Summary of Oral Argument in Already, LLC d/b/a Yums v. Nike, Inc.

Guest Post by Megan M. La Belle, Catholic University Columbus School of Law. Professor La Belle attended the oral argument in Already, LLC d/b/a Yums v. Nike, Inc. yesterday and was kind enough to prepare this summary for Patently-O.

Yesterday, the United States Supreme Court heard oral argument in Already, LLC d/b/a Yums v. Nike, Inc., a case involving a Nike trademark covering one of its sneaker designs. The issue before the Court is whether Nike’s covenant not to sue divested the federal court of Article III jurisdiction to decide Already’s counterclaim challenging the validity of the trademark. Although this is a trademark case, the Court’s decision is likely to impact patent law since the Federal Circuit allows patent owners to use covenants not to sue to divest courts of Article III jurisdiction over patent validity counterclaims. See Super Sack Mfg. Corp. v. Chase Packaging Corp., 57 F.3d 1054, 1059-60 (Fed. Cir. 1995).

All parties agreed at oral argument that an Article III case or controversy existed at the time Already asserted its counterclaim, but questions remain as to (1) whether Nike’s covenant not to sue moots Already’s counterclaim, and (2) who has the burden of proving that the counterclaim is moot. With respect to the first question, Already’s counsel, James Dabney, argued that the covenant not to sue did not moot Already’s claim because it didn’t cover certain future shoe designs. This argument prompted the justices to ask about broader covenants and whether those might suffice to divest the court of jurisdiction. Justice Kagan, for example, asked Mr. Dabney whether there is “any covenant that exists in the world that would make you feel secure.” In response, Mr. Dabney explained that the problem with covenants not to sue is that they allow potentially invalid trademarks to remain in force. Referring to Judge Learned Hand’s famous metaphor, Mr. Dabney said that these potentially invalid trademarks act as “scarecrows” that restrain the marketplace and cause “informational injury.” Mr. Dabney also argued that this practice of using covenants not to sue dates back only to 1995 (to the Federal Circuit’s Super Sack decision); it is a “recent, controversial practice that has never been embraced by this Court.”

Turning to the second issue, the Court asked a series of question about the burden of proof as to mootness. The justices all seemed to agree that, under Friends of the Earth, Inc. v. Laidlaw Envtl. Servs., Inc., 528 U.S. 167, 170 (2000), a defendant like Nike who claims that its voluntary compliance moots a case bears the formidable burden of showing that it is “absolutely clear that the allegedly wrongful behavior could not reasonably be expected to recur.” Nike’s counsel, Thomas Goldstein, did not dispute that standard during argument, but instead took the position that Nike had carried its burden by granting Already the covenant not to sue. Mr. Goldstein further argued that if Already intended to design and market shoes in the future that would not be covered by that covenant (therefore placing Already at risk of an infringement suit), then Already had to provide the court with proof of those intentions. Justice Kennedy wondered why Already should have to do this and suggested that it would give Nike an unfair advantage: “I would think that…for a competitor to demand that the other competitor tell its plans, its marketing, is, to say the least, patronizing, and probably quite injurious in and of itself.” Justice Sotomayor added that this is particularly problematic in the fashion industry where timing is so important and competitors are concerned about “beating [each other] to the punch.” In response, Mr. Goldstein suggested that this sort of information is regularly disclosed in litigation and that parties like Already can rely on protective orders to prevent the type of harm mentioned.

In addition to the parties, Assistant Solicitor Ginger Anders argued as amicus curiae on behalf of the United States in support of vacatur and remand. The United States argued that the case should be remanded for the trial court to consider the mootness question under the proper Friends of the Earth standard. The justices questioned the government about Already’s ability to challenge the trademark’s validity at the United States Patent and Trademark Office in the event Already’s court challenge is mooted. Specifically, Justice Kennedy inquired whether a party like Already, if lacking an Article III case or controversy to challenge Nike’s trademark in federal court (because of a covenant not to sue), could nevertheless challenge the trademark at the PTO and then appeal an adverse decision by the PTO in federal court. In other words, Justice Kennedy asked:

Is standing easier to show once there has been an adverse action in the administrative office? Or are we right back where we started, so once you go to the agency and you try to appeal, the court says, well, this is an Article III court, we need a case or controversy, and you’re right back where we are now?

Ms. Anders responded that, in some circumstances, the adverse decision from the PTO would create an injury-in-fact sufficient to establish Article III standing for appeal. Nike’s counsel disagreed, however, arguing that Already would not have standing to appeal even after an unsuccessful challenge at the PTO. Nike conceded this as “a point in [Already’s] favor.”

This final question about whether an adverse administrative decision makes it easier to prove Article III standing is important in the patent context as well. The America Invents Act (“AIA”) allows any person (other than the patent owner) to challenge patents at the PTO in post-grant review, including competitors, consumers, and advocacy groups who would not have Article III standing to challenge the patent in federal court under current Federal Circuit law. The AIA further provides that an adverse decision from post-grant review may be appealed directly to the Federal Circuit. However, the discussion at oral argument in Already v. Nike highlights the fact that some post-grant review proceedings may not actually be reviewable on appeal for the very reasons that Justice Kennedy suggested.

The Court is expected to issue its decision before the end of June 2013.