LEGAL NOTE—OCTOBER 2019
CASE: Mission Product Holdings, Inc.v. Tempnology, LLC, 139 S.Ct. 1652 (5/20/2019)
QUESTION: May a trademark licensee continue to use its mark even though the debtor-licensor rejects the subject license agreement in bankruptcy?
ANSWER: Yes. In Mission Product Holdings, Inc. v. Tempnology, LLC, 139 S.Ct.1652 (5/20/2019), the Supreme Court resolved a significant circuit split by holding, in an 8-1 decision, that the debtor's rejection of a trademark license merely constitutes a breach, rather than a termination, and therefore, the licensee may continue to exploit the debtor's trademark despite rejection of the license agreement in the bankruptcy proceeding. Go here for a copy of this case.
FACTS: Tempnology, LLC, manufactured clothing and accessories designed to stay cool while exercising. It marketed its products under the brand name “Coolcore” and used trademarks (e.g., logos and labels) to sell its merchandise. Tempnology entered into a contract with Mission Product Holdings, Inc. (“Mission”) that, inter alia, gave Mission an exclusive license to distribute specified Coolcore products in theUnited States, and a non-exclusive license to use the Coolcare trademark around the world. Before the expiration of the subject contract, Tempnology filed a petition for Chapter 11 bankruptcy and asked the bankruptcy court to allow it to “reject” the licensing agreement and prevent Mission from using the Coolcore trademark. The bankruptcy court ruled in favor of Tempnology, but the Bankruptcy Appellate Panel (“BAP”) for the First Circuit, relying on a Seventh Circuit case, reversed and ruled in favor of Mission. The First Circuit reversed the BAP and reinstated the ruling of the bankruptcy court. The Supreme Court granted certiorari to resolve this split between the First and Seventh Circuits.
DISCUSSION: Bankruptcy Code Section 365(a) provides that a Chapter 11 debtor may assume or reject any executory contract, subject to bankruptcy court approval. A contract is "executory'' when some performance remains due on both sides, such that the non-performance of one parry will result in a breach of that agreement. Section 365(g) states that "the rejection of an executory contract [ ] constitutes a breach of such contract" immediately before the filing date of the bankruptcy. The practical consequences of this rejection are that the debtor is no longer required to perform, and that the non-bankrupt counter party is entitled to a claim for damages; however, as a practical matter, any damages claim can be discharged in bankruptcy, and the counter party may only receive cents-on-the dollar for its damage claim, if anything at all.
What if, however, the non-bankrupt counter party wants to receive the benefits of the rejected contract? Typically, the non-bankrupt party cannot force the debtor cannot to perform following rejection. Section 365(n) provides certain exceptions to this general rule, namely, that a licensee of certain intellectual property can continue to use such intellectual property, provided that it continues to perform its duties according to the license. Trademarks, however, are excluded from the Bankruptcy Code’s definition of "intellectual property”; therefore, lower courts were faced with the immediate issue of whether the licensee can continue to use the debtor's trademark despite the debtor’s rejection of the license?
The Supreme Court in Mission held that rejection of an executory contract operates as a breach giving rise to a prepetition damages claim, but it does not rescind the agreement. In essence, the Court adopted the Seventh Circuit’s reasoning in Sunbeam Products, Inc. v. Chicago Am. Mfg., LLC, 686 F.3d 372 (7th Cir. 2012), and relied upon non-bankruptcy contract law to determine whether a breach should be treated as a termination. As noted by the Court, outside of bankruptcy, the non-breaching party gets to decide whether to continue performing its own obligations under the agreement, and the breaching party (the debtor) cannot terminate the agreement.
Although Mission has clarified the rights of trademark licensees in bankruptcy, it has potentially raised new questions about the effect of rejection in other contexts. The Mission decision is arguably not limited to trademark licenses. The Court discussed general contract principles and the applicability of Section 365(g) to all executory contracts. Mission may therefore raise the question of whether (and to what extent) it has diminished the power of rejection in bankruptcy and made it more difficult for a debtor to shed burdensome obligations. Mission may potentially hinder the ability of some debtors and their creditors to maximize the value of a bankruptcy estate.