Supreme Court Strengthens Rights of Trademark Licensees: Holds that bankruptcy debtors cannot terminate trademark license agreements under section 365 of the U.S. Bankruptcy Code

Supreme Court Strengthens Rights of Trademark Licensees: Holds that bankruptcy debtors cannot terminate trademark license agreements under section 365 of the U.S. Bankruptcy Code

In the United States, the Bankruptcy Code allows individuals and entities (“debtor”) who cannot repay their debts to seek relief from some or all of those debts.

One of the peculiar aspects of the Bankruptcy Code is that 11 U.S.C. § 365(a) enables a debtor to reject “executory contracts,” which are contracts that neither party has finished performing. Examples of executory contracts are a real estate lease and an intellectual property licensing agreement.

The question before the Supreme Court in Mission Product Holdings, Inc. v. Tempnology, LLC., was whether the “rejection” of a trademark licensing agreement under § 365(a) also terminated the rights of the licensee to use the trademark.

The Court agreed to hear the case to resolve a split among the circuit courts. The Court of Appeals for the First Circuit held in In re Tempnology, LLC, 879 F. 3d 389 (2018) that a debtor’s rejection of trademark licensing agreement terminated the licensing agreement. The Seventh Circuit, however, had ruled the other way in Sunbeam Products, Inc. v. Chicago Am. Mfg., LLC, 686 F. 3d 372 (7th Cir. 2012).

The Supreme Court agreed with the Seventh Circuit, holding that a debtor’s rejection of trademark license under Section 365 of the Bankruptcy Code has the same effect as a breach of that license agreement outside bankruptcy. Rejection does not rescind rights that the contract previously granted.

“A rejection breaches a contract but does not rescind it. And that means all the rights that would ordinarily survive a contract breach, including those conveyed here, remain in place.” The debtor “can stop performing its remaining obligations under the agreement. But the debtor cannot rescind the license already conveyed. So the licensee can continue to do whatever the license authorizes.”

The Court’s holding is a victory for trademark licensees. It strengthens the rights of licensees by making clear that rejection of a trademark license during bankruptcy does not rescind the license. It will also give trademark licensees greater power and leverage during the bankruptcy reorganization process.

 

At Bleakley Platt, Mr. Rodriguez focuses his practice in the areas of litigation, intellectual property and real estate. Previously, he was the Director of Real Estate for Westchester County, where he negotiated commercial real estate transactions valued at over $100 million. Prior to his appointment as Director of Real Estate, Mr. Rodriguez defended the County of Westchester in one of the highest-profile HUD enforcement actions in United States history. He has also served as a law clerk to two federal judges and worked as an intellectual property litigator at a large law firm in New York City.

Visit Mr. Rodriguez’s Facebook page “Trademark Tales,” Twitter feed, Instagram feed and LinkedIn for more thoughts on the law.

To read Mr. Rodriguez’s complete biography, click here.