US Supreme Court settles trademark Circuit split

On May 20, 2019, the US Supreme Court ruled that a licensor's rejection of a trademark license in bankruptcy does not terminate the licensee's right to continue using the licensed mark. Mission Product Holdings Inc. v. Tempnology LLC, 587 US __ (2019). The decision brings trademarks into alignment with how patents and copyrights are already treated under the Bankruptcy Code.

Tempnology, LLC ("Tempnology") manufactured and offered clothing and accessories in connection with the mark "COOLCORE." In 2012, Tempnology entered into a contract with Mission Product Holdings, Inc. ("Mission"), granting Mission a non-exclusive license to use "COOLCORE" both in the US and around the world. The agreement was set to expire in July 2016. In September 2015, Tempnology filed for bankruptcy protection.

Debtors can, and often do, reject contracts under Section 365(a) of the Bankruptcy Code, which provides that debtors in bankruptcy may "assume or reject any executory contract or unexpired lease of the debtor." Courts have found that intellectual property licensing agreements are executory contracts – contracts that have not been fully performed – subject to assumption and rejection under Section 365. A licensee's ability to continue using "intellectual property" when the licensor-debtor rejects the license is clarified by Section 365(n), but the Bankruptcy Code's definition of "intellectual property" in Section 101(35A) includes only trade secrets, patents, patent applications, plant varieties, copyrights and mask works for semiconductor chip products. The Bankruptcy Code does not explicitly list trademarks as "intellectual property." As such, Tempnology claimed its rejection of the license with Mission terminated Mission's rights to use "COOLCORE." 

The Circuit Courts of Appeals were split on the issue. In 2012, the Seventh Circuit decided Sunbeam Products, Inc. v. Chicago American Mfg. and held that rejection of a trademark license did not terminate the licensee's use of the debtor's trademarks. That decision directly conflicted with the 1985 Fourth Circuit decision in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. that gave debtors the ability to excuse their performance of the agreement and strip intellectual property rights already granted.

The Mission case showed the same tension and split as underlies Sunbeam and Lubrizol. Initially, the Bankruptcy Court for the District of New Hampshire decided that Mission could not continue using the licensed trademarks once Tempnology rejected the license in bankruptcy. On appeal, the Bankruptcy Appellate Panel reversed, citing Sunbeam, and preserved the licensee's right to continue use of the license after Tempnology's rejection. The First Circuit then reversed that decision, adopting the Lubrizol logic to terminate the licensee's rights. The Supreme Court then reversed again, siding with Sunbeam that "a rejection [in bankruptcy] breaches a contract but does not rescind it."

Justice Kagan, writing for the majority, held that a debtor's rejection of an executory contract under Section 365 has the same effect as a breach of contract outside bankruptcy – breach cannot rescind rights the contract previously granted. To highlight these principles, Justice Kagan analogized the issue to a lessor breaching an hypothetical photocopier license and service agreement, it might expose the lessor to damages but would not allow the lessor to terminate the lease and repossess the photocopier. The opinion therefore concludes that "construction of Section 365 means that the debtor-licensor's rejection cannot revoke the trademark license." In other words, the debtor's rejection of the agreement does not "stop the licensee from doing what it allows." 

Eight justices supported reversal including Justice Sotomayor, who concurred, writing that there may be contract terms that would change this dynamic in bankruptcy. First, she stressed the Court's holding is not as expansive as it might seem. The Court did not decide that "every trademark licensee has the unfettered right to continue using licensed marks" after a debtor rejects the license agreement. The Court's decision concerns only trademark rights that would survive a licensor's breach in the non-bankruptcy world. Second, she acknowledged that the Court's holding confirms that, in some respects, trademark licensees' rights and remedies are more expansive than licensees of other forms of intellectual property. Nevertheless, to the extent trademark licensees are treated differently under the Bankruptcy Code, Congress may tailor a provision for trademark licenses if it wishes, as it has repeatedly done so in other contexts.

Justice Gorsuch was the sole dissenting Justice, arguing that the appeal was moot because the license expired during the pendency of the appeals (a position the majority dismissed because Mission asserted that the outcome would affect a damages claim against Mission).

The Supreme Court's decision in Mission finally resolves the controversy surrounding the treatment of trademark licenses in bankruptcy and provides certainty for trademark licensees by affirming their rights to use licensed trademarks, irrespective of the licensor's bankruptcy. Trademark licensors should note that even if the licensor adds a provision in a license agreement that allows for termination of the license in the event of bankruptcy and explicitly requires the trademark licensee to stop use of the licensed marks, such a provision will likely be found to be unenforceable.