The Supreme Court held yesterday that a debtor-licensor’s rejection of a trademark licensing agreement as an executory contract pursuant to section 365(a) of the Bankruptcy Code does not terminate the licensee’s rights to use the trademark under the agreement. In doing so, the Supreme Court reasoned that, because section 365(g) of the Bankruptcy Code provides that rejection of an executory contract constitutes a breach of the contract by the debtor, rejection does not rescind any rights granted by the contract to the non-breaching party. As a result, all rights that would survive a breach of the contract outside of bankruptcy remain in place after the rejection of a contract in bankruptcy.
The decision in Mission Product Holdings, Inc. v. Tempnology, LLC, highlights the importance of detailing the rights to use trademarks in written licensing agreements. Prior to this decision, only the Seventh Circuit addressed the treatment of trademark licenses in bankruptcy, while Congress (in Bankruptcy Code section 365(n)) and other circuit courts have addressed the treatment of other intellectual property rights, primarily patent licenses, in bankruptcy.
The Mission Product case raised the question of whether a bankrupt licensor, through rejection of a trademark licensing agreement, could terminate the licensing rights that the agreement granted to a licensee. Prior to filing its bankruptcy petition, Tempnology, LLC, which manufactured products designed to stay cool when used in exercise and marketed the products using various trademarks, entered into a trademark licensing agreement with Mission Product Holdings, Inc. Pursuant to the agreement, Tempnology granted Mission a nonexclusive license to use the trademarks in the United States and around the world. However, before the license expired by its own terms, Tempnology filed a bankruptcy petition.
Citing rights granted under section 365 of the Bankruptcy Code, Tempnology sought and obtained court approval to reject its trademark licensing agreement with Mission. Tempnology believed the rejection also terminated the rights it granted to Mission to use its trademarks and sought a declaratory judgment from the bankruptcy court to confirm that view. The Bankruptcy Court ruled that the rejection revoked Mission’s right to use the trademarks. The Bankruptcy Appellate Panel for the First Circuit reversed the Bankruptcy Court’s decision, relying on the Sunbeam Products decision from the Court of Appeals for the Seventh Circuit. Sunbeam Prods., Inc. v. Chicago Am. Mfg., LLC, 686 F.3d 372 (7th Cir. 2012).
The Court of Appeals for the First Circuit reversed the ruling of the Bankruptcy Appellate Panel and rejected the view of the Seventh Circuit. The majority reasoned that trademark law supported the termination of a licensee’s rights to use trademarks after rejection. In particular, the majority reasoned that if a licensee retained the right to use trademarks after rejection of an agreement, the licensor would be required to continue to monitor use of the trademark or jeopardize the validity and quality of its trademarks.
In an 8-1 opinion delivered by Justice Elena Kagan, the Supreme Court affirmed the reasoning of the Seventh Circuit in Sunbeam and reversed the First Circuit. The Supreme Court concluded that rejection of an executory contract breaches a contract, but does not rescind it, leaving in place all rights that would ordinarily survive a breach of contract under applicable non-bankruptcy law. The Court reasoned that preservation of rights after a breach serves a fundamental rule of bankruptcy – that the bankruptcy estate cannot possess anything more than the debtor did outside of bankruptcy.
The Supreme Court also rejected the so-called “negative inference” drawn by a majority of bankruptcy courts that the omission of trademarks from the definition of “intellectual property” in the Bankruptcy Code means that trademark licenses once rejected are terminated. The holding allows for treatment of the rights under trademark licenses in bankruptcy that is consistent with (although not identical to) the treatment of other intellectual property rights, including patent licenses, under section 365(n) of the Bankruptcy Code.
Mission Product highlights the importance of delineating the rights of licensors and licensees in trademark licensing agreements and, specifically, the rights of the parties following a breach of the agreement. Attorneys in Ballard Spahr’s Trademark and Bankruptcy practices negotiate trademark license agreements and other intellectual property contracts and represent them in bankruptcy cases and other litigation.