Before the Supreme Court’s recent decision in Mission Product Holdings v. Tempnology, LLC, No 17-1657, 2019 WL 2166392, 139 S.Ct.1602 (May 20, 2019), it was uncertain whether a trademark licensee could continue to use a licensed trademark after a debtor rejected the trademark license during its bankruptcy case, because of a split among Federal Circuit Courts and divergent lower court opinions. In contrast, since 1988, when Congress amended the Bankruptcy Code to address the rights of licensees of certain intellectual property, it has been clear that rejection of the underlying intellectual property licenses did not terminate the licensees’ rights to use the licensed IP. Trademarks, however, were left out of that category.
In light of the Court’s decision in Tempnology, it now behooves a non-debtor trademark licensee seeking to protect its rights in the event of a bankruptcy to carefully craft language into its trademark license – such as a franchise agreement – to ensure all rights under applicable non-bankruptcy law are protected. For decades, FisherBroyles’ attorneys have gained substantial experience in drafting the proper language necessary to preserve the rights of a nonbreaching IP licensee.
Non-bankruptcy practitioners naturally assume that trademarks are considered “intellectual property” under the Bankruptcy Code. But, the definition of “intellectual property” in the Code does not specifically include trademarks. So, bankruptcy and appellate courts often were asked whether section 365(n) of the Code, which applies to “intellectual property” as defined under the Bankruptcy Code, could be extended to trademark licenses, affording trademark licensees, among other things, the express right to continue the use of a rejected license for its term and any extensions provided therein.
The Supreme Court finally shed light on the question in Tempnology, where the Court held that the rejection of a nonexclusive trademark license does not automatically terminate such license, and all rights that would ordinarily survive a contract breach remain in place. This holding affords significant rights to trademark licensees, who now (a) can unequivocally continue to use licensed trademarks in any jurisdiction, notwithstanding a rejection of the underlying licenses (unless the contract provides otherwise) and (b) appear not to be subject to the strictures contained in section 365(n) of the Code that apply to other intellectual property.
The Supreme Court’s rationale relies primarily on the plain language in the Bankruptcy Code. Section 365(a) of the Code gives a debtor the option, subject to court approval, to assume or reject any executory contract. Section 365(g) explains that rejection “constitutes a breach of [an executory] contract,” deemed to occur “immediately before the date of the filing of the petition.” But, since “breach” is not defined in the Code, the Supreme Court found that “[i]t means in the Code what it means in contract law outside bankruptcy.” Generally, under state contract law, the nonbreaching party to a breached contract has the option to either (a) continue performance and sue for consequential damages or (b) refuse performance altogether.
The rule established by the Supreme Court in Tempnology appears simple enough: rejection of a trademark license constitutes a breach by the debtor but not a termination or rescission of such contract. A party must now rely on applicable nonbankruptcy law to determine what rights continue to exist after the debtor’s breach (i.e., rejection). But, while this rule resolves the Circuit split about using a rejected trademark license, there are still important, unanswered questions following the Supreme Court’s decision.
Fundamentally, the opinion does not consider why Congress chose to omit trademarks from section 365(n) of the Code, nor does it acknowledge that its decision requires any such explanation. But, the fact that trademarks are indeed omitted from section 365(n) will have potentially profound commercial implications on trademark licenses rejected in bankruptcy cases going forward.
The Supreme Court’s ruling—which only dealt with a nonexclusive license—also leaves open the effects of rejection of an exclusive trademark license. For example, what effect will rejection have on a licensee’s exclusive right to use a trademark within a given territory or field of use? While section 365(n) clearly preserves such exclusivity rights for other types of IP, it is unclear, in light of Tempnology, whether a debtor must honor its exclusivity obligations under a rejected trademark license.
Another question is whether a trademark licensee can retain its right to any optional license extension? While section 365(n) clearly answers this question for other IP, it is unclear, in light of Tempnology, whether a debtor can avoid such optional extension.
In short, while the Supreme Court’s opinion attempted to bring some clarity into this very important area of law, in the end, clients should heed the comments in Justice Sotomayor’s concurring opinion, where she states: “[T]he [Supreme] Court does not decide that every trademark licensee has the unfettered right to continue using licensed marks postrejection . . . . [T]he baseline inquiry remains whether the licensee’s rights would survive a breach under applicable nonbankruptcy law. Special terms in a licensing contract or state law could bear on that question in individual cases.”
The Tempnology opinion does seem to be a significant victory for trademark licensees confronted with a debtor licensor in bankruptcy. The opinion clearly eliminates the notion that a rejected trademark license is automatically terminated or rescinded. Of course, the legal measures described herein are not a substitute for adequate due diligence regarding the proposed licensor to discern the probability of a bankruptcy filing. While careful drafting and an understanding of applicable nonbankruptcy laws (in light of Tempnology) can mitigate the problems associated with a filing, it is always better to avoid such situation in the first place.
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