Supreme Court ruling leaves a mark

November 06, 2019
Patterson Thuente IP

Trademark right survives licensor’s bankruptcy

It’s never good news for a business when a company that the business has contracted with files for bankruptcy. But, according to a new U.S. Supreme Court ruling, there’s some good news for trademark licensees. In an 8-1 decision that resolves a split among federal courts of appeal, the Court held that in some circumstances a licensee can continue to use the licensed marks despite the licensor’s rejection of their agreement during the bankruptcy process.

Licensor pursues bankruptcy

Tempnology, LLC, manufactured clothing and accessories designed to stay cool during exercise. It marketed the products under the brand name “Coolcore.”

handshake

In 2012, the company entered a licensing agreement with Mission Product Holdings, Inc. The agreement gave Mission the exclusive right to distribute certain Coolcore products in the United States, as well as a nonexclusive license to use the Coolcore trademarks in the United States and around the world.

The agreement was due to expire in July 2016. But in September 2015, Tempnology filed a petition for a reorganization bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. Shortly after filing, it sought permission under Section 365 of the Code to “reject” the licensing agreement with Mission.

The Bankruptcy Court approved the rejection and further held that the rejection terminated Mission’s right to use the Coolcore trademark. The Bankruptcy Appellate Panel reversed, holding that rejection doesn’t terminate rights that would survive a breach of contract outside of bankruptcy. But the U.S. Court of Appeals for the First Circuit reinstated the bankruptcy court’s decision. Mission then appealed to the Supreme Court.

Court revives licensee’s rights

Sec. 365 authorizes bankruptcy trustees to assume or reject certain executory contracts. A contract is executory if some extent of performance is still due on both sides. If an executory contract is a good deal for the bankruptcy estate going forward, the debtor will want to assume it. If not, the debtor will want to reject it, repudiating any further performance on its part.

Under Sec. 365, rejection of an executory contract constitutes a breach of the contract. The other party has a claim against the estate for damages resulting from the debtor’s nonperformance, but it’s unlikely to ever be paid in full because it will be treated as an unsecured creditor. These creditors typically receive only pennies on the dollar.

Tempnology contended — and the Bankruptcy Court and First Circuit agreed — that rejection of a trademark licensing agreement has another consequence: It terminates the right to use the trademarks. Tempnology and the courts pointed out that several provisions in Sec. 365 state that a counterparty to specific kinds of agreements (for example, leases and some other types of intellectual property licenses) may continue exercising contractual rights after a debtor’s rejection. They reasoned that, because Sec. 365 doesn’t include such an explicit exception for trademark licenses, a different rule applies.

The Supreme Court (and the U.S. Court of Appeals for the Seventh Circuit in an earlier case) struck down this theory. It held that rejection of an executory trademark licensing agreement is merely a breach of contract — not a termination or rescission of the contract. If a licensor breaches the agreement outside of bankruptcy, the breach generally doesn’t revoke the license or stop the licensee from doing what the license allows.

And, the Court found, the same consequences follow in bankruptcy. The debtor doesn’t have to perform its remaining obligations under the agreement, but it can’t rescind the license already conveyed. Thus, the licensee can continue to do what the license authorizes.

A caveat

A concurring opinion emphasized that the Court didn’t decide that every trademark licensee has the “unfettered right” to continue using licensed marks after rejection. Special terms in a licensing contract or state law could lead a bankruptcy court to limit a licensee’s postrejection rights.

Mission Product Holdings, Inc. v. Tempnology, LLC, No. 17-1657, May 20, 2019, U.S.

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