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"Covenant with Quality" As a Solution to the "Naked Covenant" Problem

 
Published: February 13, 2014 share

 

 

 

 

The following note was submitted for the 2012-2013 Georgia State University College of Law Intellectual Property Student Writing Competition. The author received First prize and presented the note at the 2013 Corporate IP Institute conference in Atlanta, GA. Congratulations to Daniel on his outstanding acheivement.

 

 

 

 

 

 

 

 

"Covenant with Quality" As a Solution to the "Naked Covenant" Problem:

How to Avoid Naked Licensing Forfeiture When Proffering a Covenant Not to Sue

 

By: Daniel Dowling

 

 

 

INTRODUCTION

 

     To avoid invalidity claims, trademark owners have covenanted not to sue infringers who do not pose a significant competitive threat to the owner’s business.  The recipient of a covenant not to sue, an alleged infringer, may continue to use the mark free from oversight by the trademark holder.  Absent oversight, the products or services bearing a registered trademark could potentially depart from the quality standards that a mark signifies to consumers.  For this reason, these naked covenants not to sue may have a serious unintended consequence on trademark rights, which the following hypothetical based on a real case illustrates.

 

     The world’s foremost athletic shoe manufacturer, Air-Max, Inc., identifies a cheap rip-off of its popular “B-51” trademarked basketball shoe design.  The quality is so poor that its manufacturer could not possibly possess the resources needed to compete effectively in the athletic shoe market with Air-Max’s globally recognized brand.  Nonetheless, Air-Max instructs its highly paid legal team to furnish the infringer with a cease and desist letter, which it is certain will scare off the infringer.  In open defiance, the alleged infringer, a small French shoe manufacturer called En Fringe, relishes the opportunity to not only defend the infringement claim but to counterclaim alleging that Air-Max’s trademark is invalid.  The action commences, Air-Max, Inc. v. En Fringe: a suit contending that a small competitor infringed a trademarked shoe design and the alleged infringer’s counterclaim purporting to show the disputed mark’s invalidity.

 

     Air-Max lawyers accurately informed the company that an unsuccessful defense of an invalidity counterclaim, while highly unlikely, could result in the forfeiture of the popular trademark that has been integral to Air-Max’s success and dominance of the athletic shoe market.  Since En Fringe’s use of the design poses no realistic threat to Air-Max’s business, Air-Max attorneys draft a contract promising that Air-Max will allow En Fringe to continue using the design and that Air-Max will never again sue them for infringement.  Air-Max’s attorneys assured it that dropping its own suit against En Fringe and proffering the contract would make this problem go away.  The contract titled “covenant not to sue” read in relevant part: “Air-Max will never sue En Fringe for use of the B-51 design.”  The court accepted Air-Max’s legal theory, and so it was ordered: Air-Max could never sue En Fringe for continuing to produce shoes resembling Air-Max’s trademarked design, but En Fringe could never challenge the validity of Air-Max’s trademark.

 

     Now free from suit for infringement, En Fringe ramped up production of the B-51 shoe imitation, placing its nearly identical (in appearance, but not quality) version of the shoe next to Air-Max’s in thousands of sporting goods stores—but for half the price.  While the Air-Max B-51 was widely considered to be the best shoe money could buy, the design of the shoe was so similar that many consumers purchased the much cheaper En Fringe versions of the B-51 because they couldn’t tell the difference.  Although similar in appearance, En Fringe’s B-51s used weak plastic eyelets to harbor the shoe laces rather than the precision engineered titanium eyelets on the Air-Max version.  As a result, En Fringe B-51s routinely burst near the tongue of the shoe during use beyond casual walking.  This fatal flaw of the En Fringe imitation had the following consequences for the following actors:

 

Consumers:  Almost all individuals that purchased En Fringe B-51s to save money on basketball shoes suffered severe ankle sprains when the shoes failed to perform on the basketball court as marketed.  Those who only engaged in casual walking in the imitation B-51s were relatively unharmed physically, but were still subject to the stigma associated with wearing fake “Max’s.”
Air-Max:  Aware of En Fringe’s use of the B-51 design, Air-Max’s biggest competitor, ADIDAS, also began producing a B-51 imitation.  ADIDAS’ substantial resources posed a legitimate threat to Air-Max’s success so when it brought suit against ADIDAS for infringement, proffering a covenant not to sue was not a viable option.  ADIDAS now had standing to challenge the B-51 mark’s validity and did so successfully, deregistering the valuable trademarked design.  Without control of the B-51 trademark, Air-Max was no longer able to dominate the market and ADIDAS overtook it as the world’s primary athletic shoe brand.
En Fringe:  Attempting to imitate the B-51 proved a larger challenge than anticipated because it had neither the financial resources nor the technical engineering ability to manufacture a shoe matching Air-Max’s quality.  En Fringe was repeatedly sued by the consumers who suffered ankle sprains under a theory of strict product liability until it was ultimately forced to file for bankruptcy.

 

     In reaching a conclusion, the hypothetical court in Air-Max, Inc. v. En Fringe would encounter both substantive trademark law concerns as well as procedural concerns relating to the constitutional delegation of judicial branch duties.  Procedural concerns involve defining the requirements of a sufficient Article III case or controversy necessary to grant authority to the judicial branch to adjudicate a matter.1   A covenant not to sue divests a court of requisite authority under the doctrine of mootness by eliminating a legally justiciable case or controversy.2   Prior to the decision in Already, LLC. v. Nike, Inc., assessing mootness had been subject to various standards.3   In light of the Supreme Court holding, the appropriate standard for assessing mootness is now governed by the voluntary cessation doctrine.4

 

     The voluntary cessation standard requires, among other specifics, covenants to be irrevocable and unequivocal to moot an invalidity claim.5   When proffered to avoid trademark litigation, an irrevocable and unequivocal covenant not to sue prohibits an alleged infringer from challenging the validity of the disputed trademark.   The alleged infringer’s invalidity claim is also mooted because it cannot be sued.  And without a case or controversy, the court lacks jurisdiction under Article III.6   Prohibiting the challenge of a potentially invalid trademark may well pose theoretical concerns about the function of the judicial branch, but a far more realistic concern looms ominously just beneath the surface.7

 

     A trademark must maintain its purpose as a tool to avoid consumer deception even if an alleged infringer can no longer be sued.8   When a product or service is not a genuine article of the registering source, the doctrine of naked licensing requires a trademark holder to oversee quality control to avoid the trademark from becoming a deceitful designation that may mislead consumers.9   Under this doctrine, abandonment of trademark rights may confuse the owners’ customers.  The original trademark registrant no longer has the ability to control the quality of all products bearing the mark.  The problem looming under the surface will be aptly termed a “naked-covenant” when a covenant not to sue involves the effective consent to use a registered trademark, but fails to consider quality control allowing for consumer deception.10

 

     Part I of this note presents the procedural history and standards used to assess mootness that create the naked-covenant problem.  Part II considers the function of trademarks, necessary to maintain recognition of trademark as a form of property, which are undermined by covenants not to sue.  Part III clearly establishes the naked-covenant problem as a product of the interplay between trademark law policy considerations and procedural standards used to assess mootness.  Part IV argues for recognition of the problem and the need for resolution. Also in Part IV are illustrations of how the proposed “covenant with quality” solution achieves resolution by considering its impact on the relevant interested law.  Lastly, Part V concludes that requiring a covenant not to sue to contain a quality control provision is the only just course of action, which is also practical and in accord with existing precedent.

 

I.  PROCEDURAL BACKGROUND

 

     This section presents the historical background of the mootness doctrine.11     To successfully moot a claim, a covenant not to sue must divest a court of subject matter jurisdiction under Article III’s case or controversy requirement.12   In the covenant not to sue context, the determining factor used to assess mootness is the scope of activities covered by the covenant.13

 

A.  Article III Case or Controversy Requirements and the Declaratory Judgment Act

 

     Article III of the U.S. Constitution grants authority to the courts to adjudicate the rights of adverse parties when there is a legally sufficient case or controversy between them.14   Absent a sufficient constitutionally defined case or controversy a dispute is granted no legal forum.15   The effect renders the claim of a potential litigant moot, warranting dismissal.16

     However, the mootness doctrine does not require parties to not stand idly by while their rights are threatened.   In 1934, Congress enacted the Declaratory Judgment Act (“DJA”)17  permitting parties to adjudicate their rights prior to the formal commencement of a suit against them.18   In an effort to reconcile the DJA with the Article III requirements, the DJA retained a necessary case or controversy component, slightly modified to accommodate and align with the considerations that required the need for declaratory judgments.19   Any party could seek a declaration of their rights prior to being sued so long as their claim was “justiciable.”20   The concept of justiciability is intended to accommodate the Act’s purpose to allow parties to establish their rights without running roughshod over the case or controversy requirement.  Defining justiciablity, however, has proven to be a formidable task resulting in an ever-evolving upheaval of court interpretations.21

 

1.  The Voluntary Cessation Doctrine and Subsequent Court Interpretations

 

     Under the mootness doctrine, courts will not decide cases in which “the issues presented are no longer ‘live’ or the parties lack a legally cognizable interest in the outcome.”22   The voluntary cessation doctrine provides further insight into the mootness debate and was also instrumental in defining covenants that would have such an effect.23   Subsequent courts faced with the mooting issue have applied the voluntary cessation doctrine to avoid inequitable results.24   Under the voluntary cessation doctrine, a party who stops acting wrongfully when threatened with a suit has not sufficiently mooted the claim against them.25   The logic behind the voluntary cessation doctrine is to prevent a party who desists from effectively mooting a claim and then resuming their unlawful behavior once the suit is dismissed.26   In a suit for trademark infringement, a counterclaim-defendant therefore cannot automatically moot a case simply by agreeing not to enforce its trademark rights once the infringer counterclaims alleging invalidity.27   To succeed on a mootness claim, a voluntarily complying defendant “bears the formidable burden of showing that it is absolutely clear the allegedly wrongful behavior could not reasonably be expected to recur.”28

 

     The voluntary cessation doctrine, Article III, and the DJA therefore interact to define whether a covenant not to sue moots a claim.

 

B.  History of the Mooting Issue Prior to Already, LLC v. Nike, Inc.

 

     Mootness has long been seen as both (1) a relatively inexpensive and less time consuming legal tactic to avoid litigation and (2) a means for courts to avoid issuing advisory opinions.29   Voluntary compliance or cessation provides one avenue for achieving mootness, and compliance is often sought via covenant not to sue.30   Absent precedential directive prior to Nike, Circuits were free to assess the conduct of a party seeking mootness under different standards.  This section examines some of the major mootness cases.  Although Nike has superseded their holdings, their rationales are still useful.

 

1.  Super Sack: Covenants Not to Sue Accomplish Mootness

 

     Super Sack v. Chase Packaging was decided using the reasonable-apprehension-of-suit (RAS) test to determine justiciability, which was controlling precedent at the time.31    In Super Sack, the Federal Circuit ruled on a patent holder’s infringement claims and a counterclaim alleging that the patents were unenforceable.32   In an effort to moot the claim, the patent holder promised not to sue the counterclaimant.33   The Federal Circuit held the case moot,34  placing the burden of showing both (1) a justiciable claim and (2) a continuing case or controversy after dismissal of the suit for infringement on the party seeking a declaratory judgment.35

 

     Although Super Sack was a patent case, it pointed towards the need for a strict definition of the conduct to be covered within a covenant to support a mootness claim, which is equally applicable to naked-covenant problems in trademark.36

 

2. Medimmune and Benitec Further Develop the Mootness Standard

 

     MedImmune v. Genetec quickly overruled the Super Sack RAS standard to facilitate competition by making it easier to challenge the validity of intellectual property.37   The court rejected the previously prevailing test in favor of a more liberal standard of justiciability in declaratory judgment actions.38    In a declaratory judgment action, an Article III controversy is sufficiently established to grant the court jurisdiction over the matter when “the facts alleged, under all the circumstances, show there is a substantial controversy between the parties having adverse legal interest, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.”39

 

     MedImmune clarified Super Sack’s vague language, providing further insight into covenant requirements that would later be demarcated by the Supreme Court in NikeBenitec Australia Ltd. v. Nucleonics, Inc. was decided using the test for justiciability set forth in MedImmune.40   Under this standard, a covenant not to sue would be required to quell any immediate and realistic legal controversy between the parties to justify mootness, further clarifying the amorphous doctrine of mootness.41   Seeing the shift towards an even more liberal standard, Justice Dyk filed a dissenting opinion urging a higher burden on the party seeking to moot the opposing claim.42

 

Significant mootness case law, as it evolved, began on a trajectory towards denying access to courtrooms as a forum to resolve matters that lacked justiciability as defined by existing precedent.  Justice Dyk cautioned against this trend towards liberal standards of mootness.  Later, other Circuits joined him, recognizing the potential for using this procedure as a weapon rather than for justice.43   Resolving the split of authority required the court to define clearly the mootness standard to put an end to the polarizing debate.

 

C.  The Supreme Court Defines the Mootness Standard in Already v. Nike

 

     Development of mootness case law culminated in a landmark decision that finally settled the issue.  In Already, LLC v. Nike, Inc., the Court incorporated the wealth of opinions that have amassed in lower court decisions, including their relevant rationales.44   In so doing, the landscape of intellectual property-based disputes and related business decisions were substantially altered.

 

     A common trademark dispute between competing athletic shoe manufacturers regarding a popular shoe design registered as a trademark by Nike ultimately provided the avenue to solve the mootness puzzle.45   The dispute in Already, LLC v. Nike, Inc. began when a large shoe manufacturer, Nike, filed suit against a smaller competitor, Already, alleging infringement of Nike’s Air Force 1 trademarked design.46  In addition to denying infringement, Already counterclaimed against Nike, alleging the Nike mark was invalid and asked the court to deregister it.47   To avoid the time and expense of litigation that could have potentially resulted in the deregistration of the popular Nike Air Force 1 mark, Nike proffered Already a covenant not to sue for the allegedly infringing designs.48   “Its preamble stated that ‘Already's actions ... no longer infringe or dilute the [Nike] Mark at a level sufficient to warrant the substantial time and expense of continued litigation.’”49   Nike then dropped its original infringement suit, claiming that (1) the covenant not to sue effectively mooted Already’s counterclaim and (2) the court should dismiss the case for lack of jurisdiction under Article III case or controversy requirements.50   In short, the covenant had mooted the invalidity claim.  Already objected, relying on the Declaratory Judgment Act as a basis of jurisdiction,   but the district court agreed with Nike and dismissed the case. 51

 

     On appeal, the Second Circuit affirmed the dismissal, but considered the standing issue at greater length, examining the breadth of the drafted covenant.52   Standing to support declaratory judgment jurisdiction, the court explained, requires a legally cognizable injury.  In this case, Nike’s covenant blunted any injury because no conceivable shoe that Already might manufacture could both infringe Nike’s mark and fall outside the covenant’s scope.53   The Supreme Court granted certiorari to consider whether Already should have been permitted to maintain its invalidity claim; that is whether a justiciable controversy still existed notwithstanding the Nike covenant.54

 

     Already contended that the lower courts improperly failed to acknowledge Nike’s burden to show the proffered covenant sufficiently ended the Article III case or controversy.55   The Court recognized the lower court’s error and agreed that voluntarily cessation of the infringement claim alone was insufficient to establish mootness.  Nike, the Court held, bore the burden to establish the lack of justiciability.56   After carefully analyzing the terms within the covenant however, the Court found that it met this burden under the Voluntary Cessation test.57   The unequivocal and irrevocable nature of the covenant that covered past and future activities by Already, including “colorable imitations” of the disputed design, sufficed to establish that Already could not reasonably expect suit from Nike to recur.58

 

     Already sweepingly argued that the case remained justiciable because Nike engaged in “trademark bullying” and public policy thus supported an alternative theory of Article III standing.59   The Court rejected Already’s argument holding that (1) the party seeking to moot the claim of an adverse party has the burden of showing it could not reasonably be expected to resume its enforcement efforts against the competitor;60  and (2) if the covenant meets this formidable burden and requirements, then mootness would be the result.61

  

     The majority also considered the potential consequences of employing a covenant not to sue to avoid litigating a trademark dispute.62   Addressing the economic implications63  and the effect of failure to control a mark, the opinion cautioned against abusive use of this strategy by future litigants.64   The holding, therefore, primarily addressed the effect of a covenant not to sue on Federal Court jurisdiction, setting a precedent for the standard of mootness.65   Construing a covenant not to sue as a naked license under trademark law, while ostensibly within the Court’s purview, was only cursorily considered and ultimately ignored in this context.66

 

II.  THE UNIQUENESS OF TRADEMARK PROTECTION

 

     This section lays the groundwork for the remainder of the paper, showing that trademarks are a unique form of “property,” framing in context the effect of a covenant not to sue on trademark rights.67   Naked-covenant problems arise when a mark’s owner promises not to sue an infringer (assuming it is sufficiently drafted to achieve mootness) because trademarks are a unique type of intellectual property.  Where most property rights include a broad right to exclude others from using ones’ property, trademarks protect only against confusing or disparaging use by competitors.68   The historical basis of trademark law, fundamental principles, and functions to be performed by a trademark afford the rationale for trademark recognition and protection.69   A trademark that ceases to perform its functions cannot further the goals of trademark law and is not deserving of protection.  Failure to perform the necessary functions can result from the licensing of a trademark to another, or by other actions that result in the severance of the mark from the source it is used to identify.70   Incentivizing mark holders to control their trademarks, Lanham Act provisions establish abandonment as a consequence for a trademark that no longer serves a necessary function.71

 

A.  Fundamental Principles of Trademark Protection

 

     A trademark is a designation used “to identify and distinguish” the goods or services, produced or provided by an entity.72   The role that a designation must play, therefore, is to identify and distinguish sources.73   The actual designation used for this purpose is not a tangible piece of property, but merely a legal conception used to further the policy considerations that justify recognizing and protecting trademark functions.74

     Trademarks have several functions that warrant protection, including serving legal notions of fairness, economy, and justice.75   Basic requirements of a trademark include: 1) a tangible symbol, 2) actual use of the symbol as a mark by a source of goods or services, and 3) the performance of an unassailable function by that symbol.76   Throughout the legal history of trademarks, courts and scholars have interpreted the function requirement in various ways spawning sometimes-conflicting trends.77   Equally but separately important are the goals of trademark law, acknowledging the role an actual designation (trademark) plays, and the functions performed by the tangible mark as well as the considerations justifying the protection.78

 

B.  Basic Goals of Trademark Law

 

     Historically, trademark law primarily protected consumers from confusion over the source of the product or service.79   Deceiving consumers constitutes fraud, which trademarks avoid by connecting a source with their product via distinguishing symbol.80   To achieve this goal, the Lanham Act imposes civil or criminal penalties on deceptive sellers —serving as a deterrent.81   Identifying product sources to consumers, in service of the basic goals, also achieves economic goals that are worthy of protection.82

 

     Trademark law facilitates a productive economy by encouraging both competiveness and high quality goods and services.83   At a simplistic level, trademarks allow a purchaser to identify products or services that have been satisfactory in the past and use this information to inform subsequent purchases, affording consumers a certain amount of predictability as to the products they purchase.84   The sources of products or services are therefore incentivized to produce a quality product, resulting in competition between sources of competing products to satisfy customers and ultimately drive down prices.85

C.  Trademark Functions and Theories

 

     Trademark functions are distinguishable from the goals of trademark law in that the functions to be performed by a trademark provide the rationale for their protection under trademark law.86   Trademark theories consider the functions to be performed by the actual mark and evolve to meet the demands of modern policy considerations.87

1.  The Identification Function of Trademarks

     Trademarks identify and distinguish the sources of products or services as a fundamental function of trademarks.88   In the early development of trademark law, trademark protection was justified only because the mark represented a single source of origin.89   Establishing the source of origin is paramount because “[w]ithout some such means of product identification, informed consumer choice, and hence meaningful competition in quality could not exist.”90   Seeing the same mark on goods merely identifies to the buyer that the goods come from a common source, providing advantages for both consumers and mark holders.91   The single source theory considers trademarks purely as a tool to avoid consumer deception, but mark holders also derive a substantial benefit from trademarking their products.92

     Signifying that all goods bearing a given trademark come from one, or are controlled by, a single source provides the holder of a trademark with the avenue to establish goodwill in a market.93   Establishing goodwill, a reputation for producing high quality, pleasing products or services, enables the source to prosper in a market through reputation.94   Identified sources are rewarded with continued patronage based on the goodwill they have established with consumers.95   Under a pure single source theory, the goodwill of a business and its symbol, a trademark, are inseparable.96   Without goodwill the primary justification for trademark law disappears.97

     Trademark licensing is inconsistent with the single source theory because the licensee’s goods do not emanate from the source symbolized by the mark.98   As trademark protection is not provided for in the Constitution and the Lanham Act protected only source identification, courts were initially reluctant to recognize a trademark as carrying any additional right of ownership.99   Early trademark theory permitted assignment or licensing of a trademark only upon transfer of the entire business of the seller or licensor, solidifying consumer protection as the primary function of trademarks.100   “An assignment or license without such transfer,” the Eighth Circuit held, “is totally inconsistent with the theory upon which the value of trademark depends [.]”101   Any disassociation between the business and the mark was then thought to render it valueless and deceitful as a designation essentially defrauding consumers.102

2.  Transition to the Quality Theory Allows for Trademark Licensing

     The quality theory expanded upon the identification and goodwill function of trademarks by attaching a trademark to standards of quality as a means to identify sources.103   Under this approach, a trademark performs its identification function by ensuring that all products or services bearing the mark have a consistent level of quality rather than merely identifying a particular single source of origin.104   The source has the ability to control quality, but will be connected to it by its distinguishing trademark, which ultimately encourages, but does not require, high quality products and services.105

 
     Quality, as a trademark function, serves the basic and economic goals of trademark law, providing benefits for consumers as well as mark holders.106   As Landes and Posner explained, "[t]he value of a trademark to the firm that uses it to designate its brand is the saving in consumers' search costs made possible by the information that the trademark conveys or embodies about the quality of the firm's brand.”107

     In 1946, the Lanham Act codified the quality theory of trademarks that ultimately resulted in acceptance of trademark licensing.108   “One of the most valuable and important protections afforded by the Lanham Act is the right to control the quality of the goods manufactured and sold under the holder’s trademark…For this purpose the actual quality of the goods is irrelevant: it is the control of quality that a trademark holder is entitled to maintain.”109   The quality theory now stands beside the source theory, allowing a trademark to be licensed and still serve as a tool to avoid consumer deception.110   This is achieved by requiring a licensor to exercise quality control over the licensee.  However, the Act fails to define precisely what is meant by quality or how much is to be overseen.111   Absent a quantifiable definition of quality, courts applying this requirement have been forced to interpret the meaning on a case-by-case basis.

D.  Naked Licensing

 

     A mark holder who fails to exercise quality control over a licensee using its mark has issued a “naked license.”112   An uncontrolled (naked) license allows for products bearing a registered trademark to depart from the quality standards associated with the mark, which could mislead consumers.113   While the Lanham Act does not specifically use the term naked license, it rather unambiguously references abandonment that will result when a licensor allows the underlying trademark to lose its significance.114

 

1.  Trademark Licensing and the Lanham Act

 

     If the actual source of the product changes, as is the case when a trademark is licensed, the quality must remain the same or the trademark becomes a deceitful designation.115   The Lanham Act provides consequences for infringers or mark holders that confuse or are likely to confuse consumers.116   Confusing trademark uses or imitations of trademarked products must be enjoined to ensure a mark serves the economic goals of trademark law.117   Accordingly, “likelihood of confusion” is the test for both trademark validity and trademark infringement.118

     Consumer confusion refers to the quality of products buyers expect in making purchasing decisions.   The concept is motivated by the notion that a product bearing a trademark will be of the same quality as others bearing the same mark.119   A trademark that no longer stands for a consistent level of quality attributable to the mark holder is an invalid trademark and is subject to deregistration.120   Whether the law requires quality oversight requires contractual rights to such control, actual oversight, or mere quality maintenance of the products bearing the mark by the licensee is unclear under the Act’s language and the courts’ interpretations of it.121   Under any definition, however, if the quality function of trademarks is not sustained in some way, the owner has (perhaps unintentionally) abandoned the mark.122   The naked licensing doctrine is thus applicable when a trademark no longer represents a level of quality consistent with the quality it possessed prior to its severance from the original source.123    And it essentially uses a threat of forfeiture to deter mark holders from allowing another to use their mark without making some effort to maintain the quality consumers expect.124

 

2.  Threat of Abandonment Deters Naked Licensing

 

     A trademark is a tangible symbol that identifies and distinguishes goods or services provided by a source to achieve the basic goal of trademark law—avoiding consumer deception.125   When an unauthorized use of a mark threatens to confuse consumers, the Lanham Act provides mark holders with the right to exercise their valid registration by enjoining infringers from continued use.126   But, if the mark holder permits the confusion, deregistration of the trademark under the naked licensing doctrine is necessary to avoid consumer confusion.127   It is the goals of trademark law, the functions performed by marks, and requirements articulated in the Lanham Act that shape the concepts of naked licensing and justify subjecting a covenant not to sue to those same provisions.128

 

III.  THE COVENANT NOT TO SUE RESULTS IN LOSS OF TRADEMARK RIGHTS

 

     A power player in a given market may be incentivized in two ways to covenant not to sue a smaller competitor that infringes its trademark.  First, it will seek to avoid the expense of litigation when that cost is likely to dwarf market losses.  In the introductory hypothetical, Air-Max allowed the smaller En Fringe to profit by using the B-51 trademark because its use of the mark would only minimally impact Air-Max’s sales and profits.  Second, the trademark owner wants to eliminate any risk that the court would invalidate its mark.  Regardless of the merit of the invalidity claim, the risk of losing control of its valuable trademark for a company like Air-Max is likely to outweigh the benefit of enjoining the infringer.  Avoidance of forfeiture thus combines with avoidance of litigation to lead companies like Air-Max to covenant not to sue the alleged infringer like En Fringe.  

     Although the calculus is understandable, it is fraught with problems going to the heart of trademark law.  The owner effectively granted the infringer the right to use the trademark with no means of monitoring quality.129   The covenant not to sue has thus legally severed the connection between the goodwill and quality standards established by Air-Max from its symbol, the B-51 trademark.  What then justifies continued recognition of the mark?

 

A.  Status Quo of the Naked-Covenant Problem

 

     A covenant not to sue, sufficiently broad to have the intended mooting effect (jurisdictional basis), will always result in a naked license (trademark-specific basis) when the covenant was drafted to avoid litigation of a trademark invalidity claim.  With respect to the alleged infringer, the validity of the disputed trademark can no longer be challenged and the trademark ceases to indicate a predictable product quality, as an identifier of a source to consumers.  Anti-competitive concerns aside, the covenant not to sue under the new Nike standard theoretically must result in the exact consequence it sought to avoid—forfeiture.130   Yet, the Nike Court’s holding did not directly address forfeiture, and the litigants were seemingly unaware of this necessary cause and effect relationship.  The current state of this issue is in a precarious position, ostensibly cured or “mooted” in the Nike decision; a well-drafted covenant not to sue will extinguish an Article III case or controversy.131   This may be true of the pure jurisdictional question, but a failure to address the potentially disastrous ramifications, such as forfeiture of the underlying mark, renders this issue “live” and ripe not with respect to the company given but with respect to every other competitor that might desire to use the mark.

 

B.  Covenants Not to Sue are Effectively Licenses

 

     Abandonment under the naked licensing doctrine applies to covenants not to sue if a court chooses to construe a covenant as a license.132   Although certain courts, noting the stark similarities, have chosen to treat the two instruments equally, the primary concern considered is the effect a trademark has on consumers.133   In such cases when the conduct of a trademark holder is indistinguishable from that of a licensor, forcing a licensing agreement requires quality oversight by the unwilling licensor to avoid consumer confusion over the disputed trademark. 

 

     Recognizing that a licensing relationship need not be explicitly expressed, “[c]ourts have construed a variety of agreements and relationships entered into for a range of reasons, including the cessation or forbearance of litigation, to be trademark licenses subject to the naked licensing defense.”134   A trademark holder proffering a covenant not to sue conveys on an alleged infringer the right to use its registered trademark free from suit for infringement, which is essentially a royalty free license to use the mark.135   To this end, the covenant not to sue performs like a licensing agreement, rendering the covenant that fails to contain a quality control aspect a naked license per se.136   Although the conclusion seems unassailable, even if a court did not accept it, the court would have to conclude nonetheless that the trademark cannot serve as a tool to avoid consumer confusion if competitors may use it with no oversight.137

 

 

1. Covenant Provisions Irrevocably Disclaim Quality Control: The Essence of a Naked License

 

     The irrevocable and unconditional requirements, necessary to give a covenant not to sue the desired mooting effect, legally disclaims any right a mark holder has to control the quality of the goods bearing their mark.138   The problem is that the trademark quality function must be observed because reducing consumer search costs is the primary economic justification for protecting trademarks.139   By informing consumers about the products they purchase, to which a trademark is affixed, a predictable level of quality can be assumed resulting in continued patronage of a particular source for desired products or services.140   This economic principle is undermined by inconsistent product quality from multiple sources, thought to emanate from a single, original source committed to the maintenance of that quality.141   Beyond quality, the mark has no value as an indicator of anything in the eyes of consumers because a license severs the physical connection between a source and its symbol, a trademark.142

 

 

     Whether in a franchise agreement or for a service mark, the trademark licensing agreement endows the licensee with nothing more than the right to use the registered trademark of another and freedom from suit.143   Practically, whether an arrangement is designated as a license or covenant not to sue does not absolve the mark holder of failing to protect its mark to ensure that it provides useful information to the public.  As both licenses and covenants not to sue sever the physical connection between a source and its trademark, the license still acts as a tool to avoid consumer deception because of the requisite quality control.144   A traditional covenant not to sue is incapable of maintaining this advantage for consumers because quality control is not a contract provision as required by a license.145  If a consumer is deceived by the mark and receives substandard product quality as a result, the mark is valueless.  This is the essence of a naked license.   The mark holder who proffered the covenant construed as a license has thus abandoned rights to the underlying trademark.146

 

2. Quality Control Cannot be Maintained Under Any Definition

 

     When physically disconnected from its original source, the ultimate inquiry to assess the validity of a trademark is based on consumers and concepts of quality a consumer ties to a trademark, rather than designation as a formal license or covenant.  Consumer perception constitutes both the test for infringement and trademark validity, pointing towards the quality function as tantamount to any rights to a trademark.147   As McCarthy noted, “[i]n trademark cases, whatever route one travels, whether by the street called ‘trademark infringement’ or on the broad avenue of “unfair competition,” all paths lead to the same enquiry—whether defendant's acts are likely to cause confusion.”148   Instruments labeled licenses as opposed to covenants provide no safeguard against deception of consumers if the quality function of trademarks is not preserved.149

 

     Applying either of the quality control standards used by courts—actual control of quality by a licensor or simply the maintenance of a predictable quality by the licensor—the consumer’s subjective impression of quality is the distinguishing factor.150   Construing a covenant not to sue as a license would qualify the proffering party as a licensor who has legally disclaimed the right to oversee quality.151   Using the definition of quality applied by some courts, this inability to control quality provides support enough to justify a finding that the owner effectively abandoned and that it should thus be deregistered.152

 

     Courts applying an equal-level-of-quality standard to maintain mark significance essentially shift the burden to the recipient now using the mark of another, but the effect on the consumer remains unchanged.153   If actually maintaining product quality is the standard, then it becomes the duty of the recipient to maintain quality, lest the trademark deceive the consumer.154   Placing this duty on the recipient of a covenant not to sue effectively results in a fingers-crossed optimism that the public will not be deceived by the use of a trademark by any other than the original source.  Even if all parties earnestly desire that predictable quality be maintained, their subjective intent is irrelevant if the result is consumer deception.155

 

     Referring again back to the Air-Max hypothetical, Air-Max’s covenant not to sue carried no quality control provision,156  and the poor quality of En Fringe’s B-51’s would have led to abandonment even under the an actual quality standard.157   Air-Max’s covenant not to sue is thus deserving of the title “naked-covenant” because it allowed for the uncontrolled use of the B-51 mark that ultimately deceived consumers.   

 

C.  Covenants Not to Sue Result in Trademark Abandonment: Trademark Specific Problems Require Trademark Specific Solutions

 

 

     Trademark licensing is fundamentally different from licensing in other areas of intellectual property because of the quality function that must be maintained by both licensor and licensee.  The abandonment of intellectual property rights in light of the connection between a license and a covenant not to sue manifests specifically in trademark cases.158

 

1.  Dissimilarities in Patent, Copyright, and Trademark Licensing

 

     Courts may have overlooked naked-covenant problems in finding that covenants not to sue moot deregistration claims because trademark cases raise concerns not present in more common patent and copyright analysis licensing cases.  In the Super Sack case, for example, the covenant not to sue was deemed efficacious to moot the patent invalidity claim, preserving rights for the holder of the disputed patent.159   Copying a patent solution in trademark disputes, however, ignores the fundamental differences between dissimilar forms of intellectual property.

 

     Patents and copyrights are often most valuable as a source of licensing royalties.  Although trademark licensing has also become an increasingly integral component of modern economy, trademark law requires licensors to maintain the value of the trademark by overseeing product quality.160  The required oversight prevents consumer deception and confirms that a trademark is not a “thing” deserving of protection per se (like a patent or copyright), but a means of protecting goodwill.161   Allowing a holder to protect a trademark as if it were a patent or copyright has been criticized as anti-competitive, and rightfully so.   Patent and copyright protection is justified by their durational limits and the incentive they provide to innovate.162   Trademarks are unlimited in duration and provide no similar incentive.  Being provided protection in the constitution, patents and copyrights enjoy direct protection as well as more liberal licensing standards.163

 

     Because patents and copyrights do not depend for their validity on a connection to a source like trademarks, quality oversight is not necessary to maintain validity when a patent or copyright is licensed.164   Absent source and quality concerns, a covenant not to sue to avoid patent or copyright litigation may be a perfectly viable solution that has no affect on the holder’s rights to the property.165   This, however, is not the case in the trademark context because quality control must be maintained when a trademark holder is no longer the physical source of the goods bearing its mark.

 

2.  Subjective Intent is Irrelevant if the Result is Consumer Confusion

 

     An infringer’s subjective intent is irrelevant to the likelihood of confusion and the diversion of sales caused by customer confusion presents the purest form of trademark infringement injury.166   Consider Already from the Nike case, as the recipient of Nike’s covenant not to sue, it will continue to benefit from the use of the Air Force One design trademark.167   Already’s activity that originally prompted Nike to bring suit must have sufficiently caused consumer confusion were it to actually amount to infringement.168   Already’s subjective intent with regard to any infringement or consumer confusion is irrelevant as much prior to suit as it is once receiving the covenant allowing for their continued infringement.169   The effect on the consumer is unchanged, still amounting to confusion whether suit can be brought against the party responsible for the confusion or not.  To whatever extent Already’s products were confusing consumers prior to the covenant, the fact that it can no longer be sued for continuing to do so has no effect on the consumer’s ability distinguish.170

 

     To avoid Already’s deceptive use of the Air Force 1 mark, a formal licensing agreement would provide consequences if consumer deception resulted.171   Since entering a licensing agreement with Already was not the intention of Nike, these consequences are not available to protect consumers from being deceived as to product quality.

 

3.  Recipient Incentives to Maintain Product Quality, or Lack Thereof

 

     Just as the licensor of a trademark is discouraged from confusing consumers, the licensee is bound by the licensor’s quality standards to maintain consumer predictability.172   Licensing agreements generally address exclusiveness, territorial scope, product quality, and royalties.173   Conversely, a covenant not to sue does not include these sorts of terms.174   When a licensee breaches a license, the licensor may revoke the contract, subjecting the licensee to suit for infringement.175   Licensees therefore have an interest equal to, or even greater than the licensor, to adhere to quality standards.  Licensees whose success depends upon their agreement with a mark holder to profit from the use of the holder’s mark are deterred from deceiving the public through their use by the possibility that the owner could revoke the license and sue for infringement.176   If Already were a party to a formal licensing agreement with Nike rather than a covenant not to sue, maintenance of product quality would be ensured by the terms of the agreement.

 

     The recipient of a covenant not to sue, unlike a license, may have ulterior motives.  Because obtaining a right to use a trademark via covenant not to sue still maintains actual ownership of the trademark for the original registrant, the recipient of a covenant not to sue may realistically posses the intent to diminish product quality intentionally.177   As cited in Nike, the effect of Nike’s still valid registration has the potential to dissuade retailers from carrying its product bearing Nike’s trademarked design as well as diminishing the likelihood of obtaining potential investors.178   So long as Nike still holds the mark, Already is relegated to second-seat in the market, at best.  Under these circumstances, a foreseeable advantageous tactic may be for the recipient of a covenant not to sue to intentionally seek to diminish the quality of the product to allow for deception, which would buttress a claim for the mark’s invalidity.179   If deregistered, multiple others may then use the trademark, which creates the potential for mass consumer deception.180

 

     Absent an actual licensing agreement, the recipient has no deterrent against employing this tactic because their right to use the trademark has been irrevocably disclaimed in the covenant not to sue.181   To ultimately avoid consumer deception, a covenant not to sue must not afford the opportunity to a recipient to intentionally decrease product quality as a means to invalidate the underlying trademark.

 

D.  Alternative Intellectual Property Abandonment Theories

 

     Naked licensing is but one of the methods by which trademark rights can be abandoned.  While this theory represents a pure illustration of involuntary forfeiture, other theories of abandonment could be inferred by entering a covenant not to sue to avoid trademark related litigation.182   Proffering a covenant not to sue, a mark holder likely does not subjectively possess the intent to abandon their mark.  In fact, this is precisely the result they seek to avoid.183   A mark holder’s intentional conduct in entering the covenant or subsequent failure to oversee quality, however, intentionally abandons the essence of the trademark rights.  Where a mark holder, or its legal representation, is aware that its actions will cause the trademark to deceive customers, entering the contract with this knowledge may amount to at least a negligent abandonment, if not intentional abandonment.184

 

     The consent to use agreement could also be analogized to a covenant not to sue.185   In both, the holder consents to another’s use of the mark, and consent agreements avoid quality control requirements to some extent.186   But consent agreements, like licenses, contain terms inconsistent with a unilateral covenant not to sue, which by definition does not control the use of the mark.

 

1.  Consent Agreements

 

     In trademark, consent to use agreements bear some analogy to a covenant not to sue for trademark infringement.187   If more analogous to a consent agreement, the covenant not to sue in trademark need not necessarily result in abandonment because consent agreements are not subject to such strict quality control oversight standards as trademark licenses.188   Although the covenanting party has effectively consented to the use of their trademark by another, other differences between consent agreements and covenants cannot be ignored.189   The trademark that is the subject of a covenant not to sue cannot escape naked licensing abandonment because a covenant not to sue is not a consent agreement.

 

     The essence of a consent agreement does not undermine the function of trademark because the consented use is contractually confined to specific markets, uses, and forms that do not cause confusion per se.190   Although a trademark holder’s covenant not to sue absolves the alleged infringer’s confusing use, a consent to use agreement considers the impression of consumers rather than the parties.191  The consent agreement is only applicable when the use poses no likelihood of confusion, which is the test for trademark infringement.192   Consumers are not deceived by the use of a trademark by multiple sources (parties to a consent agreement) because no such agreement can exist if any confusion would result.193  The covenant however, is made in the context where there is a likelihood of confusion, which is evidenced by the decision to sue in the first place.194  Take the Air-Max hypothetical for example: the court could not construe the covenant as a consent to use agreement because Air-Max and En Fringe both marketed confusingly similar shoes in the same area—even the same stores.

 

     Because the original suit for infringement relies on a confusing use, consent agreements and covenants not to sue are incompatible.   One renders the other superfluous.  Consequently, the use permitted by a covenant not to sue cannot be construed as a consent agreement subject to more lax standards, and still requires quality control oversight to maintain the trademark’s validity.

 

2.  Failure to Enforce; Intentional Abandonment

 

     Intentional abandonment of trademark rights results from: 1) intent to abandon, and 2) intent not to resume use of the trademark.195   A mark holder’s intent to abandon rights to a registered trademark can be implied by a failure to enforce those rights against alleged infringers.  Similar to the doctrine of laches, a failure to adequately enforce a registered trademark can yield intentional abandonment of ownership rights.196   The problem is that when a mark holder fails to prosecute infringers, it allows the trademark to lose significance.197   Proffering a covenant not to sue an alleged infringer is a failure to prosecute a per se infringer, which entails a mark holder disclaiming quality control.  Any attempt to assert quality control would be unavailing because it would either 1) require the infringer to agree, which it will not because it is seeking to challenge the mark’s validity; or 2) undermine the desired mooting of the case because it will open an avenue to sue if the quality standard is not met.  If the covenant allows for diminished quality of the products to which the mark is affixed, loss of significance is not an unforeseeable consequence and a mark holder can be held to have manifested an intent to abandon.

 

     When a trademark holder issues a covenant not to sue, the non-use element is met.    Although the mark holder may continue to apply a symbol to its products, that act is not a bona fide use if it no longer serves as a symbol of the business’s goodwill.198   After all, trademarks are not “things” to be used but a means to protect good will.199   The proffering party need not cease its activities or sales and may very well continue applying a trademark to its own products, but if the use is not considered bona fide, then actual non-use is a conceivable result in the trademark abandonment context.200

 

     Alternative to arguments for (unintentional) abandonment under naked licensing, the opening hypothetical is useful to illustrate how intentional abandonment of trademark rights could be implied from conduct relating to a covenant not to sue.  Air-Max’s failure to prosecute En Fringe’s use of the B-51 trademark could be construed as intentional abandonment.  For example, Air-Max knew En Fringe’s use of the B-51 design was causing consumer confusion, which is evidenced by its initial suit for infringement.  Air-Max also knew the covenant not to sue would allow En Fringe to continue confusing consumers, and En Fringe did not possess the resources to realistically maintain consistent product quality.  In light of Air-Max’s knowledge, the intent to enter the covenant could theoretically transfer to its intent to deceive consumers, and ultimately result in intentional abandonment.

 

V.  COVENANT WITH QUALITY

 

     The trademark specific solution is the proposed “Covenant with Quality,” where a trademark holder choosing to covenant not to sue an alleged infringer is required to include a quality control provision.201   Borrowing the quality control requirement of trademark licenses, the covenant with quality addresses the functions of trademarks with respect to precedent in support of judicial branch functions presented in naked-covenants.202

 

     The value of a traditional covenant not to sue is not lost by implementing a “covenant with quality,” nor does this approach necessarily provide a solution for scenarios beyond the scope of naked-covenant trademark problems.  Covenants realize their justifiable effectiveness under the doctrine of mootness by preserving judicial resources in situations that would otherwise amount to the issuance of an advisory opinion.203   Preservation of judicial resources under the doctrine of mootness can still be accomplished by utilizing the covenant with quality that recognizes the uniqueness of trademark law necessarily implicated by naked-covenant problems.  In short, covenants not to sue only present a problem in trademark specific cases, warranting trademark specific solutions that consider fully the goals of trademark law and function of the judicial branch.204

 

A.  The Trademark Solution

 

     A viable solution for the naked-covenant problem would be to consider the possibility for forfeiture before employing a covenant not to sue as a strategy to avoid litigation of trademark disputes.  Caution is warranted by the extreme consequences that could result from a covenant not to sue that is construed as a naked license.205   With the knowledge that a court could construe a covenant and related conduct as a license, potential trademark litigants should consider this possibility before proffering a covenant.206

 

     Construing a covenant not to sue as a license and carefully considering the implications before employing it to achieve mootness is not the only solution however.  Treating a covenant not to sue as anything other than a covenant not to sue may be an exercise in futility because it certainly maintains its formal designation independent from a license for some purpose; however, the covenant not to sue must not contradict other existing law.  In trademark, this contradiction is unavoidable, but a solution can be crafted that allows a covenant to maintain its independence from licensing agreements, in line with existing trademark law, and also still effective as a procedural mooting device.

 

B.  A Doctrine to Resolve Conflicting Doctrines

 

     It is axiomatic that precedent established in one area of law does not contradict the established precedent of another when the two intersect.  Naked-covenant issues present the intersection of the voluntary cessation doctrine207  and doctrine of mootness208  representing procedural law, and the doctrine of naked licensing209  as the primary representative of trademark law.  Requiring a covenant to be unequivocal in nature to satisfy the requirements of the doctrines representing procedural law disclaims the quality function of trademarks, contradicting applicable trademark law supporting doctrine.  By incorporating trademark concepts of quality into the procedural standards used to assess mootness, the contradiction can be eradicated.  This simply entails requiring a covenant not to sue to contain a contract provision, placing an affirmative duty to control quality while otherwise disclaiming rights of enforcement.

 

     Avoiding conflicting doctrinal support for substantive trademark law and Federal Civil Procedure presented by naked-covenants may otherwise require analysis under complex Conflict of Laws rules.210   Just resolution of naked-covenant conflicts may well proliferate through the development and application of an Erie-doctrine-like balancing test, or some similar theoretical expansion.211   Direction along these lines, however, was not offered by the Nike Court, positing the exigency for an alternative solution that avoids the conflict while also remaining in conformity with existing precedent.212   Without undermining the precedent set in Nike, lower courts applying the precedential standards of mootness in naked-covenant cases can also avoid conflict by requiring a quality control provision within covenants not to sue.

 

C.  “Covenant with Quality” Effects on Relevant Interests

 

     It is important to note that the covenant with quality as a solution to the naked-covenant problem does not require a concession by existing procedural or trademark law to be logically sound.  Procedural precedent need not concede by prohibiting a covenant not to sue as a mooting device nor does trademark law need to concede its quality function.  Contradictory elements of naked-covenants, rather, are cured by concessions granted by the covenant not to sue as an instrument.213   Crafting a covenant not to sue to contain a quality provision considers the basic and economic goals of trademark law, served by a trademark’s many functions, and remains as a practical means to apply Supreme Court procedural precedent. 

 

1.  Service of Basic Goals

 

     A covenant with quality serves the basic goals of trademark law by protecting consumers from fraud and also providing mark holders with a means to profit from established goodwill.214   Although fraud (formally) refers to identification of a particular product’s source of origin, consistent and predictable product quality is realistically the only concern of consumers, regardless of the actual source.215   When a trademark stands for equal quality, consumers patronizing any source bearing the mark are not confused or deceived as to the primary factor that motivated their patronage.216   The hypothetical B-51 purchasers would have suffered no deception (or ankle sprains) had the En Fringe B-51 been produced with quality equal to genuine Air-Max B-51’s.  Had Air-Max proffered a covenant with quality, its quality oversight would have eliminated the deception as to the primary concern of the consumer.

 

     Proffering a covenant with quality also achieves the mark-holder-focused trademark law goal because no confusing products of substandard quality are available to consumers.  B-51 purchasers thinking the imitations to be a genuine product of Air-Max would attach the poor quality of En Fringe B-51s to Air-Max’s brand that otherwise stood for consistently high quality.  Choosing to purchase Air-Max shoes in the future is not likely when a previous purchase was less than satisfactory.  Even if Air-Max was not directly responsible for the poor quality B-51s, Air-Max’s brand would be attached to its trademark for better or worse—in this scenario, much worse.

 

2.  Maintaining the Mootness Standard Established by the Supreme Court

 

     A covenant with quality is in accord with the Court’s definition of the standard because the covenant maintains the policy considerations used to justify the acceptance of voluntary cessation doctrine’s applicability to mooting attempts.217   Definition of this standard pointed towards irrevocability as a primary justification, which the covenant with quality does not undermine.218   The covenant with quality must be irrevocable as well as cover all past, present, and future actives that could reasonably amount to infringement, to the same standards articulated in Nike.219   Allowing the proffering party to oversee that quality production is maintained has no effect on a covenant’s irrevocability or the recipient’s reasonable apprehension of suit.  The covenant remains unchanged in all aspects except the addition of a quality control provision.

 

     Assessing mootness required the Nike Court to define the basic goals of procedural law, resulting in the transition to the voluntary cessation standard.220   Covenants with quality must adhere to the voluntary cessation standard for mootness to result.  As seen in the Nike case, a covenant not to sue need not contain a quality provision to meet the voluntary cessation standard, but a covenant that lacks such a provision undermines the quality function of trademarks.221   Trademark law’s basic goals of protecting both consumers and mark holders ostensibly attempts to facilitate an empirically just cause—productive economy.222   Trademark owners are not tasked to bear the burden of facilitating this cause, but they are subject to the applicable law that provides for their protection.  Because trademark protection is only justified by the interests of consumers and mark holders, their interests become interdependent; consumers benefit from competition that is encouraged by mark holder establishment and maintenance of goodwill.223   The covenant with quality does not force the action of a mark holder, it merely forces a party choosing to proffer a covenant not to sue to maintain the quality functions of trademark law in furtherance of a productive economy.

 

VI.  CONCLUSION

 

     The covenant with quality considers equally the policy considerations and goals of both trademark law and procedural precedent, arriving at a considerably more preferable resolution of naked-covenant problems.  In an alternative version of the opening hypothetical, Air-Max proffered En Fringe with a covenant with quality after dropping its suit for infringement.  En Fringe’s claim against the B-51 trademark’s validity was dismissed and En Fringe resumed production of an imitation B-51, but this time maintaining the quality of the shoe as produced by Air-Max.  A modified epilogue to the Air-Max saga provides the best illustration of covenant with quality effectiveness.

Consumers:  Those who purchased En Fringe B-51s to save money on basketball shoes suffered no ankle sprains as the shoes adequately performed on the basketball court as marketed.

Air-Max:  Air-Max maintained registration of its B-51 design and continued to manufacture the world’s finest athletic shoes.  Its globally recognized brand maintained market dominance and its genuine B-51s were still the preferred basketball shoe of consumers.

En Fringe:  En Fringe B-51s caused no injuries under Air-Max’s quality supervision, resulting in no tort claims.  By using the B-51 design legally, in accordance with Air-Max quality standards, En Fringe was able to generate enough profit to launch its own shoe design that was generally well received by consumers.

Other interests previously non-credited: The hypothetical court sitting in Air-Max, Inc. v. En Fringe was satisfied with the result that considered equally the voluntary cessation standard of mootness as well as the functions of trademark law.  Air-Max’s covenant with quality relieved the court of complex Conflict of Laws debate and commentator scrutiny, while also requiring a limited expenditure of court resources because the claim never went to trial.  Unfortunately for ADIDAS, it plays the role of the loser in the alternate ending because Air-Max’s continued success cemented ADIDAS’ deserved fate as never better than the second best athletic shoe manufacturer in the world.

 

1U.S. CONST. art. III, § 2.

 

 

 

2See infra Part I.

 

 

 

3

See generally, Already, LLC v. Nike, Inc., 133 S. Ct. 721 (2013) (holding that a covenant not to sue, sufficiently broad to meet the voluntary cessation doctrine, is sufficient to moot a counterclaim brought by an alleged trademark infringer).

 

 

 

 

4Id.  See infra Part I.

 

 

 

5See infra Part I.

 

 

 

6See infra Part I.

 

 

 

7See Already, LLC, 133 S. Ct. at 729 (discussing Already’s argument that “given Nike's decision to sue in the first place, Nike's trademarks will now hang over Already's operations like a Damoclean sword.”).  Many courts and legal scholars have used the example of the Damoclean Sword from Greek Mythology to illustrate the effect of a trademark that may be freely asserted by the holder at any time, over any who wish to compete in the market. This hold can be justifiable if the mark in question is valid and still operates to serve the function of trademarks in general by designating the source of origin.  Consider, however, the amplified Damoclean effect of an invalid trademark being the foundation of power for a given party and consequent market dominance.  In this scenario, the justifications for protecting the invalid trademark are considerably less defensible, and even more so if a court forum is unavailable to determine the validity.  A covenant not to sue can render powerless a party seeking to challenge trademark validity and therefore result in the preservation of a potentially invalid trademark.  This monopolistic effect is precisely the problem presented by allowing a covenant not to sue to result in mooting a claim for trademark invalidity.  Id.

 

 

 

 

 

 

 

 

 

 

 

 

 

8Lanham Act § 45, 15 U.S.C. § 1127 (2006).

 

 

 

 

9See infra Part II.E.2.

 

 

 

 

 

10See Tal S. Benschar, David Kalow & Milton Springut, Covenant Not to Sue: A Super Sack or Just A Wet Paper Bag?, 102 TRADEMARK REP. 1213 (2012) (identifying problems similar to the proposed “naked-covenant” from a practitioner oriented perspective).

 

 

 

 

 

 

11See generally, Matthew Hall, The Partially Prudential Doctrine of Mootness, 77 GEO. WASH. L. REV. 562 (2009) (discussing the doctrine of mootness and the function of courts as defined within Article III, the DJA, and subsequent court interpretations of each).  Modern use of the term “moot” refers to a case deprived of its vitality after commencement of the action.  The doctrine of mootness has long been recognized by courts to avoid the undesirable expenditure of judicial resources.  Mootness warranting dismissal is appropriate when proposed litigation would waste a court’s resources and the subject matter of the action is no longer at issue.  Id.

 

 

 

 

 

 

 

 

 

12U.S. CONST. art. III, § 2, cl. 1 (“The judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority; -to all Cases . . . [or] Controversies . . .”).  See also DaimlerChrysler Corp. v. Cuno, 547 U.S. 332 (2006) (interpreting and upholding Article III’s justiciability requirements).

 

 

 

 

 

 

 

13See Already, LLC v. Nike, Inc., 133 S. Ct. 721, 727 (2013).

 

 

 

 

14U.S. CONST. art. III, § 2, cl. 1.

 

 

 

 

15Id.  This construction is rooted in a desire to do justice while still preserving the sanctity of courts by reserving their use as a last resort and not simply a forum to obtain guidance.  Id.

 

 

 

 

 

16See Hall, supra note 11.

 

 

 

 

1728 U.S.C. § 2201(a) (2010) (“In a case of actual controversy within its jurisdiction . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. Any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such.”).

 

 

 

 

 

 

 

18Id.  The need for such a proactive approach, grounded in equity, was first articulated in the form legislation presented to congress in 1919.  Efforts to strictly adhere to the Article III case or controversy requirement suppressed the passage of the legislation for some time.  But the need for equitable relief outweighed strict-interpretation in 1934, and the Declaratory Judgment Act was finally enacted.  Id.

 

 

 

 

 

 

 

19Id.

 

 

 

 

20See id. (suggesting that “justiciability” refers to a sufficient case or controversy such that a court has jurisdiction to adjudicate the matter).

 

 

 

 

 

21See Medimmune, Inc., v. Genentech, Inc., 549 U.S. 118 (2007).  A two-part test applies for determining justiciability of suit for declarations of rights and relationships between competing intellectual property litigants: there must be both an explicit threat or other action by an alleged infringer, which creates reasonable apprehension on part of declaratory plaintiff that it will face infringement suit, and present activity which could constitute infringement or concrete steps taken with intent to conduct such activity.  Id; see also Already, LLC, v. Nike, Inc., 133 S. Ct. 721, 727-32 (2013) (discussing the justiciability requirement in trademark disputes consulted when defining the breadth a covenant not to sue would be required to cover in order to moot an invalidity claim).

 

 

 

 

 

 

 

 

 

 

22Powell v. McCormack, 395 U.S. 486, 496 (1969).

 

 

 

 

23See Hooker Chem. Co. v. U.S. EPA, Region II, 642 F.2d 48, 52 (3d Cir. 1981) (addressing voluntary cessation with regard to mootness: “[a] controversy still [smolders] when the defendant has voluntarily, but not necessarily permanently, ceased to engage in the allegedly wrongful conduct.”); see also Already, LLC, 133 S. Ct. at 728 (applying the voluntary cessation doctrine to a covenant not to sue in determining mootness).

 

 

 

 

 

 

 

24See Friends of the Earth, Inc. v. Laidlaw Envtl. Services (TOC), Inc., 528 U.S. 167 (2000) (holding that voluntary cessation of illegal behavior renders a case moot if the behavior has ceased and “subsequent events [make] it absolutely clear that the allegedly wrongful behavior could not reasonably be expected to recur.”)

 

 

 

 

 

 

25Id.

 

 

 

 

26See Already, LLC, 133 S. Ct. at 728 (quoting Friends of Earth, 528 U.S. at 190, 120).  The “voluntary cessation doctrine poses the question: [c]ould the allegedly wrongful behavior reasonably be expected to recur?”  Id.

 

 

 

 

 

 

27City of Mesquite v. Aladdin's Castle, Inc., 455 U.S. 283 (1982).

 

 

 

 

28See Friends of Earth, 528 U.S. at 698-99 (suggesting that the “wrongful behavior” of a trademark holder in exercising their mark over an alleged infringer is only “wrongful” in the sense that the covenant conveyed the freedom from suit).  This is a meaningful distinction that is noteworthy because a mark holder has sought registration of the mark to achieve status as the source of a product or service and, as such, would have the right to sue for infringement absent a contrary covenant provision.  The voluntary cessation doctrine shapes the requirements for a covenant to result in mootness in this way, and thereby, further perpetuates the naked license.  Id.

 

 

 

 

 

 

 

 

 

29See Hall, supra note 11.

 

 

 

 

30See Already, LLC,133 S. Ct. at 728 (holding that the voluntary cessation standard applies to covenant not to sue).

 

 

 

 

31Id. at 1056 (“The ‘actual controversy’ requirement precludes a declaration regarding the validity or enforceability of claims unless the defendant objectively has a reasonable apprehension that it is facing or will face claims of infringement regarding those [patent] claims.”).
 

 

 

 

 

 

32

Super Sack Mfg. Corp. v. Chase Packaging Corp., 57 F.3d 1054, 1056 (Fed. Cir. 1995) (stating that the claim for the patents’ unenforceability was based on inequitable conduct rather than invalidity).

 

 

 

 

33Id. at 1056-57.

 

 

 

 

34Id. at 1057.

 

 

 

 

35Id. (“In the opinion of this Court, Defendant's Motion to Amend its Pleadings in order to amend its pleadings to include the defense of inequitable conduct/unenforceability ... fails to present sufficient evidence that a continuing case or controversy is present necessitating the continuance of this litigation.”).

 

 

 

 

 

 

36See id. at 1055-57.
 

 

 

37Medimmune, Inc., v. Genentech, Inc., 549 U.S. 118 (2007).  The disputes in the cases regarding patents have equal applicability to trademark for their illustrative procedural importance.  Quickly overruling the Super Sack decision, Medimmune arguably lowered the justiciability standard.  Id.
 

 

 

 

38Medimmune, 549 U.S. 118.

 

 

 

 

39Id.

 

 

 

 

40Benitec Australia Ltd. v. Nucleonics, Inc, 495 F.3d. 1340 (Fed. Cir. 2007).  In Benitec, the patent holder brought suit for infringement and was met with a counterclaim by the alleged infringer for invalidity and unenforceability of the asserted patents.  Benitec subsequently dropped their infringement suit and, in their original brief, made an irrevocable covenant not to sue the counterclaimant for infringement of any of the disputed patents.  The alleged infringer, Nucleonics, sought to avoid dismissal by claiming that the current issue was not moot based on their plans to extend future research that could infringe upon Benitec’s patents.  Over an emphatic dissent by Justice Dyk, the majority held that these plans to extend future research were insufficient to establish justiciability under the MedImmune immediacy/reality test.  The significant rationale behind the dismissal was not that covenant not to sue itself necessarily warranted mootness, but that mootness was warranted by Benitec’s legal inability to sue.  Id.

 

 

 

 

 

 

 

 

 

 

41Id.
 

 

 

42Benitec Australia Ltd., 495 F.3d. at 1334-35 (Dyk, J., Dissenting).  Justice Dyk’s dissent expressed concerns beyond immediacy and reality for identification of sufficiently moot claims.  Reminiscent of holdings in conflict with the Benitec majority, Justice Dyk advanced the proposition that a claim was not moot unless the potential for the controversy to recur was extinguished.  Id.  See also Bancroft & Masters, Inc. v. Augusta Nat. Inc., 223 F.3d 1082 (9th Cir. 2000).  Bancroft & Masters, Inc. was one such holding in conflict the Federal Circuit that promulgated a similar sentiment to that later expressed by Justice Dyk.  Involved in this dispute was a computer company seeking to use the domain name “masters.com” when a golf club owned the trademark rights to the name “Masters.”  The computer company sought declaratory judgment for trademark invalidity, which prompted a settlement offer from the golf club to moot the claim.  While the District Court allowed the offer to moot the claim and dismissed the invalidity declaratory judgment action, the Court of Appeals reversed the decision holding that a justiciable controversy still existed.  The settlement offer did not result in a legal inability to sue and therefore did not end the controversy.  Bancroft & Masters, Inc. v. Augusta Nat. Inc., 223 F.3d 1082.  The later dissent by Justice Dyk in Benitec stands for a similar proposition that a controversy between adverse parties must not be capable of recurring, which, in his opinion, must be proven by the party seeking to moot the claim.  Benitec Australia Ltd., 495 F.3d. at 1334-35 (Dyk, J., Dissenting).
 

 

 

 

 

 

 

 

 

 

 

 

 

43Benitec Australia Ltd., 495 F.3d. at 1334-35 (Dyk, J., Dissenting).
 

 

 

44Already, LLC v. Nike, Inc., 133 S. Ct. 721 (2013).

 

 

 

 

45See id. at 725-26.

 

 

 

 

46See id. (discussing that because the shoe in question did not bear a “swoosh” or any other mark that would be considered a counterfeit of Nike’s existing shoes, but involved a separate trademark on the design of the shoe, an infringement on the “swoosh” was a separate mark irrelevant to the instant discussion and outside the scope of the covenant not to sue proffered by Nike).

 

 

 

 

 

 

47Id. at 725.

 

 

 

 

48Id.

 

 

 

 

49Id.

 

 

 

 

50Id. at 726.  See supra Part I.A.

 

 

 

 

51Already, LLC, 133 S. Ct. at 727.

 

 

 

 

52See id.

 

 

 

 

53See id.

 

 

 

 

54Id. at 726.  The question submitted for Supreme Court review was “[w]hether 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.”  Petition for Writ of Certiorari, Already, LLC, 133 S. Ct. 721 (No. 11-982).

 

 

 

 

 

 

55Already, LLC, 133 S. Ct. at 727.

 

 

 

 

 

56Id. at 728.

 

 

 

 

57Id. (quoting the Nike covenant not to sue: “’[Nike] unconditionally and irrevocably covenants to refrain from making any claim(s) or demand(s) . . . against Already or any of its . . . related business entities . . . [including] distributors ... and employees of such entities and all customers . . . on account of any i cause of action based on or involving trademark infringement, unfair competition, or dilution, under state or federal law . . . relating to the [Nike] Mark based on the appearance of any of Already's current and/or previous footwear product designs, and any colorable imitations thereof, regardless of whether that footwear is produced . . . or otherwise used in commerce before or after the Effective Date of this Covenant.” App. 96a–97a (emphasis added).’”).

 

 

 

 

 

 

 

 

 

58Id. (discussing covenant breath and colorable imitations).

 

 

 

 

59See generally id.  The theory of trademark bullying relies on the premise that threat of suit could be used as a weapon where a mark holder would be incentivized to threaten suit only to then covenant not to sue and preclude challenge of the trademark’s validity.  A trademark that cannot be challenged has the potential to loom over the market like a “Damoclean sword,” dissuading investors, distributors, or consumers from interaction with Already.  According to the Court, the Nike covenant also covered these parties as well and thus it alleviates any such concerns.  Id. at 728, 730.  See also supra text accompanying note 7.

 

 

 

 

 

 

 

 

60Id. at 734.

 

 

 

 

61See id. at 733-34.  Also within the decision was a caution to those employing covenants not to sue to achieve mootness that briefly noted the concept of naked licensing, but apparently recognized no direct application in the case at hand.  A concurring opinion authored by Justice Kennedy was also submitted to emphasize that covenants are not an automatic means for the party who first charged a competitor with trademark infringement suddenly to abandon the suit with incurring the risk of an ensuing adverse adjudication.  This concurrence attempted to dissuade the widespread use of the covenant as a primary legal strategy. Id. (Kennedy, J., concurring).

 

 

 

 

 

 

 

 

62Id. at 731.

 

 

 

 

63Id. at 732 (“Accepting Already's theory may benefit the small competitor in this case. But lowering the gates for one party lowers the gates for all. As a result, larger companies with more resources will have standing to challenge the intellectual property portfolios of their more humble rivals—not because they are threatened by any particular patent or trademark, but simply because they are competitors in the same market. This would further encourage parties to employ litigation as a weapon against their competitors rather than as a last resort for settling disputes.”).

 

 

 

 

 

 

 

64Id. at 731 (“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 (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”).

 

 

 

 

 

 

65See Already, LLC, 133 S. Ct. at 731-34.

 

 

 

 

66Id. at 732.  Stevens’ opinion only ambiguously referenced naked licensing by cautioning that a covenant not to sue may be a “risky long-term strategy” for mark holders seeking to avoid litigation, without providing any further insight.  Id.

 

 

 

 

67See Steven Semeraro, Sweet Land of Property?: The History, Symbols, Rhetoric, and Theory Behind the Ordering of the Rights to Liberty and Property in the Constitutional Lexicon, 60 S.C. L. REV. 1 (2008) (“Property recognizes (1) an individual right to acquire things and intangibles for individual use or disposition without government interference and (2) the power to call upon the government to enforce a property owner's right to exclude others from using or disposing of his acquired property.”).  See also 1 MCCARTHY, supra note 64, § 2:15.  To the extent that a trademark is the property of its “owner,” a trademark that does not perform its primary function ceases to exist.  Trademarks are more aptly characterized as property rights appurtenant rather than en gross given that they must be attached to a business, designating it as a source or origin.  Other forms of intellectual property, such as patents and copyrights, convey rights en gross to their holders.  Trademarks share certain features with patents and copyrights, but are quite unique in the context of their status as property.  Patents and copyrights allow the holder to exclude others, albeit only for a given period of time, while trademark registration provides only partial “exclusive” rights.  The exclusionary feature of a trademark is more aptly characterized as a right to prevent confusion.  Trademark holder’s right to exclude is limited to confusingly similar marks within the same market to avoid consumer deception.  Performance of utilities common to other forms of property ownership provide unique challenges because trademark rights cannot be assigned to another apart from the accompanying goodwill that the mark is used to symbolize.  See 1 MCCARTHY, supra note 64, § 2:15.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

681 MCCARTHY, supra note 64, § 2:15.

 

 

 

 

69See 1 MCCARTHY, supra note 64, §§ 2:1-2:38, 3:1-3:12.  Even use of the term “trademark” can cause confusion and, throughout this note, the term fulfills a myriad of uses in relevant context. “Trademark” or “mark” is used in reference to the actual symbol used to designate a source.  See RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 9 (1995) (a trademark is typically a name, word, phrase, logo, symbol, design, image, or a combination of these elements).  “Trademark” is used to term the distinguishable design of a product, or, if used in relation to services rather than products, it may sometimes be called a service mark.  “Trademark” is also used to refer to the protection it provides when registered or otherwise controlled if not formally registered (but still used in such an exclusive way as to convey rights to a source); the registrant of such, hereinafter, interchangeably referred to as a “mark holder.”  Id.

 

 

 

 

 

 

 

 

 

 

 

701 MCCARTHY, supra note 64, § 2:15.
 

 

 

 

71Lanham Act §45, 15 U.S.C. §1127 (2006).

 

 

 

 

72Id. (defining “trademark”).

 

 

 

 

73See 1 MCCARTHY, supra note 64, § 3:1.

 

 

 

 

74See infra Part III.

 

 

 

 

75See 1 MCCARTHY, supra note 64, § 3:2.

 

 

 

76See id. at § 3:1.

 

 

 

77See generally Irene Calboli, The Sunset of “Quality Control” in Modern Trademark Licensing, 57 AM. U. L. REV. 341, 51-54 (2007) (discussing the importance of quality control and the history of trademark licensing as it applies to shifting standards and interpretations of trademark quality).

 

 

 

 

 

78See discussion of trademark roles, infra Part III.

 

 

 

79See 1 MCCARTHY, supra note 64, § 2:1.

 

 

 

80Id.

 

 

 

81See id.

 

 

 

82Id.

 

 

 

83See Radiance A. Walters, Partial Forfeiture: The Best Compromise in Trademark Licensing Protocol, 91 J. PAT. & TRADEMARK OFF. SOC’Y 126, 127 (2009).

 

 

 

 

841 MCCARTHY, supra note 64, § 2:3.

 

 

 

85Id.

 

 

 

86See id. at §§ 3:1-3:3.

 

 

 

87Id.

 

 

 

88See id. at § 3:2.

 

 

 

89Id. at § 3:8.

 

 

 

90Smith v. Chanel, Inc., 402 F.2d 562, 566 (9th Cir. 1968).

 

 

 

911 MCCARTHY, supra note 64, § 3:7 (discussing the identification function of trademarks).  The “identification” function of trademarks does not mean that the consumer must know the identity of the manufacturer or distributor of the goods.  Anonymity of a source is allowed so long as the mark identifies a common, albeit anonymous, source.  Id.

 

 

 

 

 

92Id.at §§ 3:7, 3:8.

 

 

 

93Id.

 

 

 

94Id.

 

 

 

95See id. at § 3:5.

 

 

 

96See 1 MCCARTHY, supra note 64, § 2:15.

 

 

 

97Id.

 

 

 

98See 1 MCCARTHY, supra note 64, § 3:7.

 

 

 

99U.S. CONST. Art. 1, §8, cl. 8 (“To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”).  While the Constitution has been interpreted by Congress to provide patent and copyright protection, a trademark is afforded no protection.  Id.

 

 

 

 

 

10015 U.S.C § 1127.

 

 

 

101Macmahan Pharmacal Co. v. Denver Chemical Mfg. Co., 113 F. 468 (8th Cir. 1901).

 

 

 

102Id.
 

 

103See id. at § 3:10.
 

 

104See id. at § 3:2.
 

 

105See id.

 

 

 

106Id.
 

 

 

107WILLIAM M. LANDES & RICHARD A. POSNER, THE ECONOMIC STRUCTURE OF INTELLECTUAL PROPERTY LAW 168 (2003).
 

 

108See 3 MCCARTHY, supra note 64, §5:4.  Present as early as the 15th century in the form of barber’s poles and used for centuries by blacksmiths to identify their craftsmanship, trademarks are thought to be the oldest form of intellectual property.  It is therefore surprising that they were not provided federal protection until the Lanham Act was enacted in 1946 as the primary federal trademark statute.  Named for the Congressman who originally drafted the bill, the Lanham Act finally created substantive and procedural law for rights in trademark and is still in use today, albeit amended from its original form several times.  Id.

 

 

 

 

 

 

 

109El Greco Leather Products Co. v. Shoe World Inc., 806 F.2d 392, 395 (2d Cir. 1986).
 

 

110See 1 MCCARTHY, supra note 64, § 3:8.
 

 

111See Calboli, supra note 74, at 345.
 

 

112See generally Rudolph J. Kuss, The Naked Licensing Doctrine Exposed: How Courts Interpret the Lanham Act to Require Licensors to Police Their Licensees & Why This Requirement Conflicts with Modern Licensing Realities & the Goals of Trademark Law, 9 MARQ. INTELL. PROP. L. REV. 361, 364 (applying the naked licensing doctrine and analyzing its effects).
 

 

 

 

113Exxon Corp. v. Oxxford Clothes, Inc., 109 F.3d 1070, 1079-80 (5th Cir. 1997).
 

 

114Lanham Act §45, 15 U.S.C. §1127 (2006) (abandonment of trademark rights may be applicable “[w]hen any course of conduct of the owner, including acts of omission as well as commission, causes the mark to…lose its significance as a mark.”).
 

 

 

 

115See 1 MCCARTHY, supra note 64, § 3:2.
 

 

 

116Lanham Act §45, 15 U.S.C. § 1127 (2006).
 

 

 

117See id. (“[t]he term ‘colorable imitation’ includes any mark which so resembles a registered mark as to be likely to cause confusion or mistake or to deceive.”)
 

 

 

 

118See Lanham Act § 32, 15 U.S.C. §1141(1) (2006) (applying a test for infringement by asking whether the use of a trademark is “likely to cause confusion, or to cause mistake, or to deceive.”).
 

 

 

 

119See 1 MCCARTHY, supra note 64, § 3:2.

 

 

 

 

120Id.
 

 

 

121Compare Dawn Donut Co. v. Hart’s Food Stores, Inc., 267 F.2d 358, 366 (2d Cir. 1959) (holding that licensors have an affirmative duty to police licensed trademarks or suffer the cancellation of its registration), and Land O’Lakes Creameries, Inc. v. Oconomowoc Canning Co., 330 F.2d 667, 581 (7th Cir.1964) (ruling that a licensor has an affirmative duty to police its licensed mark, but can justifiably rely on a close professional relationship with the licensee as evidence of quality maintenance in the absence of evidence to the contrary), with Kentucky Fried Chicken Corp. v. Diversified Packaging Corp., 549 F.2d 368, 387 (5th Cir. 1977) (holding that “[r]etention of a trademark requires only minimal quality control[,]” which should be determined by the public perception of product quality).
 

 

 

 

 

 

 

122See RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 30 (2) (b).  Certain courts have held an uncontrolled license only to result in partial abandonment, confined to a specific region in which consumer deception is likely.  See, e.g., Sheila’s Shine Products, Inc. v. Sheila Shine, Inc., 486 F.2d 114, 125-26 (5th Cir. 1973).  But see Baramerica Int’l USA Trust v. Tyfield Importers, Inc. 289 F.3d 589, 598 (9th Cir. 2002) (ruling that a licensor who failed to take reasonable steps to ensure consistent quality to have forfeited all rights in the mark).  See also Dawn Donut Co., 267 F.2d at 367 (holding that total forfeiture of trademark rights will result from a naked license because “unless the licensor exercises supervision and control over the operations of its licensees the risk that the public will be unwittingly deceived will be increased and this is precisely what the [Lanham] Act is in part designed to prevent.”).
 

 

 

 

 

 

 

 

123Lanham Act 15 U.S.C. §1064(c).

 

 

 

 

124Id.
 

 

 

125See 1 MCCARTHY, supra note 64, § 2:1.

 

 

 

 

12615 U.S.C § 1127.

 

 

 

 

127IdSee also Kuss, supra note 108.
 

 

 

128See infra Parts III, IV.
 

 

 

129See Already LLC v. Nike Inc., 133 S. Ct. 721, 723 (2013) (interpreting the Nike covenant as allowing for Already’s continued alleged imitation of the Air Force 1 design that originally prompted Nike’s suit for infringement.)
 

 

 

 

130See id. at 721, 727-32. (applying the voluntary cessation standard to covenants not to sue).

 

 

 

 

131See id. at 733-34.

 

 

 

 

132De Forest Radio Tel. & Tel. Co. v. United States, 273 U.S. 236, 242 (1927) (holding in a patent case that “[n]o formal granting of a license is necessary in order to give it effect. Any language used . . . or any conduct . . . exhibited to another, from which that other may properly infer that the owner consents to his use . . . upon which the other acts, constitutes a license . . .”).
 

 

 

 

 

 

133See, e.g., Exxon Corp. v. Oxxford Clothes, Inc., 109 F.3d 1070, 1077 (5th Cir. 1997), De Forest Radio Tel. & Tel. Co. v. United States, 273 U.S. 236, 242 (1927).
 

 

 

 

134Exxon Corp. v. Oxxford Clothes, Inc., 109 F.3d 1070, 1077 (5th Cir. 1997).

 

 

 

 

135Id.
 

 

 

136See De Forest Radio Tel. & Tel.  Co. 273 U.S. 236, 242 (defining a license as “a mere waiver of the right to sue . . .”).
 

 

 

137See 1 MCCARTHY, supra note 64, § 3:7.
 

 

 

138Already, LLC v. Nike, Inc., 133 S. Ct. 727, 728 (2013) (discussing the breadth of the Nike covenant).
 

 

 

139See Calboli, supra note 74, at 351.
 

 

 

140See LANDES & POSNER, supra note 103 ("The value of a trademark to the firm that uses it to designate its brand is the saving in consumers' search costs made possible by the information that the trademark conveys or embodies about the quality of the firm's brand").
 

 

 

 

 

141See id.
 

 

 

142See Calboli, supra note 74, at 346.

 

 

 

 

143Id.
 

 

 

144See Macmahan Pharmacal Co. v. Denver Chemical Mfg. Co., 113 F. 468 (8th Cir. 1901) (“[a]n assignment or license without such transfer is totally inconsistent with the theory upon which the value of trademark depends . . .” in reference to quality control by a licensor).

 

 

 

 

 

 

14515 U.S.C. § 1064 (“[a] petition to cancel a registration of a mark . . . if the registered mark is being used by, or with the permission of, the registrant so as to misrepresent the source of the goods or services on or in connection with which the mark is used.”).  See, e.g., Barcamerica Intern. USA Trust v. Tyfield Importers, Inc., 289 F.3d 589 (9th Cir. 2002) (“[t]he generally accepted meaning of ‘uncontrolled licensing’ is where a trademark owner has licensed someone else to make or manufacture its products and then fails to control the quality of the products made by the licensee, thus permitting a deception of the public.”).
 

 

 

 

 

 

 

 

146See RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 30 (2) (b) (defining abandonment through naked licensing).

 

 

 

 

147Id.

 

 

 

 

1481 MCCARTHY, supra note 64, § 2:8.
 

 

 

149See Lanham Act 15 U.S.C. §1064(c). See also De Forest Radio Tel. & Tel. Co., 273 U.S. 236, 242.
 

 

 

150Lanham Act §45, 15 U.S.C. § 1127 (2006) (requiring some level of quality oversight, but failing to address the specific level).
 

 

 

 

151See De Forest Radio Tel. & Tel.  Co. 273 U.S. 236, 242 (requiring no formal licensing agreement to construe an agreement as a license, when the conduct of the trademark holder is akin to that of a licensor, and another acts upon such conduct as would a licensee.)
 

 

 

 

152See Calboli, supra note 74, at 346-47; see also Dawn Donut Co. v. Hart’s Food Stores, Inc., 267 F.2d 358, 366 (2d Cir. 1959) (requiring the objective presence of a quality control provision for the quality function of a trademark to be satisfied); see also text accompanying supra note 116.
 

 

 

 

 

153See generally Calboli, supra note 74, at 374 (discussing the case-by-case treatment of the quality standard: “courts often interpreted the requirement as they saw fit and stretched the concept of ‘control’--a concept per se open ended--to include any type of control, from “strict” to ‘adequate,’ to ‘sufficient,’ and eventually to ‘minimal’ control.”); see also Kentucky Fried Chicken Corp. v. Diversified Packaging Corp., 549 F.2d 368, 387 (5th Cir. 1977) (holding that quality control should be determined by the public perception of product quality).
 

 

 

 

 

 

 

154See Calboli, supra note 74, at 346.
 

 

 

155See 1 MCCARTHY, supra note 64, § 3:6 (discussing the subjective intent).
 

 

 

156See Dawn Donut Co. 267 F.2d 358, 366 (requiring the objective presence of a quality control provision for the quality function of a trademark to be satisfied); see also text accompanying supra note 116.
 

 

 

 

157See Kentucky Fried Chicken Corp. v. Diversified Packaging Corp., 549 F.2d 368, 387 (5th Cir. 1977) (assessing quality control by the impression of consumers); see also text accompanying supra note 116.
 

 

 

 

158See, e.g., Super Sack Mfg. Corp. v. Chase Packaging Corp., 57 F.3d 1054 (Fed. Cir. 1995).
 

 

 

159See id.
 

 

 

160See Calboli, supra note 74, at 351.

 

 

 

 

161Id.

 

 

 

 

162See text accompanying supra note 67.
 

 

163See 3 MCCARTHY, supra note 64, §§ 18:38, 18:42.

 

 

 

 

164Id.

 

 

 

 

165Id.

 

 

 

 

166Id. at § 3:7.
 

 

 

167Already, LLC v. Nike, Inc., 133 S. Ct. 727, 725-32 (2013).

 

 

 

 

168See id. at 729-30; see also 1 MCCARTHY, supra note 64, § 2:8 (noting that consumer perception constitutes both the test for infringement and trademark validity, pointing towards the quality function as tantamount to any rights to a trademark).
 

 

 

 

169See Already, LLC 133 S. Ct. at 730.
 

 

 

170See id. at 722 (noting that the original infringement claim by Nike must have depended on a confusingly similar product of Already bearing a registered Nike trademark, which is the test for infringement).
 

 

 

 

171Lanham Act § 45, § 15 U.S.C § 1127 (2006).

 

 

 

 

1721 MCCARTHY, supra note 64, § 2:8 (discussing the applicability of the consumer confusion test to both alleged infringers and trademark holders who may create the confusion).
 

 

 

 

173See Calboli, supra note 74, at 348.
 

 

 

174See, e.g., MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007); Super Sack Mfg. Corp. v. Chase Packaging Corp., 57 F.3d 1054 (Fed. Cir. 1995); Benitec Australia, Ltd. v. Nucleonics, Inc., 495 F.3d 1340 (Fed. Cir. 2007).
 

 

 

 

175RESTATEMENT (SECOND) OF CONTRACTS § 181 (1981) (effect of failure to comply with a licensing agreement).

 

 

 

 

176Id.
 

 

 

177See Kuss, supra note 108, at 362 (discussing a licensee’s potential motive to “free ride” on licensor’s success while diminishing the quality of products bearing a licensed trademark).
 

 

 

 

178See Already, LLC v. Nike, Inc., 133 S. Ct. 721, 730 (2013) (holding Already’s counter arguments to be unpersuasive to avoid mootness).
 

 

 

 

179See 1 MCCARTHY, supra note 64, § 2:8 (addressing the potential lack of licensee incentive to maintain consistent quality: “[i]f your mistakes and blunders are untraceable, there is little incentive to do a quality job.”).  See also Kuss, supra note 108, at 362.
 

 

 

 

180Dawn Donut Co. v. Hart’s Food Stores, Inc. 267 F.2d 358, 358 (2d Cir. 1959).

 

 

 

 

181Id. at 727 (discussing the irrevocability requirement of covenants not to sue).
 

 

 

182See 3 MCCARTHY, supra note 64, §§ 17-18.
 

 

 

183See, e.g, Already, LLC v. Nike, Inc., 133 S. Ct. 721 (2013).
 

 

 

184See Electro Source, LLC v. Brandess-Kalt-Aetna Group, Inc., 458 F.3d 931, 936 (9th Cir. 2006) (discussing trademark abandonment under the Lanham Act.).
 

 

 

 

185Exxon Corp. v. Oxxford Clothes 109 F.3d 1070, 1076 (5th Cir. 1997) (noting that “some agreements which allow another party use of the subject mark constitute “consent-to-use” agreements and not licenses.”).

 

 

 

 

 

1866 MCCARTHY, supra note 64, at §31:34.

 

 

 

 

1873 MCCARTHY, supra note 64, at §18:59.

 

 

 

 

1883 MCCARTHY, supra note 64, at §18:79.
 

 

 

189See Exxon, 109 F.3d at 1076 (quoting Waukesha Hygeia Mineral Springs Co. v. Hygeia Sparkling Distilled Water Co., 63 F.438, 441 (7th Cir. 1894)) (dismissing the consent to use agreement as an alternative to a covenant not to sue and distinguishing from a license: “[s]uch a consensual agreement ‘[i]s not an attempt to transfer or license the use of a trademark ... but fixes and defines the existing trademark of each ... [so] that confusion and infringement may be prevented.’”).

 

 

 

 

 

 

 

190Id.

 

 

 

 

1913 MCCARTHY, supra note 64, at §18:59.

 

 

 

 

192Id.

 

 

 

 

1933 MCCARTHY, supra note 64, at §18:79.
 

 

 

194See Id.
 

 

 

195Lanham Act § 45, § 15 U.S.C. § 1127 (2006).  See also Electro Source, LLC v. Brandess-Kalt-Aetna Group, Inc., 458 F.3d 931, 936 (9th Cir. 2006) (“Abandonment under the Lanham Act requires an intent not to resume trademark use, as opposed to a prospective intent to abandon the mark in the future.  This distinction is not merely semantic.  An intent not to resume use presupposes that the use has already ceased—the first prong of the abandonment statute.  In contrast, a prospective intent to abandon says nothing about whether use of the mark has been discontinued . . . However, a prospective declaration of intent to cease use in the future, made during a period of legitimate trademark use, does not meet the intent not to resume standard . . . Consequently, unless the trademark use is actually terminated, the intent not to resume use prong of abandonment does not come into play.”).

 

 

 

 

 

 

 

 

 

196Compare RESTATEMENT (SECOND) OF TORTS § 939 (1979) (for the general scope of the doctrine of laches to avoid unreasonable prosecution of a claim, resulting in a waiver of right to bring the claim), with 6 MCCARTHY, supra note 64, at §31:34 (application of the principle of laches in actions for trademark infringement).

 

 

 

 

 

1976 MCCARTHY, supra note 64, at §31:34.

 

 

 

19815 U.S.C § 1127 (requiring a bona fide use for trademark validity); see also 3 MCCARTHY, supra note 64, at § 17:18 (“‘Use’ of a mark means the bona fide use of that mark made in the ordinary course of trade, and not made merely to reserve a right in the mark.”).
 

 

 

199See Calboli, supra note 74, at 352 (identifying that trademarks are not “things” deserving of protection, but merely a symbol allowing for the holder to identify their products and maintain goodwill).

 

 

 

 

200See 3 MCCARTHY, supra note 64, at § 17:14 (discussing that loss of goodwill is evidence of abandonment).  The concept of forfeiture through loss of goodwill refers to cessation of business activities in general, whereas this argument alleges no such cessation.  Intentional abandonment through non-use, as argued, does not rely on the loss of goodwill theory of abandonment.  Id.
 

 

 

 

201See id.
 

 

202See 1 MCCARTHY, supra note 64, § 3:2 (discussing that concepts of quality as a trademark function hold that a trademark is to perform the function of identifying all products or services bearing the mark as having an equal level of quality); see also U.S. CONST. art. III, § 2, cl. 1 (defining the power of the judicial branch, and limiting the scope of a courts jurisdiction to actual cases or controversies as further defined within.)

 

 

 

 

 

 

203See Hall, supra note 11 (discussing the doctrine of mootness and the function of courts as defined within Article III, the DJA, and subsequent court interpretations of each).
 

 

 

204See 1 MCCARTHY, supra note 64, § 2:1 (identifying the historical primary goal of trademark law as protecting consumers from confusion.).
 

 

 

205See Already, LLC v. Nike, Inc., 133 S. Ct. at 721 (2013) (noting that a covenant not to sue may be a risky long-term strategy for a trademark holder.)
 

 

 

206See De Forest Radio Tel. & Tel. Co. v. United States, 273 U.S. 236, 242 (1927) (holding in a patent case that “[n]o formal granting of a license is necessary in order to give it effect.”).
 

 

 

207See Voluntary Cessation discussion and accompanying text, supra Part I.A.1.
 

 

208See Hall, supra note 11, at 562 (discussing the Doctrine of Mootness).
 

 

209See Naked Licensing discussion and accompanying text, supra Part II.D.
 

 

 

210While Conflict of Laws discussion is beyond the scope of this note, resolution of naked-covenant problems could potentially be provided through exploration of related Conflicts parallels.  Initial research suggests an inquiry into resolution using Conflicts of Law rules may be fruitful.  The “Covenant with Quality” solution, however, provides a practical, more simplistic solution that is in accord with existing precedent.

 

 

 

 

 

 

 

211As naked-covenant issues present no direct collision between state and federal laws, strict Erie analysis furnishes no explicit resolution.  Using relevant Erie rationale to resolve conflicts inapplicable to traditional Erie analysis has been the subject of other theoretical solutions to avoid conflicts of law.  See, e.g., Michael Steven Green, Horizontal Erie and the Presumption of Forum Law, 109 MICH. L. REV. 1237 (2011) (arguing for resolution of conflicts between the laws of sister-states); Matthias Lehmann, Liberating the Individual from Battles Between States: Justifying Party Autonomy in Conflict of Laws, 41 VAND. J. TRANSNAT’L L. 381 (2008) (recognizing the limitations of current Conflict of Laws analysis in terms of conflict between states).  Somewhat analogous theorization could also be applied to naked-covenant issues, but in-depth exploration of these theories is beyond the scope of the present discussion.
 

 

 

 

 

 

 

 

212See generally Already, LLC v. Nike, Inc., 133 S. Ct. 721, 729-32 (2013) (discussing only the immediate effect of the covenant not to sue without identifying any conflict of laws, but alluding to effects on the Nike trademark).
 

 

 

 

213The covenant itself likely has no valid interest.
 

 

 

214See 1 MCCARTHY, supra note 64, § 2:1.

 

 

 

 

215Id.

 

 

 

 

216Id.

 

 

 

 

217Id. at 725-26 (explaining the voluntary cessation standard of mootness).

 

 

 

 

218Id. at 728 (“[t]he breadth of the covenant suffices to meet the burden imposed by the doctrine. The covenant is unconditional and irrevocable.”).
 

 

 

 

219See id. (holding the covenant to be effective, in accord with the applicable voluntary cessation standard, because of irrevocability that achieves mootness by legally granting freedom from suit.)

 

 

 

 

 

220Id. (“[a]rticle III of the Constitution grants the Judicial Branch authority to adjudicate “Cases” and “Controversies.” In our system of government, courts have “no business” deciding legal disputes or expounding on law in the absence of such a case or controversy.”).
 

 

 

 

221See Already, LLC, 133 S. Ct. at 727 (applying the voluntary cessation standard to covenants not to sue).  But see Lanham Act §45, 15 U.S.C. §1127 (2006) (discussing loss of significance of a trademark as evidence of abandonment).
 

 

 

 

222See 1 MCCARTHY, supra note 64, § 2:1 (identifying the historical primary goal of trademark law as protecting consumers from confusion.).
 

 

 

 

223See Irene Calboli, Trademark Assignment “With Goodwill”: A Concept Whose Time Has Gone, 57 FLA. L. REV. 771, 799-800 (2005) (discussing the history of goodwill attached to a trademark).