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.
In an 8-1decision issued on May 20, the Supreme Court held that rejection of an executory trademark license agreement in a bankruptcy of the licensor is merely a breach, and not a termination or rescission, of the agreement. The licensee retains whatever rights it would have had upon a breach of the agreement prior to bankruptcy and can continue to use the trademarks pursuant to its contractual rights under applicable law. Mission Product Holdings, Inc. v. Tempnology, LLC, 587 U.S. ___, No. 17-1657 (May 20, 2019).
Background
On May 20, 2019, an 8-1 majority of the United States Supreme Court held that a bankruptcy debtor’s rejection of a trademark license agreement does not constitute a rescission of the license under the Bankruptcy Code. This resolved a split among federal circuit courts previously addressing the issue. Mission Product Holdings, Inc. v. Tempnology, LLC, No. 17-1657 (May 20, 2019).
The US Supreme Court, in an 8-1 decision authored by Justice Kagan, reversed a decision of the First Circuit and held that the rejection of a trademark license agreement under Bankruptcy Code Section 365 (11 U.S.C. § 365) constitutes a breach of the license agreement that has the same effect as a breach outside bankruptcy. Therefore, the licensor’s rejection of the license agreement does not rescind or terminate the licensee’s rights under the license agreement, including the right to continue using the mark. Mission Product Holdings Inc. v. Tempnology, LLC, Case No.
On May 20, 2019, the Supreme Court settled a circuit split concerning whether a debtor’s rejection of a trademark license under § 365 of the Bankruptcy Code “deprives the licensee of its rights to use the trademark.” In a decision written by Justice Kagan, the Supreme Court held that while a debtor-licensor’s rejection of a trademark license results in a pre-petition breach, it does not constitute a rescission of the contract, and thus the licensee may retain the rights granted to it under the license.
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 this week resolved a long-standing open issue regarding the treatment of trademark license rights in bankruptcy proceedings. The Court ruled in favor of Mission Products, a licensee under a trademark license agreement that had been rejected in the chapter 11 case of Tempnology, the debtor-licensor, determining that the rejection constituted a breach of the agreement but did not rescind it.
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: