In Mission Product Ruling, Supreme Court Clarifies Longstanding Circuit Split on Effects of Bankruptcy on Trademark Licenses

As predicted, the U.S. Supreme Court has ruled that a debtor’s rejection of a license agreement in bankruptcy proceedings does not mean the licensee no longer retains rights to the mark. Instead, the Court said that rejection of the contract – ?and therefore the trademark license? – constitutes a breach of the contract/ license, not a revocation.

In Mission Product Holdings, Inc. v. Tempnology LLC, the High Court was asked to determine whether a trademark licensor’s rejection of a licensing agreement during bankruptcy proceedings terminates the rights of the licensee which would otherwise survive a licensor’s breach of contract under applicable non-bankruptcy law. In an 8-1 decision, the Court held that the rejection of an executory contract during bankruptcy has the same effect as breach of that contract outside of bankruptcy and thus cannot rescind rights previously granted by the contract. As a result, Tempnology’s rejection in bankruptcy of its agreement to license trademarks to Mission Product Holdings didn’t rescind Mission’s rights to continue using those trademarks.

Interpreting the Bankruptcy Code 

The Supreme Court’s opinion, penned by Justice Elena Kagan, relied mainly on its interpretation of the applicable bankruptcy statute, 11 U.S.C. §365(g), which reads that “the rejection of an executory contract or unexpired lease of the debtor constitutes a breach of such contract or lease.” Given that rejection “constitutes a breach” and the word “breach” isn’t a specialized bankruptcy term but has the same meaning in contract law outside of bankruptcy, the licensor’s breach within bankruptcy couldn’t revoke licensing rights that would have remained with the licensee had the breach occurred outside of bankruptcy.

“Outside bankruptcy, a licensor’s breach cannot revoke continuing rights given to a counterparty under a contract (assuming no special contract term or state law). And because rejection “constitutes a breach,” the same result must follow from rejection in bankruptcy,” said the opinion.

Mission Product Holdings was granted certiorari last October in part to solve a circuit split in the Courts of Appeals on the issue of whether rejection of a licensing agreement during bankruptcy rescinded a licensee’s rights. The Fourth Circuit Court of Appeals had held in Lubrizol (1985) that rejection by a debtor-licensor rescinded the licensee’s trademark rights. While Congress amended U.S. bankruptcy code following Lubrizol to abrogate that decision, it left open the question regarding trademark rights. In 2012, the Seventh Circuit decided Sunbeam Products which held that a debtor-licensors rejection of a contract didn’t rescind trademark rights to the licensee. In Mission Product, the First Circuit Bankruptcy Appellate Panel applied the reasoning from Sunbeam Products but this was later reversed by the First Circuit Court of Appeals, leading to the appeal to the Supreme Court.

Oral arguments in Mission Product Holdings were held on February 20 and counsel representing the United States government joined the petitioners in arguing that the First Circuit Court of Appeals handed down the wrong decision. Reactions from industry insiders following oral arguments seemed to indicate that SCOTUS would end up siding with Mission Product Holdings although there was some consternation as to the ultimate decision given the surprisingly spirited nature of that day’s debate. However, today’s decision came out as expected, overall.

Siding with Justice Kagan in the decision’s majority opinion were Chief Justice John Roberts and Justices Clarence Thomas, Ruth Bader Ginsburg, Stephen Breyer, Samuel Alito and Brett Kavanaugh. Justice Sonia Sotomayor sided with the majority as well, but filed a concurring opinion. The lone dissent in the case was filed by Justice Neil Gorsuch.

The Upshot

In initial reactions sent to IPWatchdog, Annette Jarvis of Dorsey & Whitney said the case is a clear win for trademark licensees, but also has broader implications for both debtors and licensees:

“The Supreme Court debunked the myth that rejections of executory contracts in bankruptcy provide debtors with more rights than a breach of these executory contracts outside of bankruptcy….

Under this ruling, a trademark licensee has the option to either assert damage claims as a result of the rejection of the license or to continue to use the trademark through the end of the license term. This option is important for a licensor because claims made against a bankruptcy estate are often paid only cents on the dollar, making it likely that a continuing license is far more valuable to the licensee. As the debtor/licensor is required to monitor the quality of the trademarked products to maintain trademark rights, while this ruling does leave the debtor/licensor with this continuing obligation, the trademark licensee needs to understand that a trademark could still be put in jeopardy of abandonment if the debtor, because of its financial condition, fails to follow through with this continuing obligation.

For the debtor/licensor, this ruling today means that if it has entered into unprofitable trademark licenses prior to bankruptcy and wishes to rid itself of these licenses and renegotiate new licenses with new licensees, it does not have the option to cut out the rights of the trademark licensees already in existence.”