Is it a covenant not to sue or a license: this time about a trademark

IP licenses are legally challenging. The reason is clear—the uncertainties with respect to the creation and scope of the proprietary right are 

intertwined with the proper construction of the contractual license. This complexity is inherent in the very nature of the license. But courts, even the highest court in the land, sometimes fail to do their part in providing judicial guidance. One such issue is the legal status of a covenant not to sue—is it a license or a separate and distinct legal category?

Several months ago, this Kat dipped his paws into the murky waters of this issue. A Kat reader brought to this Kat's attention that the U.S. Supreme Court had in 2015 declined to hear this question ("Whether a covenant, promise or agreement not to sue for infringement of a federal patent is a license of that license as a matter of law").

However, while a covenant not to sue appears more prevalent with regard to patents, it is also relied upon on occasion in connection with trademarks. This Kat was so reminded in revisiting the 2013 decision of the United States Supreme Court, Already LLC dba Yums v. Nike, Inc. There, the Court addressed whether the recipient of a covenant not to sue still had standing to pursue a counterclaim, seeking a declaratory judgment of invalidity.

The use of a declaratory judgment is a popular tactic in connection with IP litigation in the U.S. Without burrowing down into the particularities of declaratory judgment practice in the U.S., suffice to say that Nike succeeded in convincing the court that, under the provisions of the covenant, there was no basis to conclude that any future case or controversy (as required by Article III of the Constitution) could be raised with respect to the mark. As such, the counterclaim for invalidity was deemed moot.

The Petitioner, "Already", made one last attempt to convince the Court otherwise, arguing that—

"No covenant, no matter how broad, can eradicate the effects” of a registered but invalid trademark. … [A]llowing Nike to unilaterally moot the case “subverts” the important role federal courts play in the administration of federal patent and trademark law. It allows companies like Nike to register and brandish invalid trademarks to intimidate smaller competitors, avoiding judicial review by issuing covenants in the rare case where the little guy fights back [citations omitted]."

This is where it gets interesting. One of the reasons put forth by the Court in rejecting this claim by the Petitioner is as follows:

“First of all, granting covenants not to sue may be a risky long-term strategy for a trademark holder. See, e.g., 3 J. McCarthy, Trademarks & Unfair Competition §18:48, p. 18–112 (4th ed. 2012) (“[U]ncontrolled and ‘naked’ licensing can result in such a loss of significance of a trademark that a federal registration should be cancelled”); Sun Banks of Fla., Inc. v. Sun Fed. Sav. & Loan Assn., 651 F. 2d 311, 316 (CA5 1981) (finding that “extensive third-party use of the [mark was] impressive evidence that there would be no likelihood of confusion”).

Without any discussion, the Court simply seems to assume that a covenant not to sue with respect to a trademark is a license. But this is a fundamental question with particular ramifications under U.S. trademark law, both in connection with the quality control requirement and the treatment of the covenant under bankruptcy. As the Court itself observes, if it is deemed a license, it could well be found to be a naked license, which could result in the cancellation of the underlying mark.

This is heavy stuff, because in reading these two sentences from the judgement, it is possible that the upshot is that a covenant not to sue might conceivably nearly always be at risk of being found to be a naked license. If so, it seems that any trademark owner giving such a covenant is shooting itself in the legal foot (The reference to the McCarthy treatise does not address the point, but rather discusses what is a naked license).

If this was the intent of the Court, then as a matter of trademark law, this is a big legal deal. If so—why did the Court need to veer off in such a direction? It was not the subject of the appeal, and it was not necessary to dismiss the Petitioner’s argument. But there it is, two sentences that leave the issue of a covenant not to sue and a trademark license less, not more, certain.

In so doing, the Court seems to have unsuccessfully ventured into that most dangerous of judicial paths—seeking to respond to one question by referring to a seemingly unrelated point and, in the process, providing judicial guidance on the other point as well. Courts seeking to adopt such a course action are counselled to be wary.

An example of how this can be properly done comes from an unlikely source from several millenia ago, the Talmud, being the central text of Rabbinic Judaism, in connection with a question about what time one may say certain prayers in the evening. It is written in Tractate Berakhot (translation by Maurice Simon).

FROM WHAT TIME MAY ONE RECITE THE SHEMA' [the name of a certain prayer] IN THE EVENING? FROM THE TIME THAT THE PRIESTS ENTER [THEIR HOUSES] IN ORDER TO EAT THEIR TERUMAH [the name of a certain offering] UNTIL THE END OF THE FIRST WATCH.

The discussion then goes to consider when the offering can be eaten. That is to say, the answer to the first question is provided by giving an answer to another question. Here, not only are we guided about when the prayer may be recited, but we are also provided with guidance about when the offering may be eaten.

Compare that with the case at hand. Here, the Court seeks to dismiss the Petitioner's claim by refering to a matter not at issue in the appeal, and then failing to provide a satisfactory treatment of this collateral issue, assuming the answer to the outstanding question of what is the legal status of a covenant not to sue with respect to a trademark.

What is a practitioner to do? Not surprising, one solution is to distinguish between a naked, versus a covenant with quality. And then we all wonder—why is IP licensing, in general, and trademark licensing, in particular, so legally challenging?

Photo on lower left by ReuvenK