Supreme Court Visits Jurisdiction and Covenants Not to Sue

Yesterday, the Supreme Court granted certiorari in Already, LLC dba Yums v. Nike, Inc., No. 11-982, an appeal from the Second Circuit’s decision that affirmed the Southern District’s holding that a covenant not to sue entered in a trademark dispute between Nike and Yums ended the case or controversy between the parties. The lower court also dismissed defendant’s counterclaims, which the Second Circuit also affirmed. See Nike, Inc. v. Already, LLC, 663 F.3d 89 (2nd Cir. 2011) (Lohier, J.).

The question presented on appeal is:

Whether a federal district court is divested of Article III jurisdiction over a party’s challenge to the validity of a federally registered trademark if the registrant promises not to assert its mark against the party’s then-existing commercial activities.

In the patent context, a patent holder can divest a Federal Court of Article III jurisdiction over a defendant’s counterclaim for declaratory judgment of patent invalidity by covenanting not to sue. This verity was based on, e.g., Super Sack Mfg. Corp. v. Chase Packaging Corp., 57 F.3d 1054, 1059-60 (Fed. Cir. 1995), and its progeny. More recently, however, the Federal Circuit has considered abandoning this Super Sack rule, as urged in a dissent by Judge Dyk. See Benitec Australia, Ltd. v. Nucleonics, Inc., 497 F.3d 1340, 1350-55 (Fed. Cir. 2007) (Dyk, J., dissenting). The decision also will potentially resolve a perceived split on the issue between the Second and Ninth Circuits.

If the Supreme Court agrees with the Yums Petitioners, the so-called “Super Sack covenant” would no longer be operative, potentially making it more difficult for patent owners to withdraw their patents once in litigation.

Practitioners should keep a careful eye out for this decision, and consider its ramifications for clients on both sides of the negotiations table.

Owen J. McKeon and Ralph A. Dengler, former Directors in the Gibbons Intellectual Property Department, co-authored this post.