Nike v. YUMS: Covenant Not to Sue Prevents Jurisdiction

Last week, theåç Supreme Court handed down its ruling in Nike v. Already, dba YUMS, 568 U.S. — (2013).  While this case is set against the backdrop of trademark infringement, the big issue here is tied up in the way the Constitution grants federal courts the power to hear cases.  For those who haven’t survived a Constitutional Law class, this can be a bit confusing.  The Nike case was “mooted out”, which is a phrase lawyers like to throw around when we want to sound like we know something.  Mootness is part of the larger doctrine of justiciability and requires a bit of an explanation before we can discuss what was really going on in Nike.  Bear with me-things are going to get a bit technical.

Article III of the United States Constitution establishes the judicial branch of our government and creates the Supreme Court (lower federal courts are created by Congress).   Section 2, Clause 1 has what’s known as the “Case or Controversy Clause”, which the Supreme Court has interpreted to tell us what limitations must be put on judicial review, e.g., what cases courts can or cannot decide.  There are several different limitations on a court’s power to hear a case, but for our purposes in discussing Nike, the justiciability concepts of standing and mootness are what we need to focus on.

Standing refers to the requirement that the person bringing the suit must be able to demonstrate that she is currently being harmed by the defendant and that a decision by the Court will remedy that harm.  If a plaintiff cannot show these three things, the case will be dismissed for lack of standing.   For example, if Suzy is playing quietly with her dolls and Tommy runs up and tears the head off of one, Suzy can run to Mom and ask her to put Tommy on time out.  Suzy is the plaintiff, Tommy is the defendant, the shameful attack on Raggedy Ann is the harm, the remedy is a time out, and Mom is the court.   Suzy has standing to ask for the time out because her doll is without a head, Tommy did it, and only Mom can grant the time out, which should be sufficient to punish said decapitation.

The justiciability concept of mootness means that there must be some sort of real controversy-not just a theory that there will be a controversy at some point in the future.  If there is no longer anything to argue about, there’s nothing for the court to decide, so the case will be dismissed as moot, or “mooted out”.  So in our previous example, if Tommy didn’t go through with his diabolical plans of doll dismemberment and swore he would never treat Suzy’s beloved Raggedy Ann so shamefully, there would be no controversy and Mom can tell Suzy to stop bothering her.   If Suzy asked Mom to put Tommy on time out because she thinks he’s got it in for Raggedy Ann as soon as Mom’s not looking, Mom can say that since Raggedy Ann still has her head and it doesn’t look like she’s going to lose it any time soon, there’s no fight and hence no reason for a time out.  Suzy’s time out request is moot.

With that background in mind, let’s go back to Nike v. YUMS.  In 2009, Nike brought suit against YUMS for allegedly infringing Nike’s design trademark for the Air Force 1 shoe (U.S. Reg. No. 3,451,905), which has been marketed since the early 1980’s.  YUMS denied Nike’s allegations and filed a countersuit seeking to invalidate the mark.   The validity and infringement analyses are a non-issue here so we’re going to skip the part where we ask if Nike’s mark actually is invalid or if it was infringed.  This case is really about jurisdiction and in broader terms, if a court will be able to hear intellectual property validity challenges when infringement is taken off the table.    Before the lower court could make a decision on the merits of either side’s claims, Nike gave YUMS a very broad covenant not to sue over the Air Force 1 trademark.  Not only did Nike promise not to sue YUMS because of the allegedly infringing shoe, but it also gave the same promise for any of YUMS’ current or previous shoe lines or “colorable imitations thereof” sold before or after the date of the Covenant.  YUMS should have been happy- heck- it should have jumped up and screamed “Yahtzee!” with that one. Alas, it maintained its counterclaims to cancel Nike’s trademark, which the lower court tossed because of the Covenant.  More specifically, the counterclaims were tossed because the Covenant removed any controversy and rendered the case moot.  The Appeals Court for the Second Circuit agreed with the lower court, so YUMS appealed to the United States Supreme Court.

YUMS’ arguments are summed up as follows:  Even though Nike promised not to sue YUMS for its current and past designs, there could be a design in the future that the Covenant would not cover.  Further, the problem with covenants not to sue is that they let potentially invalid trademarks remain in force, which has a negative impact on the marketplace.  Therefore, YUMS argued, it has standing because it is a competitor of Nike’s and Article III harm occurs when a competitor benefits from something unlawful- here, an invalid trademark.  According to YUMS, if the court refused to hear the case to determine the mark’s validity (e.g, mooted it out), Nike would then have carte blanche to engage in abusive litigation tactics that could squeeze out smaller competitors thus causing a chilling effect in the marketplace.  Further, the case shouldn’t be mooted out because the mere existence of the registration would deter investors and permit Nike to engage in unfair trade practices.  The Court didn’t buy any of this because there was nothing to show that YUMS would produce an infringing shoe, no evidence that Nike would engage in abusive litigation or unfair trade practices, and even if it did, finding the mark invalid wouldn’t do anything to remedy that.  Most importantly, however, the breadth of the Covenant rendered any question of current or future harm obsolete.

When dealing with a mootness issue, the person who promises not to something in the future has to meet a very tough burden in proving that he will make good on that promise.  The Court relied on the “voluntary cessation doctrine” set forth in Friends of the Earth, Inc. v. Laidlaw Environmental Services (TOC), Inc., 528 U. S. 167, 190 (2000): “[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.”   In English, this means that if you’re doing something wrong and you promise never to do it again, your word isn’t good enough; you have to prove it in order moot the case.  Nike argued that the Covenant itself was sufficient proof of its promise but this didn’t fly.  The Court went to the actual terms of the Covenant to determine if Nike had met this very tough burden.  In this case, though, Nike did.  The terms of the Covenant were unconditional and irrevocable.  They prohibited Nike from making any claim or demand, and even went so far as to shield YUMS’ distributors and customers. This coupled with the fact that YUMS did not provide a shred of evidence that it had plans to market a shoe that the Covenant wouldn’t cover was enough to convince the Court that the possibility of future harm was just too remote here.  YUMS was essentially asking for a decision that said even though the infringement matter was off the table forever there was still a live controversy, and even though there was no danger of YUMS ever being sued again, it still had standing, so not only should the Supreme Court still hear the invalidity claims, but it is Constitutionally permitted to do so.  The Court declined YUMS’ invitation.

A different ruling that would have allowed the counterclaims suit to go forward could have potentially turned IP law on its ear. This case is interesting because it had the potential to go beyond a little trademark infringement matter.  The Federal Circuit allows patent owners to use covenants not to sue as the basis to kick out countersuits based on validity- a concept that sort of came up at oral argument.  Courts are not the only place to challenge trademark validity-opposition and cancellation proceedings can also be brought to the Trademark Office.  YUMS could have challenged the validity of the Air Force 1 mark at the Trademark Trials and Appeal Board (“TTAB”). Patent owners have the same option with patent claims in the Patent Trials and Appeals Board (“PTAB”).   If a person does not receive a favorable ruling from the TTAB or PTAB, he may then appeal the adverse decision in federal court.   Justice Kennedy asked if this could somehow make it easier to show standing e.g., is an adverse ruling in the Patent and Trademark Office sufficient “harm” to meet the Article III standing requirement?  The opinion doesn’t really talk about it, but in their concurrence, Justices Kennedy, Thomas, Alito, and Sotomayor cautioned that careful consideration must be given in future cases to make sure the party delivering a covenant not to sue is not doing so to the disadvantage of the competitor.  My Magic 8-Ball tells me that the patent connection was not lost on the Big Dogs when they unanimously kicked this one out and to me that is a very clear warning to make sure any covenant not to sue is beyond reproach.  They also left the door wide open for a test case so I am sure someone will bring this issue up again, perhaps in litigation or perhaps in appealing a Board decision, but Magic 8-Ball also tells me we likely won’t get a bright-line rule on it.

In all honesty, the death knell sounded when YUMS trotted out a policy-based objection that big-time companies like Nike would bully small-time companies like YUMS out of the marketplace.  Is this possible?  Maybe, but because of the Covenant, YUMS no longer has a dog in that fight.  Noble as its intentions may have been, there just isn’t a way for an Article III court to adjudicate a potential-be it a future plaintiff or a future harm- not because it doesn’t want to, but because it can’t.  The Nike Covenant was ironclad, sufficiently broad, and was drafted in such a way as to “render the threat of litigation remote or nonexistent.”   If the Covenant had been worded differently or if YUMS could have shown that it intended to make an arguably infringing shoe in the future, there may have been something to go on.   I doubt it though.  Not this time and not with that 300 pound Article III jurisdiction hobgoblin in the room.