Two sneaker companies battled on Wednesday in the U.S. Supreme Court in a trademark fight with significant implications for both patent and trademark law.

Nike Inc. sued Already LLC (Yums) in 2009, alleging that the company had infringed a trademark by producing sneakers that were similar to Nike’s popular Air Force 1 design. Yums counter-claimed, challenging the validity of the trademark.

In March 2010, Nike delivered a covenant not to sue, saying Yums’ actions no longer infringed or diluted its trademark at a level that warranted the continued expense of litigation. Nike promised not to assert its trademark against “any of [Yums]‘s current and/or previous footwear product designs, and any colorable imitations.” Nike then moved to dismiss the entire case for lack of jurisdiction. The district court granted the motion, and the U.S. Court of Appeals for the Second Circuit affirmed.

In the Supreme Court in Already LLC v. Nike Inc., Yums’ counsel, James Dabney of Fried, Frank, Harris, Shriver & Jacobson, and Nike’s advocate, Thomas Goldstein of Goldstein & Russell, fought over whether the covenant not to sue divested the federal court of jurisdiction over Yums’ counterclaim. The justices’ questions homed in on the scope of Nike’s covenant and whether Yums, in the wake of the covenant, had suffered an injury for purposes of Article III federal court jurisdiction.

Dabney told the justices that Yums’ counterclaim “seeks to extinguish a source of cost, risk, and official restraint on what footwear products [Yums] can and cannot legally sell. These are classic forms of injury in fact.”

Several justices pressed Dabney to show where in the court record Yums said it planned to produce new shoes that fall outside of the covenant and thus put itself at risk of another trademark infringement suit by Nike.

The record “is what it is,” Dabney said, and he said that it showed Yums is in the business of designing and bringing out new footwear products. Under the mootness doctrine, he argued, Nike bore the burden of proving the covenant “completely and irrevocably eradicated all the facts.”

Justice Antonin Scalia said Dabney’s point was, “You shouldn’t be put through the trouble of figuring out whether the new shoes that you produce are close enough to the old one to be covered or are not. You’re at risk.” And Dabney responded, “Exactly.”

If Yums was uneasy about the covenant, Justice Ruth Bader Ginsburg said, why didn’t it tell the judge that it gave inadequate protection and seek to amend it. Dabney responded: “Because the petitioner asks for judgment in accordance with law, and it would prefer not to be the involuntary licensee of the respondent that sued it.”

Dabney said that “evasive maneuvering” by Nike—by using a covenant not to sue—was a practice that dates only to 1995. “This is a totally recent, controversial practice that has never been embraced by this Court at all,” he said.

Goldstein, Nike’s counsel, urged the Court to adopt the following rule: “If you have a covenant not to sue and it covers everything that the other side alleges an intent to produce, then there is no more injury.”

Justices Sonia Sotomayor and Anthony Kennedy questioned whether requiring the other party to show “everything they intend to produce” gives Nike and other trademark holders who have sued an unfair advantage that is injurious in itself.

Goldstein, however, tried to reassure them, saying that in most patent and trademark cases, the question is one of validity and in all of those cases, there are protective orders so no business person from the other side is entitled to see it.

Defending Nike’s covenant, Goldstein added, “Our covenant not to sue covers everything they have made in the past, everything they were making at the time and every future product of theirs that is a colorable imitation. Our point is not that it covers every future shoe of theirs. We said they have no intention, no desire, no nothing, to make something that is not unambiguously covered by the covenant; and that if they said something to the contrary, we would have modified the covenant.”

Goldstein also insisted that covenants not to sue are uncommon. Nike, for example, has a broad trademark portfolio, he said, and has issued only one in its history—the Yums case. But Kennedy rejoined, “That’s because it usually sues.” Reading from the joint appendix in the case, Kennedy quoted, “‘Your Honor, over the past 8 months Nike has cleared out the worst offending infringers. Now Already remains as one of the last few companies that was identified on that top ten list of infringers.’ I mean, that’s your company’s policy.”

The federal government filed an amicus in the case supporting neither party. Assistant to the Solicitor General Ginger Anders urged the justices to resolve the dispute by vacating the lower court’s judgment and remanding the case because the scope of the covenant and Yums’ future activities were unclear from the record.

In rebuttal, Dabney said it would be fundamentally unfair to force Yums to start all over again. “We’re seeking the ability to obtain extinguishment not just of the particular claims that this plaintiff saw fit to waive, but the much broader government-registered claim of right to exclude competition in the sale of shoes.”

Marcia Coyle can be contacted at mcoyle@alm.com.