In Mission Product Holdings, Inc. v. Tempnology LLC, 587 U. S. ____ (2019), the U.S. Supreme Court clarified what happens to the rights of a trademark licensee when a bankruptcy debtor rejects a license agreement during Chapter 11 proceedings. The Court held that a debtor/licenses rejection of a trademark license agreement does not terminate the licensee’s rights to the mark.  “Rejection of a contract— any contract—in bankruptcy operates not as a rescission but as a breach,” the Court explained.

Intellectual Property under Bankruptcy Code

When a business files for protection under Chapter 11 of the Bankruptcy Code, the trustee or the debtor-in-possession may secure court approval to "reject" any executory contract of the debtor. Under Section 365(g)(1) of U.S. bankruptcy code, that rejection “constitutes a breach of such contract.” The other party to the contract can pursue damages for breach of contract, but may not compel further performance.

The Bankruptcy Code treats some intellectual property differently. Pursuant to 11 U.S.C. § 365(n)(1), when the rejected contract is one "under which the debtor is a licensor of a right to intellectual property," the licensee may elect to "retain its rights . . . to such intellectual property," thereby continuing the debtor's duty to license the intellectual property. “Intellectual property” is defined to include patents and copyrights, but not trademarks. Because it is not directly addressed in the Bankruptcy Code, the circuit courts were divided on whether the rejection of a trademark licensing agreement terminates a licensee’s rights.

Facts of Mission Product Holdings, Inc. v. Tempnology LLC

Mission Product Holdings, Inc. entered into a contract with Respondent Tempnology, LLC, which gave Mission a license to use Tempnology’s trademarks in connection with the distribution of certain clothing and accessories. Tempnology filed for Chapter 11 bankruptcy and sought to reject its agreement with Mission.

The bankruptcy court approved Tempnology’s motion to reject the Agreement under Section 365(a), subject to Mission’s election to preserve its rights to the intellectual property under Section 365(n). The bankruptcy court subsequently ruled that Mission retained its non-exclusive, worldwide license to use Tempnology’s patents post-rejection, but held that rejection of the Agreement terminated Mission’s trademark and exclusive-distribution rights.

A divided panel of the First Circuit held that Mission's right to use Debtor's trademarks did not survive rejection of the Agreement. The majority reasoned that it was not “possible to free a debtor from any continuing performance obligations under a trademark license even while preserving the licensee’s right to use the trademark,” stating that Tempnology would be required to “monitor and exercise control over the quality of the goods” produced by Mission to protect the “continued validity” of its trademarks.

Supreme Court’s Decision

By a vote of 8-1, the Supreme Court reversed. It held that a debtor’s rejection of an executory contract under Section 365 of the Bankruptcy Code has the same effect as a breach of that contract outside bankruptcy; it can’t rescind rights that the contract previously granted.

“A rejection breaches a contract but does not rescind it. And that means all the rights that would ordinarily survive a contract breach, including those conveyed here, remain in place,” Justice Elena Kagan wrote on behalf of the Court.

Justice Kagan further explained that upon rejection the debtor "can stop performing its remaining obligations under the agreement. But the debtor cannot rescind the license already conveyed. So the licensee can continue to do whatever the license authorizes."

In reaching its decision, the Court cited the longstanding bankruptcy rule that an estate can’t possess anything more than the debtor itself did outside bankruptcy. “So if the not-yet debtor was subject to a counterparty’s contractual right (say, to . . . use a trademark), so too is the trustee or debtor once the bankruptcy petition has been filed,” Justice Kagan wrote. “The rejection-as-breach rule . . . ensures that result.”

Key Takeaway

The Supreme Court’s decision is good news for trademark licensees. Under the Court’s ruling, when a trademark owner enters into bankruptcy and seeks to reject a trademark license, the licensee has the option to either assert damage claims as a result of the breach of the licensing agreement or to continue to use the trademark through the end of the license term.

For trademark holders, the Court’s decision in Mission Product Holdings, Inc. v. Tempnology LLC may make bankruptcy less attractive because it can’t be used to free trademark owners from licensing rights that they have granted.

To determine how the Court’s decision may impact your unique circumstances, we encourage you to contact a member of the Scarinci Hollenbeck Intellectual Property Group.

If you have any questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, David Einhorn, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.