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.