Nike, Inc. v. Already, LLC

• Decision Date: 10 November 2011
• Docket Number: Docket No. 11–314–cv.
• Citation: 663 F.3d 89,100 U.S.P.Q.2d 1621
• Parties: NIKE, INC., Plaintiff–Counter–Defendant–Appellee, v. ALREADY, LLC d/b/a Yums, Defendant–Counter–Claimant–Appellant.
• Court: U.S. Court of Appeals — Second Circuit

100 U.S.P.Q.2d 1621

663 F.3d 89

NIKE, INC., Plaintiff–Counter–Defendant–Appellee,

v.ALREADY, LLC d/b/a Yums, Defendant–Counter–Claimant–Appellant.

Docket No. 11–314–cv.

United States Court of Appeals, Second Circuit.

Argued: June 20, 2011.Decided: Nov. 10, 2011.

Erik S. Maurer, Banner & Witcoff, Chicago, IL (Christopher J. Renk, Audra C. Eidem Heinze, on the brief), for Plaintiff–Counter–Defendant–Appellee.

Keith E. Sharkin, Dickstein Shapiro LLP, New York, NY, on the brief, for Plaintiff–Counter–Defendant–Appellee.

James W. Dabney, Fried, Frank, Harris, Shriver & Jacobson LLP, New York, N.Y. (Victoria J.B. Doyle, Randy C. Eisensmith, Elizabeth P. Kozlowski, on the brief), for Defendant–Counter–Claimant–Appellant.

Before: LEVAL, LIVINGSTON and LOHIER, Circuit Judges.

LOHIER, Circuit Judge:

This appeal requires us to decide whether a trademark registrant's delivery of a covenant not to sue, and voluntary dismissal of its trademark claims, divests a federal court of subject matter jurisdiction over a defendant's counterclaims for a declaratory judgment and cancellation of the trademark's registration. After considering the breadth of the plaintiff's covenant not to sue and the improbability of future infringement, the United States District Court for the Southern District of New York (Richard J. Sullivan, J.) dismissed the defendant's counterclaims because no case or controversy existed under Article III of the United States Constitution. We affirm.

BACKGROUND

1. The Complaint and Counterclaims

In July 2009, plaintiff Nike, Inc. filed a complaint against defendant Already, LLC d/b/a Yums (“Yums”), alleging trademark infringement, false designation of origin, unfair competition, and trademark dilution in violation of 15 U.S.C. §§ 1114(1), 1125(a), and 1125(c), and related claims under New York common law and New York General Business Law § 360. According to the complaint, in 1982, Nike designed a shoe called the Air Force 1, which it has since produced in more than 1,700 color combinations, selling millions of pairs each year. The complaint alleged that the Air Force 1 shoe has a distinctive appearance for which Nike owns several federal trademark registrations, including U.S. Trademark Registration Number 3,451,905, registered with the United States Patent and Trademark Office on June 24, 2008 (hereinafter the “'905 Registration”), for “the design of the stitching on the exterior of the shoe, the design of the material panels that form the exterior body of the shoe, the design of the wavy panel on the top of the shoe that encompasses the eyelets for the shoe laces, the design of the vertical ridge pattern on the sides of the sole of the shoe, and the relative position of these elements to each other.” Compl. ¶ 11 (quoting the '905 Registration). It further alleged that Yums was selling “footwear bearing a confusingly similar imitation” of the Air Force 1 shoe, including shoes known as Sugar and Soulja Boy. Id. at ¶¶ 14–15.

In November 2009, Yums filed counterclaims for a declaratory judgment that the '905 Registration was not in fact a “trademark” under 15 U.S.C. § 1127 or New York law, and for cancellation of the '905 Registration pursuant to the cancellation provisions of the Lanham Act, 15 U.S.C. § 1119. Yums also alleged that an “actual controversy” existed regarding whether Yums had infringed any rights Nike had in the purported trademark.

2. The Covenant Not To Sue

In March 2010, Nike delivered a “Covenant Not to Sue” (the “Covenant”) to Yums. The Covenant's preamble stated as follows:

NIKE has recently learned that [Yums]'s actions complained of in the Complaint no longer infringe or dilute the NIKE Mark at a level sufficient to warrant the substantial time and expense of continued litigation and NIKE wishes to conserve resources relating to its enforcement of the NIKE Mark.

The Covenant obligated Nike as follows:

to refrain from making any claim(s) or demand(s), or from commencing, causing, or permitting to be prosecuted any action in law or equity, against [Yums] or any of its [successors or related entities and their customers], on account of any possible cause of action based on or involving trademark infringement, unfair competition, or dilution, under state or federal law in the United Sates [sic] relating to the NIKE Mark based on the appearance of any of [Yums]'s current and/or previous footwear product designs, and any colorable imitations thereof, regardless of whether that footwear is produced, distributed, offered for sale, advertised, sold, or otherwise used in commerce before or after the Effective Date of this Covenant.

3. The District Court Proceedings and Decision

In April 2010, a month after Nike delivered the Covenant, the District Court held a hearing to determine whether the Covenant divested it of subject matter jurisdiction over Yums's counterclaims. Although Nike conceded during the hearing that it would be bound by the Covenant even if Yums became a competitive threat, Yums argued that a case or controversy persisted because Nike's litigation—and the '905 Registration itself—constituted a “continuing libel” against Yums by making it appear that Yums had infringed and continued to infringe Nike's trademark. In the course of its argument, Yums acknowledged that it had not previously sought to cancel the '905 Registration, which had been filed nearly two years earlier.

After the hearing, Nike moved pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure to dismiss Yums's counterclaims without prejudice on the ground that the District Court lacked subject matter jurisdiction. Nike also moved to dismiss its own claims voluntarily and with prejudice, pursuant to Rule 41(a)(2).

In response, Yums argued that Nike's claims should be dismissed with prejudice by summary judgment under Rule 56(b) rather than Rule 41(a)(2) to allow the action, insofar as it included Yums's counterclaims, to proceed. Yums argued that its counterclaims were not subject to dismissal along with Nike's claims because, under the Declaratory Judgment Act, they created an independent controversy over whether Nike had violated Yums's rights by improperly obtaining a trademark registration.

To demonstrate the existence of an actual controversy notwithstanding the Covenant's broad language, Yums filed affidavits from prospective investors who suggested that Nike's lawsuit had deterred them from investing in Yums or had prompted them to withdraw prior investments. A former investor in Yums, for example, stated that he resold his stock to Yums at a loss after learning of Nike's lawsuit, which he feared would tarnish Yums's reputation and deter other investors from investing in the company. The investor explained that the Covenant provided inadequate assurance that Nike could not “assert its trademarks against” Yums in the future over the sales of shoes similar to Air Force 1.

On January 20, 2011, the District Court dismissed Nike's claims with prejudice and Yums's counterclaims without prejudice. See Nike, Inc. v. Already, LLC, d/b/a Yums, No. 09 Civ. 6366(RJS), 2011 WL 310321, at *1, *8 (S.D.N.Y. Jan. 20, 2011). In dismissing Nike's claims “on consent,” the District Court explained that Yums had “consent[ed] to” dismissal of these claims but did not specify which rule, if any, it was invoking. Id. at *2.

Turning to Yums's counterclaims and relying on MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 S.Ct. 764, 166 L.Ed.2d 604 (2007), the District Court first concluded that Yums's declaratory judgment action failed to create a justiciable “case or controversy,” since a declaratory judgment claimant “must, ‘under all the circumstances,’ demonstrate ‘a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.’ ” Nike, Inc., 2011 WL 310321, at *4 (quoting MedImmune, 549 U.S. at 127, 127 S.Ct. 764). The District Court held that Yums's counterclaims did not meet this standard in light of the Covenant. In reaching this conclusion, the District Court considered the Covenant's language and broad scope, id., Yums's failure to show that it had taken meaningful steps to create new shoes not covered by the Covenant, id. (quoting Diamonds.net LLC v. Idex Online, Ltd., 590 F.Supp.2d 593, 600 (S.D.N.Y.2008)), and the absence of prior litigation between Nike and Yums. Id. at *5 (citing ICOS Vision Sys. Corp., N.V. v. Scanner Techs. Corp., 699 F.Supp.2d 664, 670–71 (S.D.N.Y.2010) (Chin, J.)). The District Court then ruled that Yums's counterclaim for cancellation of the '905 Registration under 15 U.S.C. § 1119 failed to confer subject matter jurisdiction because such a claim can arise only as part of a separate, independently supportable action. Id. at *6–7. Lastly, without holding an evidentiary hearing, the District Court rejected Yums's application for attorneys' fees under the Lanham Act, 15 U.S.C. § 1117(a), because the case was not “exceptional” as required by the Act. Id. at *8.

Yums timely appealed, challenging both the District Court's dismissal of its claims and the court's denial of Yums's motion for attorneys' fees without an evidentiary hearing.

DISCUSSION

We determine the existence of subject matter jurisdiction before addressing other threshold issues. Where a district court dismisses an action “for lack of subject matter jurisdiction, we review factual findings for clear error and legal conclusions de novo.” Maloney v. Soc. Sec. Admin., 517 F.3d 70, 74 (2d Cir.2008). A “case is properly dismissed for lack of subject matter jurisdiction under Rule 12(b)(1) when the district court lacks the statutory or constitutional power to adjudicate it.” Makarova v. United States, 201 F.3d 110, 113 (2d Cir.2000).

1. Rule 41(a)(2)

Because the District Court's conclusion that it lacked jurisdiction followed its dismissal of Nike's claims under Rule 41(a)(2), Yums urges us to review in the first instance...