Opinion ID: 616983
Heading Depth: 1
Heading Rank: 4

Heading: The District Court Proceedings and Decision

Text: In April 2010, a month after Nike delivered the Covenant, the District Court held a hearing to determine whether the Covenant divested it of subject matter jurisdiction over Yums's counterclaims. Although Nike conceded during the hearing that it would be bound by the Covenant even if Yums became a competitive threat, Yums argued that a case or controversy persisted because Nike's litigationand the '905 Registration itselfconstituted a continuing libel against Yums by making it appear that Yums had infringed and continued to infringe Nike's trademark. In the course of its argument, Yums acknowledged that it had not previously sought to cancel the '905 Registration, which had been filed nearly two years earlier. After the hearing, Nike moved pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure to dismiss Yums's counterclaims without prejudice on the ground that the District Court lacked subject matter jurisdiction. Nike also moved to dismiss its own claims voluntarily and with prejudice, pursuant to Rule 41(a)(2). In response, Yums argued that Nike's claims should be dismissed with prejudice by summary judgment under Rule 56(b) rather than Rule 41(a)(2) to allow the action, insofar as it included Yums's counterclaims, to proceed. Yums argued that its counterclaims were not subject to dismissal along with Nike's claims because, under the Declaratory Judgment Act, they created an independent controversy over whether Nike had violated Yums's rights by improperly obtaining a trademark registration. To demonstrate the existence of an actual controversy notwithstanding the Covenant's broad language, Yums filed affidavits from prospective investors who suggested that Nike's lawsuit had deterred them from investing in Yums or had prompted them to withdraw prior investments. A former investor in Yums, for example, stated that he resold his stock to Yums at a loss after learning of Nike's lawsuit, which he feared would tarnish Yums's reputation and deter other investors from investing in the company. The investor explained that the Covenant provided inadequate assurance that Nike could not assert its trademarks against Yums in the future over the sales of shoes similar to Air Force 1. On January 20, 2011, the District Court dismissed Nike's claims with prejudice and Yums's counterclaims without prejudice. See Nike, Inc. v. Already, LLC, d/b/a Yums, No. 09 Civ. 6366(RJS), 2011 WL 310321, at ,  (S.D.N.Y. Jan. 20, 2011). In dismissing Nike's claims on consent, the District Court explained that Yums had consent[ed] to dismissal of these claims but did not specify which rule, if any, it was invoking. Id. at . Turning to Yums's counterclaims and relying on MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 S.Ct. 764, 166 L.Ed.2d 604 (2007), the District Court first concluded that Yums's declaratory judgment action failed to create a justiciable case or controversy, since a declaratory judgment claimant must, `under all the circumstances,' demonstrate `a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.' Nike, Inc., 2011 WL 310321, at  (quoting MedImmune, 549 U.S. at 127, 127 S.Ct. 764). The District Court held that Yums's counterclaims did not meet this standard in light of the Covenant. In reaching this conclusion, the District Court considered the Covenant's language and broad scope, id., Yums's failure to show that it had taken meaningful steps to create new shoes not covered by the Covenant, id. (quoting Diamonds.net LLC v. Idex Online, Ltd., 590 F.Supp.2d 593, 600 (S.D.N.Y.2008)), and the absence of prior litigation between Nike and Yums. Id. at  (citing ICOS Vision Sys. Corp., N.V. v. Scanner Techs. Corp., 699 F.Supp.2d 664, 670-71 (S.D.N.Y.2010) (Chin, J.)). The District Court then ruled that Yums's counterclaim for cancellation of the '905 Registration under 15 U.S.C. § 1119 failed to confer subject matter jurisdiction because such a claim can arise only as part of a separate, independently supportable action. Id. at -7. Lastly, without holding an evidentiary hearing, the District Court rejected Yums's application for attorneys' fees under the Lanham Act, 15 U.S.C. § 1117(a), because the case was not exceptional as required by the Act. Id. at . Yums timely appealed, challenging both the District Court's dismissal of its claims and the court's denial of Yums's motion for attorneys' fees without an evidentiary hearing.