IP Law Daily Justices grapple with effect of trademark owner’s bankruptcy on licensee
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Wednesday, February 20, 2019

Justices grapple with effect of trademark owner’s bankruptcy on licensee

By Cheryl Beise, J.D.

The Supreme Court heard arguments on whether a debtor-licensor’s rejection of an executory trademark license agreement in bankruptcy terminates the agreement and a licensee’s rights to use the licensed marks.

The U.S. Supreme Court today heard oral arguments in a case that pits the contractual rights of a trademark licensee against the rights afforded to a trademark licensor that has filed for protection under Chapter 11 of the Bankruptcy Code. The Court is expected to resolve a circuit split regarding whether trademark licenses are protected from court-approved rejection during bankruptcy (Mission Product Holdings, Inc. v. Tempnology, LLC, Dkt. No. 17-1657).

Danielle Mary Spinelli, of Wilmer Cutler Pickering Hale and Dorr LLP, appeared on behalf of petitioner Mission Product Holdings, Inc. Douglas Hallward-Driemeier, of Ropes & Gray, LLP, argued on behalf of Tempnology, LLC (now known as Old Cold LLC). Zachary D. Tripp appeared for the United States, in support of Mission Product.

The underlying case involved a 2012 intellectual property licensing and product distribution agreement between Tempnology and Mission Product. When Tempnology filed a petition for voluntary bankruptcy under Chapter 11 in 2015, it moved to reject the parties’ 2012 agreement under 35 U.S.C. § 365(a). The parties agreed that pursuant to the exception provided in Section 365(n), Mission could insist that the rejection not apply to nonexclusive patent licenses contained in the rejected agreement. However, they disagreed as to whether the rejection applied to the agreement’s trademark license and exclusive rights to sell Tempnology’s goods. The U.S. Court of Appeals in Boston concluded that Section 365(n) did not apply to Mission’s trademark license rights for the "Cooolcore" mark or to its exclusive distributorship rights. The First Circuit relied on the Fourth Circuit’s decision in Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985), holding that rejection of an executory license agreement by a debtor-licensor terminates the license. In 1987, in response to Lubrizol, Congress amended the Bankruptcy Code to carve out an exception for licensees of patents, copyrights, and trade secrets, but it declined to add trademark license agreements.

In its petition for certiorari, Mission posed two questions, but the Court only agreed to hear the first: "Whether, under §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." Mission asked the Court to resolve a circuit split. A number of courts have rejected Lubrizol. In Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012), the Seventh Circuit held that rejection eliminates the debtor-licensor’s obligation to perform under the license agreement, but it does not terminate a licensee’s right to continue to use the trademark for the duration of the agreement.

Petitioner’s arguments. Spinelli began by arguing that under the plain text of Section 365, rejection abrogates the debtor's future performance obligations, which are then breached. She contended that it is the consensus of scholars that rejection cannot give greater contractual rights than the debtor would have outside bankruptcy.

In response to a question from Justice Sotomayor, Spinelli explained that apart from bankruptcy, a licensor cannot use its own breach as a basis to terminate the licensee's rights under the agreement. Justice Sotomayor also asked Spinelli why Congress intentionally left trademarks off the list of exceptions in Section 365(n). Spinelli explained that Congress enacted Section 365(n) to respond to the urgent patent license issues posed by Lubrizol.

Several Justices asked Spinelli to respond to the respondent’s argument that trademark licenses are unique because of the licensor’s quality control obligations. Spinelli emphasized that such obligations stem from trademark law and not from contract principles. Justice Alito likened the trademark license to a real property lease, where the lessor’s obligations may arise from separate statutory requirements.

Justice Gorsuch asked why the case was not moot since Tempnology ceased supplying Mission Product with goods two years before the bankruptcy. Spinelli contended that Mission could have purchased the goods elsewhere had the rejection order not been put in place.

Government’s arguments. In response to Justice Gorsuch’s further questioning regarding mootness, Tripp pointed out that the case was not moot because there was an outstanding issue concerning damages that could be resolved on remand. Tripp urged the Court to not to find a negative inference from Section 365(n)’s omission of trademarks.

Respondent’s arguments. Hallward-Driemeier maintained that the case was moot, but proceeded to the merits. Hallward-Driemeier argued that in a breach situation outside of bankruptcy, the licensee would not have the right to continuing use of the trademarks. He explained that "the nature of the trademark is that it is the trademark owner's reputation."

The Justices also questioned why a debtor-licensor should have more rights than a non-debtor licensor. Hallward-Driemeier answered that the need for unitary control over trademarks makes trademark licenses unique.

The case is Dkt. No. 17-1657.

Attorneys: Danielle Mary Spinelli (Wilmer Cutler Pickering Hale and Dorr LLP) for Mission Product Holdings, Inc. Douglas Hallward-Driemeier (Ropes & Gray, LLP) for Tempnology, LLC n/k/a Old Cold LLC. Zachary D. Tripp, Assistant to the Solicitor General, U.S. Department of Justice, for the United States.

Companies: Mission Product Holdings, Inc.; Tempnology, LLC n/k/a Old Cold LLC

MainStory: TopStory Trademark

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