Mission Product Oral Argument Promises Certainty on Long Unresolved Question

Mission Product Holdings v. Tempnology LLC was argued last week at the Supreme Court and seeks to solve a circuit split regarding the effects of bankruptcy proceedings on trademark licenses. The case asks the nation’s highest court to determine if the rejection of a license in bankruptcy terminates the licensee’s right to to the trademarks or whether that license rejection only constitutes a breach by the licensor, in which case the licensee can still use the marks. The International Trademark Association (INTA) has dubbed the issue presented as “the most significant unresolved legal issue in trademark licensing.”

Following our in-depth guest report on the oral argument, IPWatchdog asked those following the case to provide their take on the arguments and potential implications of the justices’ questioning.

Ruling for Licensees Likely

Robert Gerstein, Marshall, Gerstein & Borun

Bankruptcy law generally recognizes the unfairness to a licensee of terminating its rights simply because the licensor is bankrupt. While the bankruptcy code clearly prevents that unfairness for patent and copyright licensees, trademark licensees are treated like any other contracting party, whose rights turn on whether the debtor-licensor “rejects” the contract, and if so, the legal effect of the rejection. In Mission Products, the license was rejected, but circuits are split on whether that means the licensee’s rights to trademarks are terminated, or they continue, with the debtor-licensor simply freed of any other obligation it has under the license.

Like essentially every commentator and lower court, the Supreme Court will undoubtedly recognize the unfairness inherent in allowing a licensor to terminate licensed trademark rights, simply because it is in bankruptcy. However, to find for the licensee, Mission Products, the Court will have to grapple with the import of Congress’s grant of explicit protection for patent and copyright licensees, while leaving trademarks out of the statute. The Court will likely also have to deal with whether a debtor-licensor must monitor the quality of the licensee’s goods, an absolute requirement outside the context of bankruptcy if the licensor wants to protect the validity of its trademarks. Mission Products has provided the court with a roadmap for dealing with both of these issues, so it seems likely that the Court will opt to protect trademark licensees, at least under some circumstances.

A Surprisingly Spirited Debate

Patrick Dinardo, Sullivan & Worcester

What struck me is how many justices weighed in with questions on such an esoteric bankruptcy question. It was indeed a spirited argument, with lots of back and forth, and I doubt very much that the Court will decide to sidestep the issue presented by determining the question moot. Rather, the justices were very engaged and interested in what happens to the trademark if the bankrupt licensor is not able to monitor quality control of the mark. Some members of the Court seemed to accept the distinction between the obligation to maintain the mark (which they all agreed could be rejected by the debtor-licensor) and the right to use it. That seems favorable to the licensees, who argue that even if the licensor rejects the contract (i.e. breaches and fails to meet its QC monitoring obligations), it should not be able to take back by reason of its own breach, the license rights already granted pre-petition. It will be very interesting to see how the Court comes out on this question.

Predictability Would be Welcome

Christopher Bolen and Taylor Ey, Womble Bond Dickinson

Mission Products provides the Supreme Court the much-needed opportunity to resolve a split in the Circuits regarding how trademark licenses should be treated upon a debtor-licensor’s bankruptcy. If the Court upholds the lower court decision, a debtor-licensor’s rejection of a trademark license will equate to a right of rescission. A solvent trademark licensee would lose its rights to use the licensed marks and presumably face substantial economic losses. The Bankruptcy Code clearly states that rejection of an executory contract is a breach (not rescission). Upholding the petitioner’s position, on the other hand, will provide greater predictability to trademark licensing—an important business arrangement in today’s brand-driven economy.

Could Go Either Way—But Amicus Briefs May Tip the Scale

Robert Gayda, Seward & Kissel LLP

The question before the Supreme Court in Mission Product Holdings Inc. v. Tempnology, LLC has been unresolved for 30 years. The answer will have a significant impact on the rights of trademark licensees. The decision will either permit such licensees to retain their rights under a license agreement irrespective of a debtor-licensor’s “rejection” of the license agreement or allow debtors to unilaterally end the relationship. Outside of the significant impact of the decision, [it] will be interesting because the Court must consider competing interests – the Bankruptcy Code policy of providing debtors with a “fresh start” versus the Congressional intent to protect licensees in a licensor’s bankruptcy. The Court could rule either way, although amicus support has been one-sided in favor of protecting licensees.

Quality Control Focus Suggests Court May Distinguish Trademarks

Scott Bluni, Kacvinsky Daisak Bluni

The justices kept coming back to questions regarding a trademark licensor’s quality control obligations, and whether such obligations distinguish trademarks from other forms of intellectual property. That is, if a trademark licensor can abandon through license rejection its affirmative obligations to police the use and quality control of the licensed mark, the licensed mark itself could become valueless, making the license meaningless. In this way, the quality of the mark and the identity and goodwill of the licensor are inextricably linked, in contrast to other forms of intellectual property. This line of questioning seems to suggest that the Justices do not see a clear parallel between trademarks and other forms of intellectual property in the context of Section 365(n) of the Bankruptcy Code, which, although limited to patents and copyrights, allows an intellectual property licensee to elect to either treat a debtor-licensor rejected license as terminated by breach of the licensor or to retain its rights as licensee.

Licensee Looks Like the Good Guy—But That May Not Be Enough

Christian W. Liedtke, acuminis

Reading the crystal ball, it may be safe to say that there seems to be some consensus among the justices that, when applying a legal realist view and considering the situation from a “good guy,-bad guy” perspective, the licensee in this case looks like the “good guy”. The solicitor general succinctly summarized the problem when stating that allowing a bankrupt trademark owner to rescind a license would be akin to “pull[ing] the rug out from under” trademark licensees “to an extortionate choice between paying a higher royalty payment or shutting down the business and firing all the workers.”

Nevertheless, sentiments for trademark licensees alone do not provide the Court with a sufficient basis to find in the licensee’s favor. Many commentators focused on the issue of quality control as a deciding factor. That focus seems to unnecessarily complicate the issues and may result in unfair advantages to bankruptcy licensors. Justice Alito succinctly raised this issue when remarking in response to a statement by the licensor’s attorney: “… I do not understand why there would be a special rule for trademark, outside bankruptcy, that would be predicated on the licensor’s failure to exercise the quality control…. It doesn’t seem to make any sense.”

Many commentators, perhaps fueled by the legal realist desire that justice should be delivered for “the good guy”–a sentiment I share–have suggested that the Supreme Court’s ruling should be limited to trademark licensees. This would soften the blow of the Court’s decision and help agree the path toward what may be viewed as a just outcome. However, at least Justice Sotomayor was clear that “… there is no way to do that, even under [the licensor’s] interpretation.”