruled in favor of Nike, Inc., in a case concerning whether a covenant not to enforce a trademark can reliably moot a counterclaim of invalidity.

But Simi Valley patent attorney Jim Dawson said the ruling affests more than trademarking. “This case almost certainly has ramifications for similar cases involving patents,” Dawson stated.

Nike makes a line of athletic shoes called “Air Force 1.” In the summer of 2009, Nike filed suit against Already, LLC, claiming that their “Soulja Boy” and “Sugar” shoe lines infringed upon Nike’s AIR FORCE 1 trademark. Already responded with a counterclaim seeking to invalidate Nike’s trademark.

Later, Nike decided to drop its lawsuit. Already’s effect on the sales of Nike’s shoes was minimal, Nike concluded, but the threat to its valuable trademark was very real. Nike issued a broad covenant to Already, agreeing not to enforce its trademark with respect to Already’s existing products or any future “colorable imitations” of them. Then, Nike moved to dismiss with prejudice both its claims and Already’s declaratory judgment counterclaim, arguing that the counterclaim was made moot by the covenant not to sue.

Already elected to pursue its counterclaim, contending that Nike’s covenant did not go far enough to ensure its safety from future lawsuits and that Nike’s trademark prevented Already from effectively competing.

The district court granted Nike’s motion. Because Already presented no evidence that it had plans to develop any products not covered by the covenant, it failed to establish subject-matter jurisdiction necessary for the declaratory judgment it sought. The Second Circuit affirmed.

The Supreme Court unanimously affirmed the ruling, specifically noting the broad scope of the covenant. The court found that absent an extant controversy over a trademark, the federal courts did not retain jurisdiction over the matter (Already, LLC, dba Yums v. Nike, Inc., No. 11-982 (2013)).

The court rejected Already’s argument that the federal courts should adjudicate the validity of Nike’s trademark due to the “important role [they] play in the administration of federal patent and trademark law.”

“Given that language, it seems very likely this ruling will be applied to patent litigation as well,” Dawson explained. “Therefore, patent owners should retain the ability to dismiss a counterclaim of invalidity on the basis of a covenant not to sue. When drafting such covenants, patent owners should be careful to note the court’s attention to the broad nature of Nike’s covenant.”

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