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Will I Lose My Trademark License if the Licensor Files for Bankruptcy?

I’m Nervous.  I am a Licensee of Trademarks.  Will I Lose My Trademark License if the Licensor Files for Bankruptcy?

Let’s set the stage.  Your company enters into an agreement to use another’s intellectual property, including its trademarks.  You invest significant capital in your business which is highly dependent upon your ability to continue to use the licensed trademarks.  To your surprise, the owner of the trademarks files for bankruptcy, causing much consternation.

How will the bankruptcy filing affect you?  Will you be able to continue to use the trademarks?  If the licensor of the trademarks thinks it “sold” the rights to the trademarks to you for too little money, can the licensor do something in the bankruptcy case to prevent you from using the trademarks?

In bankruptcy, a debtor may “assume” or “reject” executory contracts.  Typically, a trademark license agreement constitutes an executory contract.  Section 365 of the Bankruptcy Code authorizes a debtor to assume or reject executory contracts.  A debtor’s decision whether to assume or reject generally is analyzed pursuant to a business judgment test.  What does it really mean to “assume” or “reject” a contract?  If a debtor assumes a contract, this means the debtor is agreeing to be bound by all of the terms of the contract.

But what about a rejection?  What is the effect of a rejection, particularly a rejection of a trademark license agreement?  On May 20, 2019, the U.S. Supreme Court answered that question in Mission Product Holdings, Inc. v. Tempnology, LLC,203 L. Ed. 2d 876, 139 S. Ct. 1652 (2019). .  A circuit split existed on this issue.  In Sunbeam Prods. v. Chi. Am. Mfg., LLC, 686 F.3d 372 (7th Cir. 2012), the Seventh Circuit held that a rejection of a trademark license agreement constitutes a breach of the agreement but does not constitute a termination or rescission of the agreement.  As a result, according to the Seventh Circuit, licensees are not barred from continuing to use the licensed trademark rights even after the licensor’s rejection in bankruptcy of the underlying trademark license agreement.  By contrast, in Mission Prod. Holdings, Inc. v. Tempnology, LLC (In re Tempnology, LLC), 879 F.3d 389 (1st Cir. 2018), the First Circuit held that the licensee’s trademark rights did not survive rejection of the license agreement.

In an 8-1 decision delivered by Justice Kagan, the Supreme Court held “that under Section 365, a debtor’s rejection of an executory contract in bankruptcy has the same effect as a breach outside bankruptcy.  Such an act cannot rescind rights that the contract previously granted.  Here, that construction of Section 365 means that the debtor-licensor’s rejection cannot revoke the trademark license.”

In so holding, the Supreme Court relied, in part, on the plain language of Section 365(g), which provides that “the rejection of an executory contract[] constitutes a breach of such contract.”  The Court referred to its adopted approach as the “rejection-as-breach” approach.  The Court rejected “the competing claim that by specifically enabling the counterparties in some contracts to retain rights after rejection, Congress showed that it wanted the counterparties in all other contracts to lose their rights.”  This “competing claim” relied primarily on the fact that Congress specifically provided for the rights of licensees of other types of intellectual property in Section 365(n) while not including the rights of licensees of trademark licenses.  The Court also rejected “an argument for the rescission approach turning on the distinctive features of trademark licenses.  Rejection of a contract—any contract—in bankruptcy operates not as a rescission but as a breach.”

Justice Sotomayor issued a concurring opinion addressing some lingering issues not resolved by the Court.  Justice Sotomayor observed that “[s]pecial terms in a licensing contract or state law could bear” on the issue of “whether the licensee’s rights would survive a breach under applicable nonbankruptcy law.”  Justice Sotomayor also addressed the fact that Section 365(n) contains special provisions for postrejection licensees who choose to retain rights, including the requirement to continue to make all royalty payments.  Because Section 365(n) does not apply to trademark licensees, those licensees may be treated differently from licensees of other types of intellectual property.  Justice Sotomayor stated: “[T]hat outcome leaves Congress with the option to tailor a provision for trademark licenses, as it has repeatedly in other contexts.”

In conclusion, the Supreme Court’s decision provided some certainty concerning the impact of a rejection, in bankruptcy, of a trademark license agreement.  However, there are still some unanswered questions, including how “special terms” in a licensing agreement may affect the analysis, and how courts will deal with trademark licenses being treated differently from other types of intellectual property specifically provided for in Section 365(n).

 

If you have any questions about licensing and bankruptcy, please contact Steve Metz at smetz@offitkurman.com or 240.507.1723.

 

ABOUT STEVE METZ

smetz@offitkurman.com | 240.507.1723

In 20 years of practicing law, Stephen Metz has garnered a reputation for being a tremendous advocate for his clients.  While typically meeting clients and opposing counsel under less-than-favorable conditions, Steve applies his signature techniques to each situation: he is fair-minded, a good listener and a straight shooter, providing his best advice and legal tactics in a calm but decisive manner.  In addition to earning the respect and appreciation of those he represents, Steve has been referred to by his legal colleagues as one of the best bankruptcy attorneys in Maryland.

 

 

 

 

ABOUT OFFIT KURMAN

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