Reversing the First Circuit, the Supreme Court Holds That Rejection of an Executory Trademark License Does Not Bar the Licensee From Continuing to Use the Mark

In Mission Product Holdings v. Tempnology, the Supreme Court, in an 8-1 opinion delivered by Justice Kagan, held that a debtor’s rejection of a trademark license under Section 365 of the Bankruptcy Code does not terminate the licensee’s rights to use the trademark under the agreement.

Tempnology made clothing and accessories designed to stay cool during exercise, and marketed those products under the brand name “Coolcore.” In 2012, Tempnology gave Mission Product Holdings an exclusive license to distribute certain Coolcore products in the United States and granted Mission a non-exclusive global license to use the Coolcore trademarks. The agreement was set to expire in July 2016. In September 2015, however, Tempnology filed for relief under Chapter 11 of the Bankruptcy Code, and rejected the license agreement under Section 365(a).

The Bankruptcy Court held that Tempnology’s rejection of the agreement revoked Mission’s right to use the marks. The Bankruptcy Appellate Panel reversed. The First Circuit rejected the Bankruptcy Appellate Panel’s view and reinstated the Bankruptcy Court’s decision. The First Circuit reasoned that Congress, in enacting Section 365(n) in 1988, “expressly listed six kinds of intellectual property,” but not trademarks. The First Circuit thus held that trademark licenses are categorically unprotected from court-approved rejection. The Supreme Court granted certiorari, and reversed the First Circuit.

Section 365(a) of the Bankruptcy Code gives a debtor the option to “reject any executory contract”—meaning a contract that neither party has finished performing. Under Section 365(g), rejection “constitutes a breach of [an executory] contract,” deemed to occur “immediately before the date of the filing of the petition.” Section 365(n) allows a licensee to “retain its rights” after the rejection of an “executory contract under which the debtor is a licensor of a right to intellectual property.” “Intellectual property” is defined in Bankruptcy Code Section 101(35A) to cover trade secrets, patents, patent applications, plant variety, copyrights, and mask works.

Because “breach” under Section 365(g) is neither defined nor a specialized bankruptcy term, the Supreme Court looked to non-bankruptcy contract law to determine the effects of a breach. Under general contract law, if a licensor breaches the agreement, “the breach does not revoke the license or stop the licensee from doing what it allows,” i.e., the licensor has no ability, based on its own breach, to terminate the agreement. Applying these principles to Section 365, the Court reasoned that a debtor, after rejecting a license under Section 365, “can stop performing its remaining obligations under the agreement,” but “the debtor cannot rescind the license already conveyed.” So, assuming no special contract term or state law, “the licensee can continue to do whatever the license authorizes.”

The majority rejected Tempnology’s arguments to the contrary. Sections 365(h) and (i) make clear that certain purchasers and lessees of real property and timeshare interests can continue to exercise rights after a debtor has rejected the lease or sales contract. Section 365(n) similarly provides that licensees of some intellectual property—but not trademarks—retain contractual rights after rejection. Read as generously as possible to Tempnology, the Supreme Court interpreted these provisions to say “nothing much of anything about the content of Section 365(g)’s general rule.” Read less generously, the Court interpreted the provisions to affirmatively refute Tempnology’s position, reinforcing “the general rule that contractual rights survive rejection.”

Justice Sotomayor filed a concurring opinion, joining the Court’s opinion in full, but noting that the right of a non-debtor trademark licensee to continue using the mark post-rejection is dependent on special terms in the licensing contracts and on state law. Trademark licensees do not have the “unfettered right” to continue using licensed marks post-rejection. Justice Gorsuch filed a dissenting opinion, arguing that the case should never have been accepted because any claim of relief was mooted when the license expired during litigation.

The decision, which resolves a decades long issue as to the rights of a trademark licensee in bankruptcy, has broad implications. Under the ruling, a debtor/licensor cannot rid itself of an unprofitable trademark license in bankruptcy by simply rejecting the license under Section 365. This gives trademark licensees certainty that their agreements will not be unilaterally revoked in bankruptcy. Importantly, this does not give licensees the unfettered right to use the mark post-rejection. As Justice Sotomayor noted, other factors, such as the terms of the license and the applicable state laws, affect the licensee’s right to continue using the mark. Parties to a trademark license should thus be cognizant of Tempnology and should consider drafting their agreements to account for a bankruptcy contingency.

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