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Precision Patent®

Supreme Court Issues Decision in Trademark License in Bankruptcy Case

On May 20, 2019, the U.S. Supreme Court issued a decision in Mission Product Holdings, Inc. v. Tempnology, LLC, a case arising in bankruptcy and involving the rejection of a trademark licensing agreement.  The Supreme Court held that rejection of an executory contract in bankruptcy, such as a trademark licensing agreement, constitutes a breach of that contract, and therefore does not terminate the licensee’s rights that would survive a breach of contract outside of bankruptcy.  The debtor-licensor’s rejection of the trademark licensing agreement does not rescind the contract and thus does not revoke continuing rights given to the licensee under the contract.

In this case, Tempnology had entered into an agreement with Mission Product Holdings in which Mission would distribute certain Tempnology clothing and accessories.  The agreement also granted Mission a non-exclusive license to use Tempnology’s COOLCORE trademarks in connection with the distribution and sale of the Tempnology products.  Before the agreement expired, Tempnology filed for Chapter 11 bankruptcy.  In the bankruptcy proceeding, Tempnology sought to reject the trademark license, in order to repudiate its duties to further performance under the contract.  The bankruptcy court approved the rejection.  However, Tempnology further asserted that its rejection of the agreement terminated the rights it had granted Mission to use the COOLCORE trademarks.

The bankruptcy court agreed with Mission that the rejection of the licensing agreement revoked Mission’s right to use the trademarks.  The bankruptcy appellate panel then reversed the bankruptcy court’s decision, but on appeal to the First Circuit, the termination of the agreement was reinstated.  The Supreme Court now has sided with the bankruptcy appellate panel (and Seventh Circuit precedent) that rejection of a trademark licensing agreement under Section 365 of the bankruptcy code is a breach of contract rather than a termination of the contract.  The presence of subparts of Section 365 that delineate specific instances in which a counterparty may continue to exercise rights after a debtor’s rejection (which instances do not include rejection of a trademark agreement) does not alter the fact that Section 365(g) generally states that “the rejection of an executory contract . . . constitutes a breach of such contract.”  And “breach” of a contract under bankruptcy has the same effects as it does under non-bankruptcy contract law, i.e. the injured party may continue to perform and sue for damages arising from the breach.  The injured party has continuing rights under the agreement, which the breaching party cannot unilaterally revoke.

Since the rejection of the licensing agreement in bankruptcy is a breach of the contract, and not a recission of the entire agreement, a licensee can continue to use a debtor-licensor’s trademark(s) after rejection for the length of the agreement (per the terms of the agreement).  The rejection does not revoke the trademark license, and simply allows the debtor-licensor to stop performing its remaining contractual duties under the agreement.

A copy of the Mission Product Holdings decision may be accessed at https://www.supremecourt.gov/opinions/18pdf/17-1657_4f15.pdf.