Two fundamental goals of chapter 11 of the Bankruptcy Code are rehabilitating a debtor’s business and maximizing the value of the debtor’s estate for the benefit of various stakeholders.
A debtor's decision to assume or reject an executory contract is typically given deferential treatment by bankruptcy courts under a "business judgment" standard. Certain types of nondebtor parties to such contracts, however, have been afforded special protections. For example, in 1988, Congress added section 365(n) to the Bankruptcy Code, granting some intellectual property licensees the right to continued use of licensed property, notwithstanding a debtor's rejection of the underlying license agreement.
Trademark licensees won a victory on July 9, 2012, when the Court of Appeals for the Seventh Circuit issued its decision in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC. The opinion holds that the rights of a trademark licensee do not automatically terminate when its license agreement is rejected by a trademark owner in bankruptcy. Nevertheless, the significance of that victory will only become clarified if and when other courts, including possibly the Supreme Court, and Congress address the issues raised in Sunbeam.
This past May, in a highly-anticipated decision, the Supreme Court held in Mission Product Holdings, Inc. v. Tempnology, LLC that a debtor’s rejection of an executory contract under Section 365 of the Bankruptcy Code has the same effect as a breach of contract outside of bankruptcy.
On May 20, 2019, the United States Supreme Court ruled that a debtor-licensor’s ‘rejection’ of a trademark license agreement under section 365 of the Bankruptcy Code does not terminate the licensee’s rights to continue to use the trademark. The decision, issued in Mission Product Holdings, Inc. v. Tempnology, LLC, resolved a split among the Circuits, but may spawn additional issues regarding non-debtor contractual rights in bankruptcy.
The Court Tells Debtors, “No Take Backs”
The United States Supreme Court has agreed to address “[w]hether, 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 nonbankruptcy law.” The appeal arises from a First Circuit decision, Mission Prod. Holdings, Inc. v.
In the recently decided case, Mission Product Holdings, Inc. v. Tempnology, LLC, the United States Court of Appeals for the First Circuit took a hardline position that trademark license rights are not protected in bankruptcy. Bankruptcy Code section 365(n) permits a licensee to continue to use intellectual property even if the debtor rejects the license agreement.
The Delaware bankruptcy court recently decided that a debtor could not assign a trademark license absent the consent of the licensor. The court concluded that federal trademark law and the terms of the license precluded assignment without consent. Because the debtor could not assign the license under any circumstances (consent was not forthcoming), the court held that cause existed to annul the automatic stay to permit the licensor to “move on with its trademark and its business.”
The Bankruptcy Code generally permits intellectual property licensees to continue using licensed property despite a licensor’s bankruptcy filing. However, because the “intellectual property” definition in the Bankruptcy Code does not include “trademarks,” courts have varied on whether trademark licensees receive similar protection. A New Jersey bankruptcy court recently grappled with this issue, concluding that trademark licensees may retain their trademark rights.