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The Voluntary Cessation Doctrine: An Escape from Troublesome Litigation?

Posted in Trademark Law

By Dale Campbell

The United States Supreme Court issued a ruling in January 2013 clarifying the application of the Voluntary Cessation Doctrine in trademark actions. The case is entitled Already LLC, dba Yums v. Nike, Inc., 184 L.Ed.2d 553 and 2013 LEXIS 602. The Supreme Court’s decision provides important practical guidance for all practitioners.

The Voluntary Cessation Doctrine is founded upon United States Constitution Article III’s requirement of a “case” or “controversy.” The case becomes moot when there are no longer live issues to resolve.

Nike originally sued Already, a competing footwear company, for alleged infringement of Nike’s trademark related to Nike’s Air Force 1® shoe. This infringement claim did not involve the famous Nike “swoosh.” Already filed a counterclaim, contending that the Air Force 1® trademark is invalid. Months after Nike originally sued, it issued a “Covenant Not to Sue” letter to Already and then filed a motion to dismiss its complaint with prejudice and to dismiss Already’s counterclaim without prejudice on the ground that the Covenant Not to Sue had extinguished any existing case or controversy.

It is clear that an actual controversy must exist not only “at the time the complaint is filed, but through ‘all stages’ of the litigation.” (Alvarez v. Smith, 558 U.S. 78, 92 (2009).) However, a defendant cannot automatically moot a case simply by ending the alleged unlawful conduct. If so, a defendant could conceivably stop the wrongful conduct, move for dismissal as moot, then resume the wrongful conduct.

To determine whether a Covenant Not to Sue terminates the “case or controversy,” the Court will look to the totality of the circumstances, including: (1) the language of the covenant; (2) whether the covenant covers past and future conduct; and (3) the concrete intent of the party seeking to preserve jurisdiction to engage in conduct not covered by the covenant. 

Based on the facts presented before it, the trial court dismissed Already’s counterclaim to invalidate the Air Force 1® trademark without prejudice. The Second Circuit affirmed, as did the Supreme Court. The Supreme Court examined the language of the Covenant Not to Sue and found that it covered past and future conduct, covered related entities including distributors, employees, and all customers, and protected all of Already’s past and current product designs, as well as any colorable future imitations of those designs, even when produced and distributed after the date of the covenant. “It was Nike’s burden to show that it could not reasonably be expected to resume its enforcement efforts against Already.” (184 L.Ed.2d 553, 560, citing Friends of the Earth, Inc. v. Laidlaw Environmental Services, 528 U.S. 167, 190 (2000).) The Supreme Court found this covenant to be unconditional and irrevocable and agreed with the Court of Appeals that “it is hard to imagine a scenario that would potentially infringe [Nike’s trademark] and yet not fall under the covenant.” (184 L.Ed.2d 553, 561-62.)

Once Nike carried its burden, “[i]t was incumbent upon Already to indicate that it engages in or has sufficiently concrete plans to engage in activities not covered by the covenant.” (184 L.Ed.2d 553, 563.) There is no longer a case or controversy if, “considering the covenant’s language and [Already’s] anticipated future activities, [the Court] is satisfied that it is ‘absolutely clear’ that the alleged unlawful activity cannot reasonably be expected to occur.” (Id.) Here, Already was not able to establish that it had concrete plans to engage in activities not covered by the covenant. In fact, the Supreme Court found that the language of the covenant was sufficiently broad that it could not even conceive of a product that would fall outside the scope of the covenant yet still infringe the Nike Air Force 1® trademark. 

Already also attempted to convince the Court that it still had Title III standing because it was financially harmed by Nike’s practice of filing the infringement suit, scarring off Already’s investors, and tainting Already’s product in the marketplace. However, the Court found that these injuries, if established, do not support Title III standing. The Court observed that Already was basically arguing that “dismissing the case allows Nike to bully small innovators lawfully operating in the public domain.” (Id. at 565.) That concern was not sufficient.

The majority’s opinion was concurred in by Justice Kennedy, Justice Thomas, Justice Alito, and Justice Sotomayor. The thrust of the concurring opinion was to reinforce that the burden on the party issuing the Covenant Not to Sue is a “formidable burden of showing that it is absolutely clear the allegedly wrongful behavior could not reasonably be expected to reoccur.” (Id. at 567, citing Friends of the Earth, 528 U.S. at 190.) The “formidable burden” should require the trademark holder, at the outset, “to establish that the business of the competitor and its supply network will not be disrupted or weakened by the satellite litigation over mootness or by any threat latent in the terms of the covenant itself.” (184 L.Ed.2d at 568.) Specifically, the Court noted it would be unfair for a trademark holder to use its delivery of the Covenant Not to Sue as an opportunity to compel its competitor to disclose its future design and marketing plans, or to otherwise disadvantage the competitor and its distributors. In closing, the concurring Justices recommended that district courts proceed with caution before terminating litigation based upon a Covenant Not to Sue letter.

The Already v. Nike case deserves close reading concerning the specific terms and scope of the Covenant Not to Sue letter and burdens of proof before attempting to adopt this strategy.