Covenant not to sue leads to Fifth Circuit reversal of district court invalidity finding

In Nursery Decals & More Inc v Neat Print Inc, the US Court of Appeals for the Fifth Circuit reversed a district court’s trademark invalidity finding based on lack of subject matter jurisdiction because the trademark owner issued a covenant not to sue (CNS), which precluded any reasonably expected future injury that the alleged infringer might incur (case no 22-10065, Fifth Circuit, 1 August 2023; Haynes, Engelhardt, JJ; deGravelles, Dist J, sitting by designation) (per curiam)).

Neat Print and Nursery Decals are both sellers of novelty t-shirts on online marketplaces. In 2018 Neat Print notified one of these marketplaces that Nursery Decals’ products allegedly infringed its trademarks. In response, the online marketplace sent Nursery Decals a final warning, threatening a site ban for any future violations. Nursery Decals complied and pre-emptively pulled its products from other platforms.

Nursery Decals then sued Neat Print in the Northern District of Texas. Most of its claims aimed to invalidate Neat Print’s trademarks or obtain a non-infringement judgment, and it also included three claims seeking damages. One of these was a federal claim for fraud on the USPTO, while the other two were Texas law claims based on tortious interference with an existing and prospective business relationship. The district court ultimately granted summary judgment on all of the trademark-related claims, ordering the USPTO to cancel all of the disputed marks.

Prior to this grant, Neat Print had tried to avoid summary judgment by filing a CNS, along with a motion to dismiss for lack of subject matter jurisdiction. The district court had denied the motion to dismiss, concluding that the covenant did not moot the case. The court explained that Neat Print’s CNS failed to address Nursery Decals’ past and potential future injuries (ie, the damages claims), nor did it meet the high standard set forth in the Supreme Court’s 2013 Already decision. The court reasoned that Neat Print’s covenant left the door open for future takedown notices based on the disputed trademarks.

Neat Print amended the CNS to address takedown notices and then filed to reconsider its motion. The district court orally denied it at the pre-trial conference and ordered that the case proceed to trial. The jury ultimately found no liability on both claims. After, the court issued a written opinion, explaining that it rejected Neat Print’s motion for reconsideration because Nursery Decals had a legally cognisable injury that supported subject matter jurisdiction. While Neat Print had defeated all of Nursery Decals’ damages claims, it appealed the judgment concerning the trademark claims, arguing that the court failed to properly evaluate subject matter jurisdiction on a claim-by-claim basis in view of the CNS.

The Fifth Circuit agreed with Neat Print, finding that the district court committed two errors:

• it failed to consider mootness on a claim-by-claim basis; and
• it erred by using Nursery Decals’ claims for past damages to justify considering the trademark claims in light of the CNS.

The Fifth Circuit reasoned that, in light of Already, a CNS must be broad enough to cover all reasonably expected future injuries and that past injuries are immaterial. The court explained that it was incumbent on Nursery Decals to show that it engaged in – or had sufficiently concrete plans to engage in – activities not covered by the CNS. Given Nursery Decals’ failure to make this requisite showing, the court vacated the district court’s final judgment with regard to the trademark claims.