The Velvet Underground sought a declaration that the Andy Warhol Foundation has no copyright in the iconic banana image used by the Velvet Underground and designed by Warhol. The Warhol Foundation had covenanted not to sue the Velvet Underground for copyright infringement for the Velvet Underground's use of the banana image. The Court held that the covenant not to sue eliminated any justiciable controversy between the parties over copyright in the design, and thus dismissed the Velvet Underground's declaratory judgment claim. (The Velvet Underground's trademark claims were not the subject of the motion and were not dismissed).
In the decision, Judge Nathan does a thorough analysis of the Declaratory Judgment Act (28 U.S.C. 2201 et seq.), and specifically with respect to intellectual property cases. Notably, the covenant not to sue was entered after the litigation had commenced, so the issue had been mooted by a subsequent development (the covenant). The Court found that: "[I]n intellectual property cases, when a declaratory judgment plaintiff seeks a declaration that an asserted right is invalid or otherwise unenforceable and the declaratory judgment defendant provides the plaintiff with a covenant not to sue for infringement of that right, that covenant can extinguish any current or future case or controversy between the parties, and divests the district court of subject matter jurisdiction." (Doc. 30 at pp. 6-7).
The Court held that the covenant at issue was broad, and then determined that there no longer was a "live, actual controversy." First, the Court found that there was no real and substantial prospect that the Warhol Foundation's alleged copyright would impact the Velvet Underground's legal interests, and the Foundation's mere assertion of the right did not support a declaratory judgment claim. The Covenant no only held litigation in abeyance, but it also vitiated any coercive force that the Foundation's alleged copyright might have had against the Velvet Underground. Second, the Court held that the Declaratory Judgment Act could not be sued to test the validity of an affirmative defense that a plaintiff anticipates the defendant will assert, to wit: the Foundation claiming that its copyright shields it from trademark liability. Third, the alleged adverse economic impact of the alleged copyright was not sufficiently immediate and real to warrant the issuance of a declaratory judgment. "Without the 'how,' [the Velvet Underground] cannot show the controversy is 'real'; without the 'when', it cannot show the controversy is 'immediate'." (Doc. 30, p. 14). Fourth the right to an accounting under the Declaratory Judgment Act is not an independent cause of action, but is merely relief that may be granted.