How Cool: Using Bankruptcy to Upset Intellectual Property Licenses

by Dennis Crouch

The Supreme Court has granted certiorari in the bankruptcy-trademark case of Mission Product Holdings v. Tempnology LLC.  The licensed marks are COOLCORE and DR. COOL.

In bankruptcy, the debtor is permitted to reject exectory contracts in order to improve the business position of the debitor (and its creditors).  The question at issue here is whether a debtor-licensor is permitted to terminate a trademark license that was granted prior to the bankruptcy — and what would the impact be of such a termination.

Whether, under Section 365 of the Bankruptcy Code, a debtor-licensor’s “rejection” of a license agreement—which “constitutes a breach of such contract,” 11 U.S.C. § 365(g)—terminates rights of the licensee that would survive the licensor’s breach under applicable non-bankruptcy law.

One oddity of the setup of this case is that the bankruptcy code already spells out how this should work for intellectual property licenses. THe code allows a licensee to elect to continue to use licensed IP rights even if the debtor-licensor attempted to reject the license. 11 U.S.C. 365(n) (licensee of “a right to intellectual property . . . may elect . . . to retain its rights”).  The problem for the trademark holder in this case is that the bankruptcy code excludes trademark rights from its definition of intellectual property rights.  11 U.S.C. 101 (35A) (patents, copyrights, and trade secrets are covered but not trademarks).

Thus, the real question here is what is the result of a rejection of the license by the trustee — is the rejection avoidance of a contract or is it breach of the contract?  A law professor brief explained the situation:

Under the First Circuit’s rule, a debtor/licensor can use the power to reject to destroy a licensee’s business or hold the licensee hostage, forcing it to pay twice for a license it had already purchased. This unjust result is the unfortunate and natural consequence of treating the power to “reject” a contract as the power to “avoid,” or claw back, a transfer of property.

One way to look at the basic background here to begin with the 4th Circuit in Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985).  In that decision, the court held that a bankrupt licensor could use bankruptcy to unilaterally revoke the rights of a technology licensee (patent license).  Other Circuits rejected the Lubrizol approach, but Congress still acted to clear-up the disputes with the creation of 365(n).  However, as mentioned, 365(n) does not cover trademark licenses.

6 thoughts on “How Cool: Using Bankruptcy to Upset Intellectual Property Licenses

  1. 2

    Dennis Crouch: These incidents are not supposed to happen here, but they are happening. As Dan Rather writes “now is a time when none of us can afford to remain seated or silent. We must all stand up to be counted. . . . I believe there is a vast majority who wants to see this nation continue in tolerance and freedom. But it will require speaking.”

    Offered without comment.

    1. 2.1

      That’s great Malcolm.

      As noted though, THIS is not a general place for your rants of feelings.

      THIS is a patent law blog.

      I fully endorse your ability and desire to not “remain seated or silent.”

      Just find an appropriate forum and stop h1j acking every thread with your feelings that have nothing to do with patent law (no matter how attenuated you try to shoehorn some connection). And when this is asked of you, do not prevaricate and attempt to impugn those wanting this to be an on-topic forum. There is NO place for you to project and attempt to cast anyone not agreeing with you into one bucket.

  2. 1

    You lost me with “exectory contracts.” Google thought you might have meant “excretory contracts”….

    On an unrelated note – Cert denied in Bhagat v. Iancu.

    1. 1.1

      Cert denied in Bhagat v. Iancu.

      I’m totally shocked — shocked! — that the Supreme Court ran away from this dumpster fire.

    2. 1.2

      In a major victory in the fight against Republican gerrymandering, the U.S. Supreme Court declined to hear a Republican appeal of a Pennsylvania state Supreme Court ruling from earlier this year that used the Keystone State’s own constitution to hold that gerrymandering violates voters’ rights to “free and equal” elections. With the U.S. Supreme Court lurching far to the right and almost certainly dooming efforts to set a federal standard against gerrymandering, the court’s decision to let a state ruling stand provides a groundbreaking way forward.

      By turning down the GOP’s appeal, the U.S. Supreme Court has shown the way forward to stop gerrymandering at the state level: elect progressive state supreme courts in states that hold judicial elections, and elect Democratic governors who can appoint progressive justices in the states that don’t elect them directly. Fortunately, 2018’s elections provide Democrats with just that opportunity in many states with important governor’s races.

      Vote these psych-0 Repu k k ke @ h0les out of office and shun them.

Leave a Reply

Your email address will not be published. Required fields are marked *

You can click here to Subscribe without commenting

Add a picture