IP Law Daily Supreme Court to decide whether licensee keeps trademark rights after bankruptcy rejection
Wednesday, October 31, 2018

Supreme Court to decide whether licensee keeps trademark rights after bankruptcy rejection

By Thomas Long, J.D.

In a case involving an intellectual property licensing and product distribution agreement rejected by a debtor in Chapter 11 bankruptcy, the U.S. Supreme Court has granted a petition for review by licensee Mission Product Holdings, Inc. ("Mission"), asking whether the debtor’s rejection of the licensing agreement under 35 U.S.C. §365(a) terminated Mission’s rights to use certain trademarks, which would have survived the licensor-debtor’s breach of the agreement under applicable non-bankruptcy law. At issue is a decision of the U.S. Court of Appeals in Boston, holding that trademark licenses are categorically unprotected from court-approved rejection during bankruptcy, and that while Mission retained nonexclusive patent license rights pursuant to a provision of the Bankruptcy Code, it lost its trademark rights.

Mission manufactures, markets, and distributes athletic and performance apparel and accessories for men and women. Tempnology, LLC—a maker of specialized products, such as towels, socks, headbands, and other accessories, designed to remain at low temperatures even when used during exercise—filed a petition for voluntary bankruptcy under Chapter 11 on September 1, 2015. The day after filing for bankruptcy, Tempnology moved to reject 17 of its contracts pursuant to 11 U.S.C. § 365(a), including a 2012 agreement giving certain marketing and distribution rights to Mission through July 1, 2016.

Mission objected to the rejection motion, arguing that 11 U.S.C. §365(n) allowed Mission to retain both its intellectual property license and its exclusive distribution rights. Section 365(n) provides an exception from section 365(a)’s broad rejection authority by limiting the debtor-in-possession's ability to terminate intellectual property licenses it has granted to other parties.

The parties agreed that 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 grant of a trademark license and of exclusive rights to sell Tempnology’s goods.

The bankruptcy court ruled that Section 365(n) only protected certain specifically enumerated intellectual property rights, and that Mission’s exclusive distributorship was not such a right. With respect to trademarks, the bankruptcy court reasoned that Congress’s decision to leave trademarks off the definitional list of intellectual property rights in the Bankruptcy Code left trademark licenses unprotected from rejection. Mission appealed to the Bankruptcy Appellate Panel (BAP). Applying a Seventh Circuit case, Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012), the BAP held that, because Section 365(g) deems the effect of rejection to be a breach of contract, and a licensor’s breach of a trademark agreement does not necessarily terminate the licensee’s rights, rejection under Section 365(g) likewise did not necessarily eliminate those rights. Thus, the BAP reversed the bankruptcy court's determination that Mission no longer had protectable rights in Tempnology’s trademarks.

The First Circuit affirmed the bankruptcy court's determinations and concluded that Section 365(n) did not apply to Mission’s rights to be the exclusive distributor of Tempnology’s products, or to the trademark license. The appellate court also held that Mission's right to use Tempnology’s trademarks did not otherwise survive rejection of the agreement.

In its petition for certiorari, Mission noted that there is a split among the circuits on the question of whether rejection terminates an intellectual property licensee’s rights. While the Fourth Circuit had held that a debtor-licensor’s rejection of an agreement to license intellectual property terminated the licensee’s right to continue using the intellectual property, the Seventh Circuit had held that rejection of a trademark license did not terminate the licensee’s right to use the debtor’s trademarks. Mission argued that the First Circuit, in adopting the view of the Fourth Circuit by deciding that rejection of a license agreement terminates a licensee’s rights, was incorrect, and that its holding was contrary to the text and purpose of the Bankruptcy Code. According to Mission, "By treating rejection as a breach, §365 makes clear that if the licensee’s rights under the agreement would survive the debtor’s breach outside bankruptcy, they survive rejection inside bankruptcy." Trademarks were no exception to this rule, Mission contended.

The petition for certiorari presented the following two questions:

  1. 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.
  2. Whether an exclusive right to sell certain products practicing a patent in a particular geographic territory is a "right to intellectual property" within the meaning of §365(n) of the Bankruptcy Code.

The Court’s grant of review was limited to the first question.

The petition in Mission Product Holdings, Inc. v. Tempnology LLC, Dkt. No. 17-1657, was granted on October 26, 2018.

Attorneys: Danielle Mary Spinelli (Wilmer Cutler Pickering Hale and Dorr LLP) for Mission Product Holdings, Inc. Lee Harrington (Nixon Peabody LLP) for Tempnology, LLC n/k/a Old Cold LLC.

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

MainStory: TopStory Trademark

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