Business Law Journal

On May 20, 2019, the United States Supreme Court resolved a circuit split and answered a significant previously unresolved legal issue in trademark licensing.  The Supreme Court held in Mission Product Holdings, Inc. v. Tempnology, LLC, No. 17-1657, 587 U.S. __ (2019), that a debtor-licensor’s rejection of an executory trademark licensing agreement in bankruptcy has the same effect as a breach of contract outside bankruptcy and therefore does not rescind the licensee’s rights or revoke the trademark license.

Section 365 of the Bankruptcy Code allows a debtor to “reject any executory contract”—meaning a contract that neither party has finished performing.  The issue before the Court was whether a debtor-licensor’s rejection of a trademark license agreement, which “constitutes a breach of such contract” under Section 365(g) of the Bankruptcy Code, resulted in a rescission of the license even though a breach of contract in a non-bankruptcy context would not automatically terminate the license.

In its 8-1 decision authored by Justice Kagan (and joined by every justice except Justice Gorsuch), the Supreme Court reversed the First Circuit’s January 2018 decision that had ruled that a licensee loses its right to use licensed trademarks if the debtor-licensor rejects the trademark licensing agreement in bankruptcy.  Instead, the Supreme Court sided with the Seventh Circuit’s reasoning from Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012), where the Seventh Circuit construed Section 365 and held to the contrary.

Prior to the Supreme Court’s decision, the circuits had been divided as to the effect of a debtor-licensor’s rejection of a license.  Some circuits, including the Seventh Circuit, had held that a rejection of a license agreement was simply a breach of contract, in which case the licensee’s rights under the contract remained intact and the licensee could continue to use the trademark.  Other circuits, such as the First Circuit, held that a rejection of a license agreement was a termination of the license, thereby prohibiting the licensee from continuing to use the trademark.  The debate has now been settled.

The Supreme Court’s decision significantly enhances the bargaining strength of trademark licensees because there is now certainty that a licensor’s rejection in bankruptcy does not revoke the licensee’s rights under a pre-existing license agreement.  Potential debtors are also affected because trademark licenses granted prior to bankruptcy remain valid and the debtor-licensor’s obligations under the license agreement continue. 

Justice Sotomayor issued a concurring opinion in part to highlight the special treatment of a trademark licensee’s post-rejection rights and remedies under Section 365. 

Parties who now find themselves negotiating agreements, including trademark licenses in particular, must carefully consider what terms and obligations will survive bankruptcy before entering such agreements.  Because the Supreme Court’s ruling implicates many business and drafting issues, it is important to consult with experienced intellectual property counsel before negotiating and entering into a trademark license agreement.

AALRR has a dedicated group of attorneys on its Intellectual Property Team who can assist you with negotiating and drafting license agreements.  Contact the authors for assistance with navigating the complicated intersection of intellectual property and insolvency.