Supreme Court Agrees to Hear Trademark License Bankruptcy Dispute

Tuesday, October 30, 2018

Mission Product Holdings Inc. v. Tempnology, LLC, Case No. 17-1657, cert. granted (Oct. 26, 2018).

The U.S. Supreme Court has agreed to hear a case addressing the effect a trademark owner’s bankruptcy may have on a licensee’s right to continue to use a mark licensed before the bankruptcy was filed. The case presents an issue that has divided many courts, and may have far-reaching consequences for both trademark owners and trademark licensees.

Under the Bankruptcy Code, a debtor may opt to reject executory contracts, including license agreements. Following the Fourth Circuit’s decision in Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985), Congress amended the Bankruptcy Code to include 11 U.S.C. § 365(n), which gives some protection to licensees of intellectual property affected by license terminations. Under Section 365(n), when a debtor-licensor rejects an intellectual property license, the licensee can elect to continue to pay royalties and use the licensed intellectual property as it existed at the time of the licensor’s bankruptcy filing.

The effect of Section 365(n) in cases involving trademark licenses is muddled, however, because the Bankruptcy Code omits trademarks and related rights from the statutory definition of “intellectual property.” See 11 U.S.C. § 101(35A). As a result, disputes have arisen over the right of a trademark licensee to continue to use a licensed mark after a licensor files for bankruptcy and rejects the license.

In some cases, such as the Tempnology case now on appeal to the Supreme Court, courts have ruled that rejection of a trademark license terminates the licensee’s right to use the mark. In re Tempnology, LLC, 879 F.3d 389, 393 (1st Cir. 2018). By contrast, in an important Seventh Circuit case, the court ruled that a debtor-licensor’s rejection of a trademark license constitutes a breach of the license, and the licensee may continue to perform under the license, including using the licensed mark. Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012).

Still another case, In re Crumbs Bake Shop, Inc., 522 B.R. 766, 772 (Bankr. D.N.J. 2014), held that although Section 365(n) does not expressly cover trademark licenses, a bankruptcy court has the equitable discretion to treat a trademark license in the same manner as a license governed by the provision.

The scope of Section 365(n) is important because trademark licenses usually contain provisions carefully restricting the licensee’s use of a mark to prevent the mark from being damaged or destroyed by a licensee’s improper use. The inability of a debtor-licensor to control a licensee’s use of a mark after the licensor’s bankruptcy filing may jeopardize the licensor’s trademarks, which are critical assets, and may also hinder debtor-licensors’ efforts to restructure businesses with significant trademark licensing programs.

The ability of licensors to terminate trademark license rights upon bankruptcy also raises concerns for licensees, however, since the risk of termination may make prospective licensees reluctant to enter into long-term licensing deals, particularly given the commercial realities of the current retail environment.

The Court has not yet scheduled oral arguments in the case.