When A Trademark Is Challenged, a Covenant Not to Sue Might Be the Answer

The United States Supreme Court, which rarely agrees to hear trademark cases, has recently ruled that a properly drafted covenant not to sue a competitor for trademark violation can effectively moot the competitor’s counterclaims challenging the drafter’s trademark.

In Already, LLC, dba Yums v. Nike, Inc.,  Nike sued Yums for violation of Nike’s trademark  associated with Air Force 1s shoes and alleged that Yums’s “Soulja Boys” and “Sugars” shoe designs infringed and diluted Nike’s trademark.   Yums denied these allegations and filed a conterclaim contending that Air Force 1 trademark was invalid and seeking its cancellation.

Four months after Yums filed its counterclaim, Nike issued a “Covenant Not to Sue,” which proclaimed that Yums’s actions no longer infringed or diluted the Nike’s trademark at a level sufficient to warrant the substantial time and expense of litigation and that Nike promised not raise against Yums or any of its affiliated entities any trademark or unfair competition claims based on any of Yums’s existing footwear designs, or any future Yums designs that constituted a “colorable imitation” of Yums’s current products.

After issuing the covenant, Nike moved to dismiss its claims and Yums’s counterclaim stating that its promise not to sue for trademark infringement eliminated any controversy between the parties.  Yums opposed the dismissal and argued that a controversy still existed – that despite the covenant not to sue, investors remained nervous about investing in Yums as long as the Nike registration was in effect and that Nike could possibly refile its trademark infringement lawsuit at some point in the future.

The Supreme Court ruled that under the Voluntary Cessation Doctrine, Nike carried a “formidable burden” or showing that it “could not reasonably be expected” to resume its enforcement efforts against Yums.  The Court then held that Nike’s covenant not to sue met that burden for the following reasons:

(1)  The covenant was unconditional and irrevocable; thus Nike could not simply change its mind and pursue Yums in the future;

(2) The covenant prohibited Nike from not only filing suit, but also from making any claim or any demand. Thus, Yums was protected not only against future lawsuits, but other cease and desist letters, demands or threats that might place a cloud over its business activities;

(3)  The covenant reached beyond Yums to protect Yums’s distributors and customers, protecting Yums from “downstream” IP claims; and

(4) The covenant covered both current and previous designs, as well as any “colorable imitations” of those designs – thus protecting Yums’s going forward.

With respect to the last factor, Yums was unable to come up with any shoe design that could potentially infringe upon Nike’s trademark but would not be covered by the covenant not to sue.

Practical Implications of the Decision:

1.      If you have filed a suit to protect your intellectual property, asserting infringement claims against a defendant, and now you want to end the case quickly – either because the suit is no longer economically viable or because there is a real threat that your asserted rights will be declared invalid or significantly narrowed, and the defendant refuses to agree to a dismissal, issuing a covenant not to sue might be your most viable option.

2.    Nike’s covenant will probably become the golden standard against which all future covenants not to sue will be held.

3.    Even if the lawsuit is dismissed after the covenant not to sue is issued, the party seeking to cancel trademark registration may still pursue opposition or cancellation proceedings before the Trademark Trial and Appeal Board.

4.    Issuing a covenant not to sue may carry some long-term risks to the issuer’s trademark strategy, which should be carefully analyzed.