IP Owners May Avoid Invalidity Challenges With Covenants Not to Sue

Intellectual Property Litigation Update

Date: January 17, 2013


Claims for intellectual property infringement carry a substantial downside risk: The accused infringer may challenge the validity of the patent, trademark, copyright or other IP right and, if successful, leave the IP owner worse off than if no infringement claim had been asserted in the first place. In a closely watched case, on January 9, 2013 the U.S. Supreme Court issued its decision in Already, LLC v. Nike, which may provide a blueprint for companies to forestall invalidity claims by promising not to sue competitors for infringing their IP rights.

The athletic shoe giant Nike sued Already, LLC, a designer and marketer of athletic footwear, alleging that some of Already's designs infringed and diluted Nike's Air Force 1 trademark. Already counterclaimed, asserting that the Air Force 1 trademark is invalid. Soon thereafter, Nike issued a "Covenant Not to Sue" in which it agreed "unconditionally and irrevocably" to refrain from making any claims or demands against Already, as well as its employees, distributors and customers, for any possible cause of action based on trademark infringement, unfair competition or dilution relating to the Nike trademark. Nike then moved to dismiss the case, asserting that the Covenant Not to Sue terminated the case or controversy and rendered the case moot, depriving the federal court of subject-matter jurisdiction.

The Supreme Court agreed, holding that Nike sufficiently established it "could not reasonably be expected" to enforce its trademark against Already or its distribution channels in the future because the Covenant Not to Sue was extremely broad, and Already made no assertion that it planned to design or market any infringing shoe not covered by the covenant. Thus, the court held that "the case is moot because the challenged conduct cannot reasonably be expected to recur."

The court rejected Already's argument that the case should not be considered moot because potential investors were dissuaded by Nike's lawsuit, a risk encountered by many market entrants in the face of deep-pocketed incumbent competitors. Nonetheless, the court concluded the Covenant Not to Sue would preclude Nike from enforcing its trademark in the future, and therefore investment decisions based on such conjecture were not sufficient to give rise to the concrete and actual injury required for Article III standing. Moreover, although affording Already standing benefits a smaller competitor in this case, the court acknowledges that "lowering the gates for one party lowers the gates for all." Such a loose interpretation of standing would allow larger companies to challenge the IP rights of smaller rivals merely because they are competitors, even if not threatened by any particular patent, trademark or other IP right.

Although Nike's Covenant Not to Sue may not address all issues regarding global, non-U.S. invalidity assertions, this case has implications for all IP holders involved in litigation regarding their patents, trademarks and other IP rights in U.S. federal courts. Companies involved in such litigation should know that it appears under certain circumstances an IP holder may avoid an invalidity claim by issuing a broad covenant not to enforce its IP rights against an infringer. And because invalidity challenges can arise even before litigation or in declaratory judgment actions, the court's decision in Already provides the IP rights owner another avenue in choosing where and when to fight invalidity battles.