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Supreme Court Agrees Licensee Has Right to Use Mark After Rejection of Trademark Licensing Agreement Supreme Court Agrees Licensee Has Right to Use Mark After Rejection of Trademark Licensing Agreement

Supreme Court Agrees Licensee Has Right to Use Mark After Rejection of Trademark Licensing Agreement in Bankruptcy

“Rejection of a contract—any contract—in bankruptcy operates not as a rescission but as a breach.”

On May 20, 2019, the Supreme Court issued an 8-1 opinion regarding trademark licenses that clarifies the rights of non-debtor parties to essentially all executory contracts that debtors can reject in bankruptcy. In Mission Product Holdings Inc. v. Tempnology LLC the Supreme Court confirms that non-debtor trademark licensees can, subject to state law and the terms of the agreement, continue to use a licensed trademark, notwithstanding the licensor-debtor’s rejection of the agreement under Section 365 of the Bankruptcy Code. More generally, the decision makes clear that, unless the parties negotiate otherwise, “rejection” frees the debtor of its obligations, but it does not strip the non-debtor party of its bargained-for rights. Rejection, therefore, does not “vaporize” the counterparty’s rights, including, but not limited to, revoking a trademark license.

This opinion highlights how the anticipated results in a bankruptcy are highly informative to, and often drive, how agreements should be drafted on the front-end. Contract provisions are frequently outcome-determinative in bankruptcy. The opinion noted that one of the “friend of the court” briefs discussed “examples of contract terms that could potentially lead a bankruptcy court to limit licensee rights postrejection.” In other words, an agreement may contain special terms that would have changed the outcome.

In Tempnology, the debtor/trademark owner entered into a pre-bankruptcy license agreement that granted Mission a non‑exclusive license to use Tempnology’s “Coolcore” trademark on its apparel products. Ten months before the term of the agreement expired, Tempnology filed Chapter 11 bankruptcy and rejected the licensing agreement. As is almost always the case, the bankruptcy court approved the rejection. The controversy, and the split with several other courts, was the bankruptcy court’s view that Tempnology’s rejection of the license agreement also terminated Mission’s right to use Tempnology’s trademark. The intermediate appellate court—the Bankruptcy Appellate Panel—disagreed with the bankruptcy court, taking a position followed by the Seventh Circuit Court of Appeals. On further appeal to the First Circuit Court of Appeals, which is the Circuit where Tempnology filed its Chapter 11, the First Circuit sided with the Bankruptcy Court and held that Mission could no longer use Tempnology’s trademark.

Tempnology’s primary argument, which the First Circuit adopted, relied on the negative inference of Section 365(n) of the Bankruptcy Code, which permits certain enumerated intellectual property licensee (not including trademark licensees) to maintain their license rights postrejection. Specifically, Section 365(n) (through the definition of “intellectual property” in Section 101) authorizes a licensee to continue using copyrights, patents, and trade secrets despite a debtor’s rejection of the license in bankruptcy, but does not mention trademarks. The First Circuit found that, by leaving trademarks out of that list, Congress intended a rejection of a trademark license agreement to terminate a licensee’s rights. The First Circuit’s ruling directly contradicted the Seventh Circuit’s 2012 decision in Sunbeam Products Inc. v. Chicago American Manufacturing LLC, which expressly found that rejection alone would not prohibit a licensee’s continued use of a trademark.

Writing for the majority, Justice Kagan resolved a fundamental disagreement among the appellate circuits over the effect of rejection of an executory contract, namely, whether rejection has the same consequence as a “breach” of the agreement outside of bankruptcy or results in “rescission” of the agreement, terminating all rights conferred under the agreement. Justice Kagan answered, on behalf of the Court, that “[t]oday, we hold that both Section 365’s text and fundamental principles of bankruptcy law command the first, rejection-as-breach approach.” Thus, “Rejection of a contract—any contract—in bankruptcy operates not as a rescission but as a breach.” This is true not only for trademark licenses, but also for any executory contract. Rejection by a debtor-in-possession or bankruptcy trustee does not terminate or rescind a contract; the parties to that contract will have the same rights after rejection that the applicable state law would give them after a breach of that contract – as a pre-bankruptcy claim. The Court rejected the notion that, by passing section 365(n), Congress somehow changed this fundamental principal of bankruptcy law, explaining, instead, that, in enacting Section 365(n), Congress, as it often does, had simply attempted to address a court decision (Lubrizol Enterprises v. Richmond Metal Finishers), which Congress found to be contrary to its statutory scheme insofar as it allowed rejection of a patent agreement in bankruptcy to revoke the license conferred under that agreement.

The Supreme Court’s ruling gives certainty to trademark licensees, and will likely inform how trademark licensing agreements, as well as other commercial agreements, are crafted going forward. Accordingly, parties to trademark licenses (and other ongoing business agreements) should revisit the terms of their current agreements and address precisely the effect a “breach” will have on the parties’ positions thereafter. Doing so could have a significant financial impact in the event of a bankruptcy. Moreover, as a practical matter, addressing these issues with particularity beforehand will not only serve the parties well in the event of a rejection in bankruptcy, but will also help the parties understand their respective rights, obligations, and options in the event of a breach outside of a formal bankruptcy proceeding.

If you have any questions about the potential effects of bankruptcy upon your agreements, including your intellectual property licenses, and how to craft or amend them in light of the Supreme Court’s ruling, please contact one of the many members of Ice Miller’s Bankruptcy & Financial Restructuring or Intellectual Property Groups in New York, Chicago, Indiana, and Ohio.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.

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