On May 20, 2019, the Supreme Court answered the longstanding question of what happens to a licensee’s right to use a trademark under a license agreement if a bankrupt licensor rejects the license agreement. The Court held that a licensor’s ability to reject a license agreement does not extinguish licensee’s rights under the trademark license and therefore, the licensee may continue to use the trademark under the terms of the license agreement.
The dispute arose from a licensing agreement between Tempnology, LLC and Mission Product Holdings, Inc. Tempnology manufactured clothing and accessories designed to stay cool when worn while exercising under the trademark COOLCORE. Tempnology entered into a license agreement with Mission that allowed Mission to use the COOLCORE trademark. The Agreement was to expire in July 2016 but in September 2015, Tempnology filed a petition for Chapter 11 bankruptcy and requested that the Bankruptcy Court allow it to reject the licensing agreement pursuant to Section 365(a) of the Bankruptcy Code.
Section 365(a) of the Bankruptcy Code allows a debtor to assume or reject executory contracts, including trademark license agreements. Several provisions under Section 365 identify contracts under which a counterparty may retain specific contractual rights despite the debtor’s rejection of the executory contract, including Section 365(n) which states that if the debtor is a licensor of a right to “intellectual property,” the licensee has the option to retain its rights under the agreement. At first glance, this would appear to be a non-issue: Trademarks are intellectual property and pursuant to Section 365(n), a licensee has the option to retain its rights under the license agreement and continue using the intellectual property. The catch is that “trademarks” are not included in the definition of “intellectual property” in the Bankruptcy Code. “Intellectual property” is defined to include trade secret, invention, process, design, or plant protected under Title 35, patent application, plant variety, work of authorship protected under Title 17 or work protected under chapter 9 of Title 17. See 11 USC Section 101(35)(B). The exclusion of trademarks from the definition of intellectual property created a split among the circuits of whether a bankrupt licensor that rejected a trademark license agreement effectively rescinded the license – meaning that the licensee no longer had the right to use the trademark or if the rejection was a breach of contract – meaning that the licensee could continue to use the trademark.
The Bankruptcy Court permitted Tempnology to reject its executory contract with Mission and held that Tempnology’s rejection of the license agreement revoked Mission’s right to use the COOLCORE trademark going forward. The Bankruptcy Appellate Panel reversed and held that per Section 365(g), Tempnology only breached the license agreement and a breach of a trademark license agreement does not eliminate rights that a party had already obtained. The Court of Appeals for the First Circuit reversed and reinstated the termination of the license agreement per the Bankruptcy Court’s decision.
In a 8-1 decision, the Supreme Court reversed the First Circuit and held that a bankrupt debtor’s rejection of an executory contract operates only as a breach and is not a rescission that would allow a licensor to revoke a trademark license agreement. Writing for the majority, Justice Kagan wrote, “[a] rejection breaches a contract but does not rescind it. And that means all the rights that would ordinarily survive a contract breach, including those conveyed here, remain in place.” Justice Kagan clarified that upon a debtor’s rejection of a trademark license, the debtor “can stop performing its remaining obligations under the agreement. But the debtor cannot rescind the license already conveyed. So the licensee can continue to do whatever the license authorizes.” The Court was unpersuaded by Tempnology’s argument that because “trademarks” was excluded from Section 365(n), that a different rule must apply: “That debtor’s rejection must extinguish the rights that the agreement had conferred on the trademark licensee.” Instead of focusing on Section 365(n) and the other exceptions provided in Section 365, which the Court declared to be a “mash-up of legislative interventions”, the Court based its holding on Section 365(g). Section 365(g) provides that a rejected executory contract constitutes a breach by the debtor. Trademark licensing, since it not included in the definition of “intellectual property” in Section 365(n) would fall under the general rule of Section 365(g) which would declare the bankrupt debtor’s rejection of the contract as a breach by the debtor, not a rescission of the license, and the licensee would still be allowed to act pursuant to the license agreement.
If you need help understanding your trademark rights, Astrachan Gunst Thomas, P.C. can help. Contact Jim Astrachan at 410-783-3550 (email@example.com) or Kaitlin Corey at 410-783-3526 (firstname.lastname@example.org).