On May 20, 2019, the Supreme Court handed down an 8 -1 opinion in MissionProduct Holdings, Inc. v. Tempnology, LLC, holding that a debtor’s rejection of a trademark license under Bankruptcy Code § 365 does not revoke the licensee’s trademark license or deprive the licensee of its rights to use the trademark. Instead, the Court concluded that the debtor’s rejection has the same effect as a breach of contract outside bankruptcy; it does not rescind the contract and all rights that would ordinarily survive a breach of contract remain in place.
This case arises from a licensing agreement between a debtor/licensor, Mission Product Holdings, Inc. (Mission) and Tempnology, LLC (Tempnology), for the use of Tempnology’s trademarks (logos and labels for “Coolcore”) on manufactured clothing and accessories. The agreement provided Mission with an exclusive license to distribute Coolcore products in the United States and a non-exclusive license to use the trademarks in the United States and around the world. The agreement was set to expire in July, 2016. In September 2015, Tempnology filed for Chapter 11 bankruptcy and asked the court to allow it to reject the Mission licensing agreement under Section 365.
Section 365 of the Bankruptcy Code enables a debtor to “reject any executory contract” – meaning a contract that neither party has finished performing, thus allowing a debtor to decide whether a particular contract is a good deal for the estate going forward. This is especially important when a debtor is reorganizing under Chapter 11. Rejecting the contract constitutes a breach of contract, giving the licensee a pre-petition claim against the estate for damages as a result of the nonperformance.
In this case, the Bankruptcy Court held that even though Section 365 allows, for example, a tenant to stay and pay rent for the duration of a property lease despite a bankrupt landlord rejecting the lease, or allows certain intellectual property (e.g. patent) licenses to remain in place despite rejection, Section 365 does not reference trademark licenses and, therefore, does not apply to the facts of this case. The Bankruptcy Appellate Panel (BAP) reversed, noting that while a rejection can convert a debtor’s unfilled obligations to a pre-petition claim, it does not vaporize the counterparty’s rights. The First Circuit Court of Appeals rejected the BAP’s reasoning and reinstated the Bankruptcy Court’s decision to terminate the license, finding that because special features of trademark law include licensors monitoring and exercising quality control over goods associated with their trademark, if a licensor is forced to carry on these monitoring activities, it would frustrate “Congress’s principal aim in providing for rejection,” which is to release the debtor’s estate from burdensome obligations.
Interestingly, the Supreme Court disagreed with the First Circuit and agreed with the BAP, concluding that Congress intended, except in very limited cases, for parties to retain rights after rejection of an executory contract, and trademark licenses should not be any different. Thus, rejection of a trademark license in bankruptcy is treated as a breach, not a rescission. As to the concerns about ongoing monitoring, the Supreme Court found that while Congress considered the burdens on the debtors when certain contracts are rejected, it also weighed the “legitimate interests and expectations of the debtor’s counterparties.” In the case of trademark licenses, the ruling clarifies that the legitimate interests and expectations of the trademark licensee outweigh the burdens on the debtor, and the licensees rights remain in place after rejection.
Jennifer T. Poochigian