Bankruptcy Does Not Provide A Basis To Revoke Trademark Licenses

On May 20, 2019, in an 8-1 decision the Supreme Court resolved a split among the Circuits as to whether a debtor/licensor’s rejection of a license under § 365(g) of the Bankruptcy Code, which reads that “the rejection of an executory contract or unexpired lease of the debtor constitutes a breach of such contract or lease”, merely constituted a breach, in which case the licensee could continue to use the trademark, or terminated the license, in which case the licensee could no longer continue to use the trademark. The Court held that the “rejection” of a trademark license under § 365 was merely a breach, and does not terminate the license. Mission Product Holdings, Inc. v. Tempnology, LLC, No. 17-1657.

Uncertainty concerning whether § 365(a), which permits debtors to reject executory contracts, arose in 1985 when the Fourth Circuit held that a debtor’s/licensor’s rejection of a trademark license effectively cancels the license, with the result being that the licensee loses the right to use any licensed copyrights, trademarks, and patents — its only remedy being a claim for damages. Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043, 1046 (4th Cir. 1985).

In response to Lubrizol, in 1988 Congress amended the Bankruptcy Code to add § 365(n) which allow a licensee, after the license is rejected by the debtor, the option of either continuing to use licensed intellectual property or asserting a claim for damages. The applicability of § 365(n) to trademark licenses, however, was uncertain as trademarks, trade names, and service marks are not included in the definition of “intellectual property” under § 101(35A) of the Bankruptcy Code.

In 2012 the Seventh Circuit took a different approach noting that § 365(g) of the Bankruptcy Code defines a rejection under § 365(a) as a “breach”, and that because outside of a bankruptcy proceeding a licensor’s breach of a trademark license does not terminate the licensee’s right to use the mark, a rejection under § 365(a) does not limit the licensee’s bargained for rights to use the licensed trademark. See Sunbeam Products, Inc. v. Chicago Am. Mfg., LLC, 686 F.3d 372, 276-77 (7th Cir. 2012).

In its holding in Mission Product Holdings the Supreme Court adopted the rationale expressed by the Seventh Circuit in Sunbeam Products. The Court held that “[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.”

Tempnology argued that because a bankrupt licensor that has rejected a license is unlikely to continue to exercise quality control over the licensed goods (as it must), trademark licenses should be treated differently than other contracts under § 365. The Supreme Court rejected this argument reasoning that “[h]owever serious Tempnology’s trademark-related concerns, that would allow the tail to wag the Doberman”. Licensees should be aware, however, that if a debtor/licensor does not exercise quality control over the use of the licensed trademark, the trademark could be deemed abandoned.

The Supreme Court’s ruling in Mission Product Holdings conclusively resolves the question of whether debtors/licensors can terminate unprofitable trademark licenses under § 365 of the Bankruptcy Code. They cannot.

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