The U.S. Supreme Court provided much-needed clarity on the effect bankruptcy has on the licensor’s right to revoke a trademark license. On May 20, 2019, SCOTUS decided, in an 8-1 decision, that “A debtor’s rejection of an executory contract under Section 365 of the Bankruptcy Code has the same effect as a breach of that contract outside bankruptcy. Such an act cannot rescind rights that the contract previously granted.” Mission Product Holdings, Inc. v. Tempnology, LLC NKA Old Cold LLC No. 17-1657 (U.S. May 20, 2019).
An April 12, 2019 Delaware Bankruptcy Court decision in the Sports Authority Chapter 11 case (In re TSAWD Holdings, Inc.) is an important reminder for sellers of goods on properly obtaining security in the goods they sell, to insure payment from the customer.
In an 8-1 decision, the Supreme Court settled a long-standing circuit split regarding the impact of bankruptcy filings on trademark licenses. Until May 20th, brand owners in some jurisdictions could use bankruptcy protections to terminate the rights of third parties to use its licensed trademarks. Now, it is clear that a bankrupt licensor cannot rescind trademark license rights. Licensees can continue to do whatever their trademark licenses authorize, even if the licensor has filed for bankruptcy.
The court noted that the DOJ might prosecute cannabis-related businesses under the CSA, notwithstanding plan confirmation. Thus, Garvin may have foreclosed any future DOJ CSA-based noneconomic objections to cannabis reorganizations.
In Mission Product Holdings Inc. v. Tempnology LLC, No. 17-1657, the Supreme Court has held that a debtor’s rejection of an executory contract does not abrogate the rights others enjoy under that contract. Although the Court’s ruling specifically dealt with rights to a trademark license, the reasoning appears broader than that. The Supreme Court has in effect done away with a debtor’s right to reject any lease, concession, license, or agreement and then prevent a counterparty from enjoying the use of the rights previously granted.
Yesterday the U.S. Supreme Court ruled that bankrupt trademark licensors cannot unilaterally rescind trademark license rights previously granted, resolving a longstanding split among the circuits and providing much needed certainty to intellectual property (IP) licensors and licensees. In fact, the International Trademark Association had dubbed this "the most significant unresolved legal issue in trademark licensing."
Prior to Monday, May 20, 2019, the rights of a trademark licensee to continue to use the mark after the licensor “rejected” the license in bankruptcy remained an unresolved legal issue with licensees left scrambling. If the Chapter 11 Debtor “rejects” the license contract, then must the licensee immediately stop all sales of products bearing the mark and “get in line” with other unsecured creditors for its damages? Or, can they continue to sell products bearing the mark when the trademark owner expressed to desire to monitor the proper and effective use?
Yesterday, in Mission Product Holdings v. Tempnology LLC, the Supreme Court held that a trademark licensee may continue using a licensed trademark after its licensor files for bankruptcy and rejects the relevant license agreement. While a debtor-licensor may "reject" a trademark license agreement under Section 365 of the Bankruptcy Code, such rejection is only a breach of the agreement and does not allow the licensor to revoke the licensee's rights.
Previously published in Bankruptcy Law News, Vol. XXIV, No.28.
Courts possess inherent authority to regulate conduct in their courtrooms and to enforce their orders. All litigants who are unsuccessful in civil litigation are disappointed. Fortunately, after they have exhausted their remedies, virtually all of them recognize the binding nature of the adverse ruling and move on. But not everyone is so sanguine and accepting. Certain litigants refuse to accept the court’s ruling, and indeed, will objectively and affirmatively refuse to abide by such decrees.