Breaking a Circuit split, on May 20th the Supreme Court handed down an anticipated decision in Mission Product Holdings, Inc. v. Tempnology, LLC, and held that a trademark licensor cannot rescind licensed rights in bankruptcy proceedings. Instead, a licensor’s rejection of a license agreement operates as a breach of contract outside of the bankruptcy context, rather than a repudiation, and trademark rights conveyed under the license remain intact.
Bankruptcy Code 11 U.S.C. § 365(a) provides that a debtor in bankruptcy may assume or “reject” an executory contract where neither party has finished performing as of the bankruptcy filing date. The debtor can assume contracts that are valuable, but “reject” contracts that are burdensome (or use the threat of rejection to seek to negotiate better terms). Section 365(g) equates rejection of a contract to a “breach” of that contract. The issue before the Supreme Court, however, was how to interpret the consequences of this “breach” in terms of whether a licensee would retain rights in the licensed trademarks. By this opinion, the Supreme Court has now held that the trademark rights granted under such licenses continue even after the breach.
Defendant Tempnology, LLC produces clothing and accessories marketed as “Coolcore” that help people stay cool while exercising. It had granted Mission Product Holdings, a non-exclusive license to use the Coolcore trademarks in the United States and around the world. Tempnology filed for Chapter 11 bankruptcy in September 2015 and “rejected” the license under 11 U.S.C. § 365(a). The Bankruptcy Court held that rejection meant that the trademark rights Mission had obtained no longer belonged to them, a decision that was reversed by the Bankruptcy Appellate Panel, but then reinstated by the Court of Appeals for the First Circuit. Reasoning that the text of Section 365 and the l principles of bankruptcy law call for rejection to be treated as a breach of contract rather than a repudiation, the Supreme Court reversed.
In reaching this conclusion, the Supreme Court focused on the word “breach” in the text of Section 365(g): rejection “constitutes a breach of [an executory] contract.” The Court reasoned that because “breach” is neither defined nor specific to bankruptcy, it is appropriate to look at contract law outside of bankruptcy for guidance. Outside of the bankruptcy context, a breach of contract, for instance, in the case of a dealer who licenses a photocopier to a law firm, would not require the law firm to send back the photocopier; rather, the law firm would have the choice of how to act based on the breach. The same result should follow here. According to the Court, this reading of the statute aligns with the Bankruptcy Code’s limitations on “avoidance” actions, where a trustee should be restricted to unwinding pre-bankruptcy transfers in only limited circumstances— trademark licenses excluded. The Court also disagreed with Tempnology’s argument that Section 365’s list of circumstances where counterparties to certain agreements will retain their rights does not include trademark licenses. Instead, this list has evolved with time and since Congress has been confronted with these issues, the list is not telling of what Congress intended for trademark licenses.
*Meghna Prasad, a Baker Botts Law Clerk, assisted in the preparation of this article.
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