In an 8-1 decision on May 20, 2019, the Supreme Court of the United States held in Mission Product Holdings Inc. v. Tempnology, LLC that a debtor's rejection of a trademark license under Section 365 of the Bankruptcy Code amounts to a breach of the license agreement and the licensee retains the rights to the licensed marks for the remainder of the license term.

The opinion, authored by Justice Elena Kagan, concisely resolved a circuit split, stating:

This week, in Mission Product Holdings Inc. v. Tempnology, LLC, the Supreme Court settled a dispute between the Circuit Courts regarding how trademark licenses are treated when a licensor declares bankruptcy. Under the Bankruptcy Code, debtors may reject executory contracts—or contracts that have not been fully performed—upon declaring bankruptcy. Although the Bankruptcy Code explicitly dictates that when a licensor rejects a patent license, the licensee may continue to use the patent so long as it pays royalties, it contains no such provision for trademark licenses.

In February, following oral argument before the U.S. Supreme Court in Mission Product Holdings, Inc. v. Tempnology, LLC, we wrote about the hugely important trademark law issue presented by this case, namely: If a bankrupt trademark licensor “rejects” an executory trademark license agreement, does that bankruptcy action terminate the licensee’s right to continue using the licensed trademark for the remaining term of the agreement?

HIGHLIGHTS:

The Supreme Court’s Decision in Mission Product Holdings, Inc. v. Tempnology

Many Chapter 11 debtors have reorganization plans that reject contracts in droves and they never look back. Why? Rejection is part of the debtor’s “fresh start”. A debtor “monetizes” its old contracts into prepetition claims, often paying only cents on the dollar in damages. But where does that leave counterparties? If that contract was a trademark license, the licensee might be in the catbird seat.

Trademark licensors and licensees, as well as their stakeholders (including lenders), should heed the U.S. Supreme Court’s decision in Mission Product Holdings, Inc. v. Tempnology, LLC n/k/a Old Cold, LLC, No. 17-1657. The Justices resolved a long-standing question arising from the intersection of bankruptcy and trademark law: whether a debtor/licensor’s rejection of a trademark license terminates the licensee’s right to use a trademark after rejection.

Trademark licensors and licensees, as well as their stakeholders (including lenders), should heed the U.S. Supreme Court’s decision in Mission Product Holdings, Inc. v. Tempnology, LLC n/k/a Old Cold, LLC, No. 17-1657. The Justices resolved a long-standing question arising from the intersection of bankruptcy and trademark law: whether a debtor/licensor’s rejection of a trademark license terminates the licensee’s right to use a trademark after rejection.

The US Supreme Court has reversed the First Circuit’s ruling in Mission Products (Mission Prod. Holdings v. Tempnology, LLC (In re Tempnology, LLC), 879 F.3d 389 (1st Cir. 2018)), thereby allowing the trademark licensee in that case to continue using the licensed trademark despite the debtor trademark licensor’s rejection of the underlying trademark agreement in its bankruptcy case.

The Supreme Court’s recent decision in Mission Product Holdings, Inc., v. Tempnology, LLC  clarifies that a debtor-licensor’s rejection of a trademark license under § 365(a)  of the Bankruptcy Code is treated as a breach, and not as a rescission, of that license under § 365(g).  The Court held that if a licensee’s right to use the trademark would survive a breach outside of bankruptcy, that same right survives a rejection in bankruptcy.

On May 20, 2019, the U.S. Supreme Court ruled in Mission Product Holdings, Inc. v. Tempnology, LLC, 587 U.S. ___, that a debtor’s ability to reject executory contracts under Section 365(a) of the Bankruptcy Code does not permit the debtor to rescind trademark licenses. In concluding that trademark licensees cannot unilaterally be deprived of their rights to use a debtor’s mark, the Court resolved a long-standing circuit split that the International Trademark Association had referred to as “the most significant unresolved legal issue in trademark licensing.”