Supreme Court to Determine if Bankruptcy Code Allows Debtor to Terminate Trademark License Rights

The U.S. Supreme Court has recently agreed to hear Mission Product Holdings Inc. v. Tempnology, LLC on appeal from the Court of Appeals for the First Circuit. The case will ask the nation’s highest court to determine whether 11 U.S.C. § 365, the statute in U.S. bankruptcy code regarding executory contracts and unexpired leases, requires that a debtor-licensor’s rejection of a trademark license agreement in bankruptcy terminates rights of the licensee that would survive the licensor’s breach under applicable non-bankruptcy law. The Supreme Court declined to take up a second question presented on whether an exclusive right to sell certain products practicing a patent in a particular geographic territory is a “right to intellectual property” within Section 365(n) of U.S. bankruptcy code.

In November 2012, Mission Product Holdings and Tempnology entered into a co-marketing and distribution agreement which gave Mission a non-exclusive, worldwide, perpetual license to make and sell chemical-free cooling fabric products, such as towels and headbands, covered by Tempnology’s issued and pending patents. The agreement also gave Mission the non-exclusive right to use Tempnology’s trademarks on the fabric products distributed by Mission as well as the exclusive right to sell Tempnology’s patented fabric products using Tempnology’s trademarks in the United States.

In June 2014, Mission exercised its right to give notice to terminate the contract, triggering a two-year wind-down period. Tempnology tried to terminate the agreement for cause the following month but an arbitrator ruled in July 2015 that Tempnology’s termination was improper. Further arbitration was set to determine whether Tempnology had breached the agreement by failing to perform but those proceedings were stayed following a bankruptcy filing made by Tempnology in September 2015. The day after filing for bankruptcy, Tempnology moved to reject its agreement with Mission under Section 365(a), a motion granted by the bankruptcy court subject to Mission’s election to preserve its rights to the intellectual property under Section 365(n). The bankruptcy court then determined that the scope of the IP rights retained by Mission included the non-exclusive worldwide license but not the exclusive U.S. rights.

Mission appealed this holding to the Bankruptcy Appellate Panel (BAP) for the First Circuit which affirmed that Mission couldn’t retain its exclusive rights under the agreement. However, the BAP reversed the lower bankruptcy court’s findings on the trademark rights, finding that rejection of an agreement does not allow a debtor-licensor to revoke rights which have been granted to a licensee. On appeal to the First Circuit, the panel split 2-1 on the issue of the trademark rights, holding that the rejection of the agreement terminated the rights. The majority held that maintaining Mission’s trademark rights would have forced Tempnology to monitor and exercise control over the marks to protect their validity, over a dissent which held that the BAP was correct in holding that Tempnology’s rejection of the agreement shouldn’t eviscerate Mission’s trademark rights.

Mission argued in its petition for writ that SCOTUS should grant writ on the question of whether rejection of an agreement terminates a licensee’s rights because there is an acknowledged split among the circuit courts on that question. In the Fourth Circuit’s 1985 decision in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., the court held that a debtor-licensor’s rejection of an agreement to license a metal-coating process terminated the licensee’s right to continue practicing the intellectual property covering the metal-coating process. This ruling was controversial in that it allowed the debtor-licensor to not only excuse its performance obligations under the agreement but also to take back IP rights already granted to a licensee. Congress attempted to address this controversy by codifying Section 365(n) in bankruptcy code, but Mission argued that this statute doesn’t clearly answer the question regarding trademark rights. The circuit split on this issue is made clear by the Seventh Circuit’s 2012 decision in Sunbeam Products, Inc. v. Chicago American Mfg., which expressly rejected Lubrizol in finding that rejection of a trademark license didn’t terminate the licensee’s rights to use the debtor’s trademarks.

Further, Mission argued that the Supreme Court should take up the question because the First Circuit’s decision is wrong. Under Section 365(g)(1) of U.S. bankruptcy code provides that rejection of a contract “constitutes a breach of such contract” and doesn’t grant any special powers to the debtor. The rule in Lubrizol adopted by the First Circuit’s decision has been widely criticized as providing an “avoiding” power to the debtor allowing the debtor to reclaim estate interests in property in a way that isn’t available under U.S. bankruptcy code. Such power is not available to parties terminating an agreement either within or outside bankruptcy, Mission argues, giving an example of a landlord that breaches a lease agreement by failing to heat or maintain a property; such a breach doesn’t give the landlord the power to terminate the lease and evict the tenant.

Image Source: Deposit Photos.