For decades, federal courts have been split on what happens to a trademark licensee’s rights when a debtor-licensor “rejects” a trademark license agreement in bankruptcy. In this article, we discuss the two longstanding interpretations of this issue, the recent resolution by the U.S. Supreme Court, and the resulting impact on licensors and licensees.
The issue: Rejection-as-breach vs rejection-as-rescission
The Bankruptcy Code gives a debtor the ability to “assume or reject” contracts, including trademark license agreements. When a debtor rejects a contract, the contract terminates and the debtor ceases performance. For trademark license agreements, the effect of rejecting a licensee has been in contention. Courts have split in defining rejection in such cases, thus creating two competing interpretations: 1) “rejection-as-breach,” and 2) “rejection-as-rescission.”
The distinction between the two interpretations is critical, as it dictates whether the licensee has any remaining rights under the trademark license:
- Under rejection-as-breach, the rights to use the trademark under the license survive rejection. In other words, it operates as a standard breach of contract outside of bankruptcy.
- On the other hand, rejection-as-rescission, “deprives the licensee of its rights to use the trademark,” more akin to rescission of a contract.
The resolution: Mission Product Holdings, Inc. v. Tempnology, LLC
In the recently decided Mission Product Holdings, Inc. v. Tempnology, LLC, the U.S. Supreme Court resolved the issue in favor of rejection-as-breach, holding that trademark license rights survive rejection under § 365 of the Bankruptcy Code.
Tempnology manufactured and sold “Coolcore” brand athletic apparel. In 2012, Tempnology granted Mission Product Holdings a license to use the Coolcore trademarks in connection with the distribution of certain clothing and accessories through 2016. But, in 2015 with about a year remaining on the license agreement, Tempnology filed for bankruptcy and petitioned the court to reject the license agreement. Mission Product Holdings filed suit.
The question presented on certiorari to the U.S. Supreme Court was “whether the debtor-licensor’s rejection of that contract deprives the licensee of its rights to use the trademark.”
On May 20, 2019, the U.S. Supreme Court adopted the interpretation of the Seventh Circuit, endorsing rejection-as-breach. In an 8-1 opinion, Justice Kagan concluded that in the context of a trademark license agreement, rejection (i.e., breach) by the licensor of a contract does not invalidate the rights of the non-breaching licensee under that agreement. To get to this seemingly intuitive conclusion, Justice Kagan looked no further than the text of the Bankruptcy Code itself: “the rejection of an executory contract . . . constitutes a breach of such contract.”
The impact on licensors and licensees
- The benefit for licensors: Resolution of this issue benefits licensors, since intellectual property counsel must account for this scenario when building a strategy to protect intellectual property portfolios that monetize critical intellectual property via license. Clarity improves the ability to plan.
The debtor-licensor can no longer revoke trademark licenses by rejecting the license agreement in bankruptcy. This affects the ability to reorganize. Licensors must choose to either: 1) bear the burden of continuing to monitor the licensee’s trademark usage while the licensor is going through bankruptcy, or 2) risk the trademark becoming unenforceable in a “naked license” scenario.
- The benefit for licensees: Licensed trademark rights are protected should the licensor reject the license agreement in bankruptcy. Additionally, after rejection, the licensee can assert a claim against the bankruptcy estate for any damages resulting from the debtor-licensor’s nonperformance.
At Henson Efron, our attorneys help clients protect and enforce trademark, trade secret, copyright and other intellectual property rights through contracts, registration, licensing and, when necessary, intellectual property litigation. If you’d like to learn more about how our experience and knowledge can help protect your rights, please contact Henson Efron.
The purpose of this article is only to provide general information and should not be construed as legal advice.