The US Supreme Court held that under 11 U.S.C. § 365, a debtor’s rejection of an executory contract in bankruptcy has the same effect as a breach outside bankruptcy. The rejection does not rescind rights that the contract previously granted. Thus, a debtor-licensor’s rejection of a trademark license under §365 is a breach of contract, but does not revoke or terminate the trademark license.

In Depth

The US Supreme Court, in an 8-1 decision authored by Justice Kagan, reversed a decision of the First Circuit and held that the rejection of a trademark license agreement under Bankruptcy Code Section 365 (11 U.S.C. § 365) constitutes a breach of the license agreement that has the same effect as a breach outside bankruptcy. Therefore, the licensor’s rejection of the license agreement does not rescind or terminate the licensee’s rights under the license agreement, including the right to continue using the mark. Mission Product Holdings Inc. v. Tempnology, LLC, Case No. 17-1657 (May 20, 2019) (Kagan, Justice) (Sotomayor, Justice (concurring)) (Gorsuch, Justice (dissenting)).

Tempnology manufactured specialty products under the mark “Coolcore,” entered into a contract with Mis­sion Product that gave Mission an exclusive license to distribute certain Coolcore products in the United States and granted a non-exclusive license to use the mark “Coolcore” worldwide (License). Prior to expiration of the License, Tempnology filed a petition for Chapter 11 bankruptcy and asked the Bankruptcy Court to allow it to “reject” the License.

Section 365 of the Bankruptcy Code authorizes the trustee in bankruptcy, or a debtor in possession when applicable, to assume or reject certain executory contracts. The purpose behind §365 is to “allow a debtor to reject executory contracts in order to relieve the estate of burdensome obligations, while at the same time providing ‘a means by which a debtor can force others to continue doing business with it when the bankruptcy filing might otherwise make them reluctant to do so.’” Bankruptcy Code §365(g)(1) states that “the rejection of an executory contract … constitutes a breach of such contract … immediately before the date of the filing of the petition.”

Section 365(n) provides a special protection for the non-debtor licensees of “intellectual property” (as defined under the Bankruptcy Code). In the event that a debtor licensor rejects an intellectual property license agreement, the non-debtor licensee is given two choices: (1) the non-debtor licensee may treat the debtor’s rejection as a termination of the license agreement and file a claim against the debtor licensor in the amount of the licensee’s damages caused by the breach; or (2) the non-debtor licensee may elect to retain its rights under the executory license agreement, notwithstanding the debtor’s rejection thereof. The Bankruptcy Code’s definition of “intellectual property” includes trade secrets, patents and copyrights, but does not mention trademarks.

Prior to the Mission Product decision, courts were split on whether a trademark licensee retains the ability to use a debtor-licensor’s marks after the corresponding license is rejected in bankruptcy. The Court of Appeals for the Seventh Circuit had held that a trademark license agreement was not rescinded or terminated upon rejection of a trademark license agreement. Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012), whereas the Court of Appeals for the First Circuit had held that rejection constitutes complete termination of the licensee’s rights, including the right to use the mark. In re Tempnology, LLC, 879 F.3d 389 (1st Cir. 2018).

The Supreme Court affirmed the Seventh Circuit’s reasoning in Sunbeam and reversed the First Circuit. The Supreme Court reasoned that:

If the licensor breaches the agreement outside bankruptcy … the breach does not revoke the license or stop the licensee from doing what it allows. See, e.g., Sunbeam, 686 F. 3d, at 376 (“Outside of bank­ruptcy, a licensor’s breach does not terminate a licensee’s right to use [the licensed] intellectual property”). And because rejection “constitutes a breach,” §365(g), the same consequences follow in bankruptcy. The debtor can stop performing its remaining obligations under the agree­ment. But the debtor cannot rescind the license already conveyed. So the licensee can continue to do whatever the license authorizes.

The Court was unpersuaded by the debtor-licensor’s argument that the omission of trademarks from the definition of “intellectual property” and §365(n) creates a “negative inference” that the rejection of a trademark license constitutes a rescission that terminates the licensee’s rights: “Congress did nothing in adding Section 365(n) to alter the natural reading of Section 365(g) – that rejection and breach have the same results.”

Justice Sotomayor filed a concurring opinion joining the majority’s opinion in full and highlighting “two potentially significant features of [the Court’s May 20, 2019] holding”:

[1] the Court does not decide that every trademark licensee has the unfettered right to continue using li­censed marks postrejection … Spe­cial terms in a licensing contract or state law could bear on that question in individual cases. …

[2] Provisions in §365(n) mean that the covered intellectual property types are governed by different rules than trademark licenses.

Justice Gorsuch dissented, finding that it was not clear that there was an actual case or controversy: “[Petitioner] hasn’t come close to articulating a viable legal theory on which a claim for damages could succeed … where our jurisdic­tion is so much in doubt, I would decline to proceed to the merits.”

Practice note: IP licensing and bankruptcy professionals should review the Court’s decision and take note of Justice Sotomayor’s observations:

1. special terms in a trademark license agreement or state law could bear on the question of the right to continue using a mark after the licensor files for bankruptcy; and

2. other forms of intellectual property, such as trade secrets, patents and copyrights are governed by different rules than trademark licenses in bankruptcy.