Cancelling a TM License via Bankruptcy

by Dennis Crouch

This week the Supreme Court heard oral arguments in Mission Product Holdings v. Tempnology.  The setup for the case involves a trademark licensor who filed for bankruptcy.  The basic question is whether that license is an executory contract that can be rejected by the bankruptcy trustee. And, if it is rejected, does the licensee retain any rights to use the mark — is the rejection equivalent to termination of the license?

11 U.S.C. § 365, indicates plainly that “the [bankruptcy] trustee, subject to the court’s approval, may assume or reject any executory contract or unexpired lease of the debtor.”  In the 1985 Lubrizol decision, the 4th Circuit held that a “technology license” fit within § 365 and thus could be rejected by the Trustee — leaving a former licensee with no right to continued use of the technology.  Congress then legislatively overruled Lubrizol — effectively allowing “intellectual property” licensees to retain license rights even after a rejection by the trustee.  The problem for trademark holders is that the statute specifically defines “intellectual property” to include patents, copyrights, and trade secrets — but not trademarks.  11 U.S.C. § 101.  Without the express protection of § 365(n), the trademark licensee has to fall-back on more basic licensing principles and the meaning of “rejection” under the Bankruptcy Code.

Setup:

• TM-Owner licenses to TM-User
• TM-Owner declares bankruptcy and “Rejects” the license (a breach of contract under § 365(g)).
• Following rejection, what rights do the TM-User retain?

In Sunbeam Products, Inc. v. Chicago Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012), the Seventh Circuit rejected Lubrizol and held that the TM-User gets to keep using the mark even after rejection of a TM license.  Here, however, the First Circuit followed Lubrizol and held that the bankruptcy rejection cancelled all of the licensee’s rights to use the mark under the license agreement.

The issue in the case is presented as follows:

Issue: 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.

DANIELLE SPINELLI argued on behalf of the licensee MISSION PRODUCT but split time with ZACHARY TRIPP from the Solicitor General’s Office who supported the petition. DOUGLAS HALLWARD-DRIEMEIER argued on behalf of the bankrupt TM-Owner TEMPNOLOGY, LLC, NKA OLD COLD LLC.

Ms. Spinelli began with an her argument that a rejected license does not eliminate the already-granted license rights:

MS. SPINELLI: [Following rejection,] the debtor will not fulfill any remaining unperformed obligations under the contract, and the counterparty will have a prepetition claim against the debtor for any resulting damages.

But that’s all rejection is, the estate’s decision not to take on the debtor’s future performance obligations, which are therefore breached.

The overwhelming consensus of courts and scholars is that rejection can’t give the estate any greater rights with respect to the rejected contract than the debtor would have outside bankruptcy.

And as Respondent doesn’t contest, outside bankruptcy, a licensor could not use its own breach of contract as a basis to terminate the licensee’s rights under the agreement.

The justices appear to have affirmatively latched-onto this argument — making it likely (in my view) that the court will limit the licensor’s right to cancel an already-given license as part of the bankruptcy process.

Trademark licenses are often treated differently than patent/copyright licenses. Part of the treatment is that there is more actual upkeep that needs to take place – both by the licensor and licensee. In addition, the mark generally needs to be linked with goods and products and so is not merely a bare IP license.  Here, the licensee (Mission Product Holdings) was buying products from the licensor (Tempnology) that were already marked and then using the mark for advertising, etc.  So, the rejection of the TM license here is wrapped-up in the refusal to supply goods.  However, one aspect of the contract apparently allows Mission to find an alternative supplier if Tempnology refuses.

MS. SPINELLI: Well, what happened, Justice Sotomayor, is that, prior to bankruptcy, Tempnology attempted to terminate the contract. Mission placed a purchase order. Tempnology said, we’re not going to fill that order. . . . But, Justice Sotomayor, we had a right under the agreement, if Tempnology failed to provide us with goods, to source those goods elsewhere.

A major additional sticking point in the case is the role of the exception for all-other-IP in 365(n) – and whether the absence of TM from provision creates a negative implication that TM licenses are revocable. The argument is that Congress expressly stated in 365(n) that when a licensor trustee rejects a Patent or Copyright license that the licensee can elect to either (1) treat the license as terminated or (2) retain its right to the license.  One way to read 365(n) is for the implication that Trademark licenses should be treated differently, and that difference can be explained by usual differences in TM licenses where those are typically wrapped-up in additional supply, quality, monitoring and business good will activities.

Read the oral arguments transcript.