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February 14, 2013

Clarifying the Uncertainty of Covenants Not to Sue in MSO Litigation
By George Medlock and Joshua Weeks

     George Medlock

The cable industry deals with patent litigations on a regular basis. One of the issues that MSOs face during patent litigations is dealing with the implications of a plaintiff’s decision to dismiss a lawsuit. Often, a plaintiff will provide a covenant not to sue, as a way of ensuring that the case will be dismissed. While one would think that the potential dismissal of a lawsuit would always be a positive outcome, there are several issues that have to be considered in order to determine the ramifications for the dismissed MSO at a later date. Recently, in Already, LLC v. Nike, Inc., No. 11-982 (Jan. 9, 2013), the Supreme Court shed light on covenants not to sue and provided insight as to the proper scope of covenants and potential actions that defendants may consider pursuing if they view the dismissed litigation as being improperly initiated.

One of the common practices that occur in patent litigations after a plaintiff has filed suit is that the MSO will file counterclaims against the plaintiff. Generally, in patent litigations the counterclaims seek an order from the Court that the defendant does not infringe the asserted patent(s) or that the asserted patent(s) are invalid. While counterclaims are occasionally withheld for strategic reasons, parties frequently file them to ensure that the plaintiff is not simply free to dismiss its claims and walk away from the suit.
One way that a plaintiff can eliminate the effects of counterclaims is by issuing a covenant not to sue, in which it agrees to drop the pending claims in the litigation it started and not to file suit on the same or related claims in the future. For example, in prior litigation involving In re: Rembrandt Technologies LP Patent Litigation, Civ. No. 1:07-md-01848 (D. Del. Oct. 23, 2009), covenants not to sue were used to dismiss the matters. In practice, covenants not to sue effectively remove the dispute between the parties—a requirement for any court to hear a dispute—thus requiring dismissal of all pending claims.

The recent Supreme Court case of Already, LLC v. Nike, Inc., No. 11-982 (Jan. 9, 2013), provides guidance and cautions defendants on the use of covenants. In Already, Nike filed suit against Already alleging that two of its shoes violated a Nike trademark. In response, Already asserted a counterclaim challenging the validity of the Nike mark. Nike subsequently issued a covenant not to sue and sought to dismiss all claims in the suit based on the premise that there was no longer a controversy between the parties. Seeking to preserve its counterclaim, Already opposed the dismissal, claiming that the suit continued to cast a shadow over its business, as potential investors had refused to fund the company and retailers were unwilling to carry their products. Unconvinced by Already’s arguments in light of the broad covenant issued by Nike, the Court found that there was no conceivable product that Already could manufacture that would infringe Nike’s trademark, but not be covered by the covenant. Accordingly, the Supreme Court upheld the lower Court’s dismissal of all claims in the case, including the counterclaims asserted by Already.

As shown by Already, covenants not to sue may be written broadly enough to dispose of a defendant’s counterclaims, in addition to the plaintiff’s original claims. In light of Nike’s success, a plaintiff seeking to back-track out of an action will likely mirror the language used by Nike in order to ensure that it is able to make a clean getaway. Occasionally plaintiffs will reach out to defendants before filing the covenant not to sue, in order to avoid any dispute regarding the scope of the language. For those that find themselves in a position to offer input to the language of a proposed covenant, defendants should parse the language carefully to be sure that the proper scope is present in the covenant.
Although an undesirable position, defendants who are unable to offer input into the wording of a covenant may not be entirely without recourse. As emphasized by the concurring opinion in Already, a plaintiff issuing a covenant not to sue bears the burden of proving that future suits are unlikely. Where a covenant is perceived simply as a litigation tactic to harm the defendant, dismissal may not be appropriate. Moreover, in cases of frivolous litigation, attorneys’ fees may be pursued by defendants—even where a covenant dispatches both parties’ claims.

Accordingly, while the dismissal of a case pursuant to a covenant not to sue is usually a positive outcome, it is important to consider the scope of the covenant and potential claims regarding the frivolity of the litigation, in order to ensure that the outcome remains that way.   

(George Medlock is partner at Alston + Bird LLP. He is a member of the firm's Intellectual Property Litigation Group and his practice includes all areas of intellectual property litigation and counseling, with a particular emphasis on patent litigation and enforcement. Joshua Weeks is an associate in Alston + Bird LLP’s Intellectual Property Litigation Group, focusing his practice on patent litigation and enforcement.)

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