The Supreme Court recently held that if a bankrupt trademark licensor rejects a trademark license agreement during bankruptcy proceedings, the trademark licensee does not lose its right to continue using the licensed trademark.
Tempnology, LLC manufactured and marketing exercise clothing and accessories under the brand name COOLCORE. In 2012, Tempnology granted Mission Product Holdings, Inc. a non-exclusive license to use Tempnology’s COOLCORE trademarks in the United States and around the world, and an exclusive license to distribute certain COOLCORE products in the United States. The licensing agreement expired in July 2016.
In September 2015, Tempnology filed for Chapter 11 bankruptcy and asked the Bankruptcy Court to “reject” its trademark licensing agreement with Mission, and the Bankruptcy Court obliged. Both parties agreed that Tempnology’s rejection relieved Tempnology of its duty to perform under the agreement and permitted Mission to bring a damages claim against Tempnology for failing to perform its obligations. But Tempnology also believed that its rejection of the agreement terminated any rights it had granted Mission to use the COOLCORE trademarks.
The Bankruptcy Court agreed with Tempnology, finding the licensing agreement was rescinded upon its rejection, but the Bankruptcy Appellate Panel reversed this decision. On appeal, the First Circuit reversed the Appellate Panel and reinstated the Bankruptcy Court’s original decision. The U.S. Supreme Court then agreed to hear the case on appeal.
The Mission Decision
Section § 365(a) of the Bankruptcy Code allows a debtor who is asking the court for relief from obligations to “assume or reject any executory contract” after they enter bankruptcy, subject to the court’s approval. An “assumed” contract obligates both parties to continue their performance. A “rejected” contract relieves the debtor of its duties to perform and allows the other party to the contract to sue the estate of the debtor for damages resulting from the debtor’s nonperformance.
Section 365(g) of the Bankruptcy Code explains that the rejection of an executory contract “constitutes a breach.” So, any debtor who rejects a contract under § 365(a) has breached that contract under § 365(g).
Mission argued that under normal contract rules a “breach” by a trademark licensor would not terminate a licensee’s rights. And it argued the result should be the same under the bankruptcy code.
The U.S. Supreme Court agreed that the term “breach” has the same definition in bankruptcy law as in contract law and so, should not terminate Mission’s rights. The Court explained its conclusion by using a hypothetical from contract law.
The Court described a contract leasing a photocopier where the lessor would service the photocopier on a monthly basis. Upon breach of that contract by the lessor, the lessee would not be required to return the photocopier. Rather the lessee would have the option to either keep the photocopier and continue paying the lessor or return the photocopier to avoid future payment. The Court found that the same result follows in bankruptcy law—in other words, a rejection is merely a breach and the consequences of rejection are merely that of a breach, which does not include contract termination.
The Court explained that this result applies to trademark license agreements because §§ 365(a) and (g) apply to “any executory contract,” which includes trademark licensing agreements. And while a trademark license requires the licensor to monitor and exercise quality control over the licensee, potentially making a debtor’s reorganization more difficult by forcing the debtor to choose between expending scarce resources on quality control or potentially losing a valuable asset, the Court noted that this is simply one of the many burden’s intentionally built into the bankruptcy process.
The Court also addressed numerous exceptions in § 365 that enumerate specific categories of contracts where a counterparty may retain the contract rights even when the debtor rejects the contract. One of these exceptions—§ 365(n)—even carves out copyright and patent licenses, but not trademark licenses. The Court rejected the negative inference that only these specific contracts survived rejection, and in doing so, clarified that each exception was created in response to a judicial determination that a certain contract was terminated due rejection, so the exceptions did not alter the plain meaning of § 365.
Finally, the Court grounded its decision in policy, citing the general bankruptcy rule that “the estate cannot possess anything more than the debtor itself did outside of bankruptcy.” The Court notes that a contrary holding—allowing termination upon rejection—would not only run afoul of this basic bankruptcy principle, but it would also undermine the exceptional cases where a bankruptcy trustee may legally undo pre-bankruptcy transfers, called “avoidance,” by making rejection the functional equivalent of avoidance.
Justice Sotomayor, agreeing with the Court in full, concurred to highlight two aspects of the Court’s decision. First, she noted that the decision does not decide that every trademark licensee may continue using licensed marks post-rejection because, for instance, the licensing agreement itself may include contrary provisions. Second, given that § 365(n) enumerates specific provisions for the rejection of other intellectual property licenses, she noted that trademark licenses post-rejection are actually more expansive than other intellectual property licenses.
Justice Gorsuch dissented on the ground that the case was moot because the trademark license at issue expired nearly three years ago, but the Court rejected this argument because Mission asserted a damages claim based on its inability to use the COOLCORE marks after rejection of the trademark license agreement by the debtor.
Strategy and Conclusion
Declaring for bankruptcy will not allow a debtor to prematurely terminate an ongoing trademark license. As such, a decision to reject a trademark license may have little practical effect, only ridding a debtor of its obligation to provide services collateral to the trademark license itself. To retain its valuable trademark rights and avoid naked licensing, the debtor will need to continue monitoring and policing the licensee, regardless of the rejection.
The Mission Product Holdings decision can be found here.
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Finnegan is deeply saddened by the death of our colleague Donald R. Dunner, who passed away on October 16, 2019, after a life of dedication and inspiration to many in IP law. Don was in a category all his own with his talent and distinct knowledge of IP law. His direct approach and enthusiasm for work and life touched everyone who worked with him, and we will miss him dearly.