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. However, the Bankruptcy Code definition of “intellectual property” does not include trademarks, leading a majority of courts to conclude that trademark rights fall outside the scope of licensee rights under section 365(n). The First Circuit’s decision marks a split from the Seventh Circuit’s decision in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 382 (7th Cir. 2012), which held that a trademark licensee retains basic contractual rights to use a debtor’s trademarks post-rejection.

In Tempnology, Mission entered into a co-marketing and distribution agreement with Tempnology (the Debtor). Under the agreement, Mission was granted: (i) an exclusive right to distribute certain manufactured products; (ii) a non-exclusive perpetual license to use Tempnology’s intellectual property other than its trademarks; and (iii) a non-exclusive, non-transferable, limited license to use Tempnology’s trademark and logo. After filing its chapter 11 petition, Tempnology moved to reject the co-marketing and distribution agreement. Mission objected and, relying on section 365(n), asserted that it retained its rights under the agreement, including the use of the intellectual property license, its exclusive product distribution rights and its right under the trademark license.

The Bankruptcy Court held that section 365(n) only protected Mission’s non-exclusive intellectual property rights and did not preserve Mission’s exclusive distribution rights or the trademark license. Mission appealed.

The Bankruptcy Appellate Panel for the First Circuit (BAP) agreed that the exclusive distribution rights were not preserved under section 365(n). The BAP also agreed that section 365(n) does not apply to trademarks because the definition of “intellectual property” under the Bankruptcy Code does not include trademarks. However, the BAP did not find that rejection of the agreement extinguished all of Mission’s rights under the trademark license. Instead, the BAP followed the Seventh Circuit’s ruling in Sunbeam and found that “because section 365(g) deems the effect of the rejection to be a breach of contract, and a licensor’s breach of a trademark agreement outside the bankruptcy context does not necessarily terminate the licensee’s rights, rejection under section 365(g) likewise does not necessarily eliminate those rights.” Thus, the BAP held that Mission’s post-rejection rights were governed by the terms of the agreement and non-bankruptcy law.

The First Circuit agreed that neither exclusive distribution rights nor trademarks were considered “intellectual property” under the Bankruptcy Code and thus neither were covered by section 365(n). Accordingly, section 365(n) did not preserve Mission’s exclusive distribution rights or its right to use the trademarks.

The First Circuit went on to reject the BAP’s support of Sunbeam, finding that the Sunbeam approach would impose a burden on a debtor, as the trademark owner, to monitor the quality of the trademark despite having rejected the contract. The Court noted that Sunbeam rested on the notion that it is possible to free the debtor from any continuing performance obligations under a trademark license even while allowing the licensee to continue to use the trademark. The Court reasoned that trademarks, unlike patents, were public-facing messages that required monitoring and control to maintain the goodwill associated with the trademark. Sunbeam’sapproach would allow Mission to retain the use of Tempnology’s “trademarks in a manner that would force the Debtor to choose between performing executory obligations arising from the continuance of the license or risking the permanent loss of its trademarks, thereby diminishing the value….” Such a restriction runs afoul of section 365(a) and invites further degradation of a debtor’s fresh start options. Accordingly, the First Circuit concluded that trademark licenses are unprotected from court-approved rejection, and Mission retained no rights post-rejection.

The First Circuit joins the majority of courts that have found a trademark licensee only has a claim for damages upon rejection of its license, despite a recent trend of cases protecting trademark licensee’s rights in bankruptcy. This decision marks a split among the circuits, which may ultimately be resolved by Congressional amendment to the definition of intellectual property in the Bankruptcy Code, or by the Supreme Court.