Trademark Licensees Retain Their Rights to Use a Debtor’s Trademarks Despite the Debtor-Licensor’s Rejection of the Licenses
V&E Restructuring & Reorganization Update, May 22, 2019
The question regarding whether a trademark licensee may continue to use a license after a debtor-licensor rejects the license in its bankruptcy case has now been answered. On Monday, May 20, 2019, the Supreme Court handed down an 8-1 opinion in Mission Product Holdings, Inc. v. Tempnology, LLC, in which the Court held that a debtor’s rejection of an executory contract under Bankruptcy Code § 365—in this case, a trademark license—has the same effect as a breach of contract outside of bankruptcy. Accordingly, a debtor licensor’s rejection cannot serve to revoke the licensee’s trademark license.
The Bankruptcy Court below held that the debtor’s rejection terminated the licensee’s rights; the Bankruptcy Appellate Panel reversed, finding that rejection constitutes a breach but not a termination of rights; and the First Circuit reversed once more and reinstated the Bankruptcy Court’s decision. The Supreme Court reversed the First Circuit’s decision, and in so doing, resolved a split between the First Circuit and the Seventh Circuit’s decision in Sunbeam Prods., Inc. v. Chi. Am. Mfg., LLC, 686 F.3d 372 (7th Cir. 2012), which the Supreme Court expressly affirmed.
Given that a debtor-licensor’s rejection of a license simply constitutes a breach of the license, the Court explained that the licensee in this scenario may continue to do whatever the license authorizes. Analogizing to a personal property lease of a copy machine, the Court explained that the non-debtor counterparty, when faced with rejection, may choose how to respond to the breach: it may continue the contract or walk away, while suing for whatever damages go with its choice. In bankruptcy, though, the damages suit constitutes a prepetition claim, which will likely receive only cents on the dollar.
The Court acknowledged that its ruling may impede some reorganizations of trademark licensors and others, but the straightforward statement in Bankruptcy Code §365(g) that a rejection constitutes a breach compelled the Court’s ruling. The Court declined to adopt the debtor’s argument that the Court should read a negative inference into certain specific subsections of Bankruptcy Code § 365 that make clear that certain parties can continue to exercise certain contract rights notwithstanding rejection (including §365(n), which relates to certain intellectual property, excluding trademarks). The Court explained that those subsections were enacted by Congress to reinforce or clarify the general rule that contractual rights survive rejection, and there should be no negative inference read into them.
The Court also ruled that the case is not moot (in contrast to Justice Gorsuch’s dissent) because Mission presented a plausible claim for money damages arising from its inability to use Tempnology’s trademark after it was rejected due to its compliance with the Bankruptcy Court’s ruling below. The Court found that damages claim to present a live controversy.
This ruling implicates a number of business and drafting issues that should be addressed by consulting counsel.
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