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:

It is hard to deny the growing sense of uncertainty that has developed since 2011 when the Bankruptcy Rules were amended to add Rule 3002.1 which requires, among other things, a notice to be filed itemizing any post-petition fees, expenses or charges incurred in connection with their claim.  With more and more disputes arising between Chapter 13 creditors, debtors and trustees over the reasonableness and entitlement of those fees it is imperative that creditors understand the best practices for recovering the full amount of their fees and how to defend against any unwanted objections.

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.