Bankrupt with Bygone Rights: Supreme Court Tackles Tough Trademark Issue

Posted by Jordan Meggison-Decker on Thursday, August 22, 2019

Article written by BrownWinick 2019 Summer Associate, Mackensie Graham, and BrownWinick attorney, Jordan Meggison-Decker

In a recent Supreme Court case that bridged the areas of law between intellectual property, contracts, and bankruptcy, trademark licensees came away with a win. To best understand the May 2019 decision in Mission Product Holdings, Inc. v. Tempnology, LLC, let’s start with some background.

Background: Judicial History

Over the years, courts were divided on the question of whether rejection of a debtor-licensor’s license agreement deprived a licensee of the right to use a trademark. Some, such as the Fourth Circuit in the case of Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. (1985), held that rejection of a licensing agreement terminates the licensee’s rights to use the intellectual property under said agreement.

After that ruling, Congress adopted Section 365(n) of the Bankruptcy Code. This provision was written to protect intellectual property licensees from rejection. But, unlike intellectual property assets such as trade secrets, copyrights, and patents, trademarks were not accounted for because they were excluded from the definition of “intellection property” in Section 101(35A) of the Bankruptcy Code. So, the ambiguity around licensee rights to trademarks subjected to rejection continued.

Decades passed until the Seventh Circuit in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC (2012) deserted Lubrizol and decided a trademark license rejection did not terminate the licensee’s rights to utilize the marks. 

Ultimately the Supreme Court decided to hear the Tempnology case due to the circuit split where the Tempnology court (First Circuit) reasoned differently than the Sunbeam court.

Background: Bankruptcy Code & Helpful Definitions

Under Section 365 of the Bankruptcy Code, the law provides that a debtor can “assume or reject any executory contract,” subject to court approval. (Note that an “executory contract” is an agreement that has not been fully performed such that each party continues to hold obligations to one another.) The law defines “rejection” of an executory contract as a breach of the contract…deemed to occur immediately before the date of the petition filing. As noted in this case, the Supreme Court says the word “breach” means the same thing in contract law and bankruptcy—a party’s failure to perform one or more contractual obligations that gives the non-breaching party an opportunity to make a claim for damages or other avenues of relief.

Facts of the Case

Tempnology owned intellectual property for accessories—like headbands and socks—designed to stay at a low temperature even when someone was working out. The company made an agreement with Mission Product Holdings in 2012 that, among other allocations, granted Mission a license to use Tempnology’s logo and trademark to sell the Tempnology products. In 2015, Tempnology filed for bankruptcy and used Section 365(a) of the Bankruptcy Code to “reject any executory contract” that was no longer beneficial to the company.

Mission asserted that the rejection did not apply to the trademark licenses under the agreement. Tempnology, on the other hand, sought a court ruling that the rejection terminated Mission’s trademark rights under the license.

The bankruptcy court agreed with Tempnology, but the Bankruptcy Appellate Panel disagreed and sided with Mission. On appeal, the First Circuit agreed with the bankruptcy court and found for Tempnology, denying Mission’s rights to the trademarks. Clearly the different courts in this case, and previous cases, couldn’t agree on how trademarks fit in to the bankruptcy mix, making Tempnology ripe for the hearing.

What the Supreme Court Decided

In Tempnology, the Supreme Court had to deliberate over the main question of: Under the U.S. Bankruptcy Code (specifically Section 365), if a debtor-licensor rejects a license agreement, does this terminate a licensee’s rights to a trademark—even if these rights would otherwise survive the rejection under non-bankruptcy law?

In an 8-1 decision finding for Mission (the licensee), the Court held that rejection of a trademark license under Section 365 equates to a breach of the license agreement. This rejection (aka breach) entitles the licensee to: 1) damages; 2) other remedies as agreed to under the terms of the license; and 3) other remedies under appropriate (non-bankruptcy) laws. What rejection does not do is automatically result in termination of the trademark license. So, in short, a bankruptcy debtor’s rejection of an executory contract in a bankruptcy context has the same effect as a contract breach outside of bankruptcy law.

Writing for the majority, Justice Kagan opined that upon rejection the “debtor can stop performing its remaining obligations” but “cannot rescind the license already conveyed.” The holding also articulated a licensee can continue to take actions under whatever the license authorizes.

What does this Mean Moving Forward?

Justice Sotomayor agreed with the majority, and in a written concurrence expanded on what the Court’s decision means for licensees moving forward. She was careful to limit the holding, remarking the Court did not decide that every trademark licensee has the free right to continue using the licensed marks following rejection. In each individual situation, the basic question will be whether the licensee’s rights would survive an agreement breach under the applicable laws (outside of bankruptcy law).

This ruling could have repercussions on other cases and beyond trademark licenses. It could affect what remedies are open to counterparties to executory contracts if said agreements are rejected in bankruptcy proceedings.

In light of this ruling, parties to license agreements should be certain to design contracts in a way that reserves post-rejection remedies.

Main Takeaways

  • Rejection of any contract under bankruptcy law is a breach, not a rescission.
  • If a debtor-licensor breaches an executory licensing agreement by rejecting the agreement, the licensor breaches and may stop performing its side of the contract, but cannot rescind the trademark rights already conveyed.
  • Following rejection of an executor licensing agreement, the licensee may continue to do whatever actions the license authorizes.

If you have any questions or want to discuss your trademark license agreements, don’t hesitate to reach out to Jordan E. Meggison-Decker by email or phone (515-242-2444).