By Cheryl Beise, J.D.
A trademark owner’s rejection of an executory license agreement in bankruptcy has the same effect as a breach outside bankruptcy.
In an 8-1 decision, the U.S. Supreme Court has ruled that a debtor-licensor’s rejection of an executory license agreement Section 365 of the Bankruptcy Code has the same effect as a breach outside bankruptcy and that a trademark owner cannot revoke a licensee’s right to continue to use the owner’s marks. In reversing a decision of the U.S. Court of Appeals in Boston, the High Court resolved a circuit split regarding whether trademark licenses are protected from court-approved rejection during bankruptcy. Justice Elena Kagan delivered the opinion of the Court, which seven other justices joined. Justice Sonia Sotomayor filed a concurring opinion, and Justice Neil Gorsuch filed a dissenting opinion expressing his view that the Court lacked subject matter jurisdiction because the underlying controversy was moot (Mission Product Holdings, Inc. v. Tempnology, LLC, May 20, 2019, Kagan, E.).
The dispute in this case involved a 2012 intellectual property licensing and product distribution agreement between the Tempnology, LLC (now known as Old Cold LLC) and Mission Product Holdings, Inc. When Tempnology filed a petition for voluntary bankruptcy under Chapter 11 in 2015, it moved to reject the parties’ 2012 agreement under 11 U.S.C. § 365(a). The agreement was set to expire in July 2016. The bankruptcy court approved Tempnology’s rejection and further held that the rejection terminated Mission’s rights to use Tempnology’s "Coolcore" trademarks, leaving Mission with only a claim for pre-petition breach of contract damages. The Bankruptcy Appellate Panel (BAP) reversed, relying on Section 365(g)’s statement that rejection "constitutes a breach" to hold that rejection does not terminate rights that would survive a breach of contract outside bankruptcy. In support of its decision, the BAP cited Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012), in which the Seventh Circuit held that while rejection eliminates the debtor-licensor’s obligation to perform under the license agreement, it does not terminate a licensee’s right to continue to use the trademarks or its obligations to pay royalties for the duration of the agreement. The U.S. Court of Appeals in Boston rejected the BAP’s judgment and reinstated the bankruptcy court’s decision. The First Circuit reasoned that a licensee cannot continue using a debtor-licensor’s marks if the debtor-licensor is released from the burden of monitoring and exercising control over the licensee’s use.
Mootnesss. Before reaching the merits, the High Court rejected Tempnology’s argument that the case was moot. The Court found that Mission presented a plausible claim for lost profits damages arising from its inability to use the Coolcore trademarks between the time Tempnology rejected the license agreement and the agreement’s scheduled expiration date. While Mission ultimately may not recover its damages for a variety of reasons, its claim was sufficiently viable to preserve a live controversy, in the Court’s view. Moreover, Mission did not voluntarily cease using the Coolcore marks, as Tempnology maintained; rather, the bankruptcy court’s order prevented Mission from using the marks through the agreement’s expiration. Although the bankruptcy estate had recently distributed all of its assets, leaving nothing to satisfy Mission’s judgment, Mission argued that it could seek the unwinding of prior distributions to get its fair share of the estate.
Debtor’s rejection under Section 365. The Court next addressed the merits question: the effect of a debtor’s (or trustee’s) rejection of a contract under Section 365 of the Bankruptcy Code.
Section 365(a) gives a debtor the option, subject to court approval, to "assume or reject any executory contract." Section 365(g) provides that rejection "constitutes a breach" of an executory] contract, deemed to occur "immediately before the date of the filing of the petition." As term "breach" is neither a defined nor a specialized bankruptcy term, "it means in the Code what it means in contract law outside bankruptcy," the Court said.
Under ordinary contract principles, a breach of a trademark license agreement does not revoke the license or stop the licensee from doing what the contract allows. The same consequences follow in bankruptcy. While a debtor can stop performing its remaining obligations under the agreement, the debtor cannot rescind the license already conveyed, the Court explained. The rejection-as-breach rule preserved in Section 365 "reflects a general bankruptcy rule: The estate cannot possess anything more than the debtor itself did outside bankruptcy," the Court said. On the other hand, the rejection-as-rescission rule would circumvent the Code’s stringent limits on "avoidance" actions. "If trustees (or debtors) could use rejection to rescind previously granted interests, then rejection would become functionally equivalent to avoidance," the Court reasoned.
The Court declined to read a negative inference from the fact that trademark licenses are not included in any of the statutory exceptions Section 365 carves out for specific types of contracts. For example, Section 365(n) provides that licensees of some intellectual property retain contractual rights after rejection. Two years after the Fourth Circuit’s 1985 decision in Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985), Congress amended the Bankruptcy Code to carve out an exception for licensees of patents, copyrights, and trade secrets, but not trademarks. "Congress’s repudiation of Lubrizol for patent contracts does not show any intent to ratify that decision’s approach for almost all others," the Court said. "Congress did nothing in adding Section 365(n) to alter the natural reading of Section 365(g)—that rejection and breach have the same results."
The Court also was not persuaded by Tempnology’s argument that a trademark owner’s loss of control (naked licensing)—risking possible loss of rights in a trademark as an asset valuable to the estate—provides an adequate reason for repudiation of a trademark license agreement. This argument could not overcome the plain language of Sections 365(a) and (g). "Section 365 does not grant the debtor an exemption from all the burdens that generally applicable law—whether involving contracts or trademarks—imposes on property owners," the Court said.
The Court concluded that a debtor’s rejection of an executory contract under Section 365 of the Bankruptcy Code has the same effect as a breach of that contract outside bankruptcy. Such an act cannot rescind rights that the contract previously granted, and a debtor-licensor’s rejection cannot revoke a trademark license.
Concurring opinion. Justice Sotomayor agreed with the Court that a debtor’s choice to reject an executory contact under Section 265 functions as a breach of the contract rather than unwinding the rejected contract as if it never existed. However, Justice Sotomayor wrote separately to clarify that not every trademark licensee has the unfettered right to continue using licensed marks post-rejection. Justice Sotomayor pointed out that "the baseline inquiry remains whether the licensee’s rights would survive a breach under applicable nonbankruptcy law." Justice Sotomayor also noted that the Court’s holding confirms that due to their exclusion from Section 365(n), trademark licensees’ post-rejection rights and remedies may in some cases be more expansive in some respects than those possessed by licensees of other types of intellectual property. "Although these differences may prove significant for individual licensors and licensees, they do not alter the outcome here," she said.
Dissenting opinion. In a dissenting opinion,Justice Gorsuch explained that he would not have taken up the petition because he did not view the facts of this case as presenting a live case or controversy. Mission sought to reverse the bankruptcy court’s declaration that it could no longer use Tempnology’s marks. However, after the bankruptcy court ruled, the license agreement expired by its own terms, "so nothing we might say here could restore Mission’s ability to use Tempnology’s trademarks," Justice Gorsuch said. Justice Gorsuch also opined that Mission had not presented a plausible legal theory for recovery of damages against Tempnology. "After all, when Tempnology asked the bankruptcy court to issue a declaratory ruling on a question of law, it was exercising its protected ‘First Amendment right to petition the Government for redress of grievances.’ And petitioning a court normally isn’t an actionable wrong that can give rise to a claim for damages," Justice Gorsuch said.
The case is No. 17-1657.
Attorneys: Danielle Mary Spinelli (Wilmer Cutler Pickering Hale and Dorr LLP) for Mission Product Holdings, Inc. Douglas Harry Hallward-Driemeier (Ropes & Gray, LLP) and Lee Harrington (Nixon Peabody LLP) for Tempnology, LLC n/k/a Old Cold LLC.
Companies: Mission Product Holdings, Inc.; Tempnology, LLC
MainStory: TopStory Trademark
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