/ 11.02.2018

May a Licensee Keep Using a Trademark After a Bankruptcy Rejection?

By David Posteraro

Summary.

Addressing a vexing problem involving the intersection of trademark and bankruptcy law, the U.S. Supreme Court has granted a petition for review of a case involving an intellectual property licensing and product distribution agreement. The U.S. Court of Appeals in Boston held that trademark licenses are unprotected from court-approved rejection during bankruptcy.

Background.

In 1988, Congress added section 365(n) to the Bankruptcy Code. That section granted certain intellectual property licensees the right to continued use of licensed property notwithstanding rejection of the underlying executory license agreement by a debtor or bankruptcy trustee. Curiously, the bankruptcy code definition of intellectual property, incorporated in Section 365(n), while including trade secrets, inventions, patent applications, copyrights, etc. omitted trademarks. That omission has generated confusion for licensors and licensees of trademarks nationally and a clear split among the federal circuit courts as to whether a trademark licensee may or may not continue to use those licensed trademarks after the license has been rejected by a bankrupt licensor.

The Mission Case.

Tempnology, LLC makes specialized sportswear products (towels, socks, headbands, and other accessories) designed to remain cool during exercise, under the “Coolcore” and “Dr. Cool” brand trademarks. As the debtor-in-possession seeking to reorganize under Chapter 11, Tempnology rejected an agreement granting certain marketing and distribution rights to its patents and trademarks to Mission Product Holdings, Inc. The parties agreed that Mission could insist that the rejection not apply to nonexclusive patent licenses contained in the rejected agreement. They disagreed as to whether the rejection applies to the agreement’s grants of a trademark license and of exclusive rights to sell certain of Tempnology’s goods.

The bankruptcy court ruled that Section 365(n) only protected the intellectual property specifically defined and enumerated in the statute (i.e., it did not include trademarks), and thus Mission’s exclusive trademark and distributorship agreement was not such a right. With respect to trademarks, the court reasoned that Congress’s decision to leave trademarks off the definitional list of intellectual property rights in the Bankruptcy Code left trademark licenses unprotected from rejection.

The First Circuit affirmed the bankruptcy court’s determinations and concluded that Section 365(n) did not apply to Mission’s rights to be the exclusive distributor of Tempnology’s products, or to the trademark license. It also held that Mission’s right to use Tempnology’s trademarks did not otherwise survive rejection of the agreement.

In its petition for certiorari, Mission noted that there is a split among the circuits: does rejection terminate a trademark licensee’s rights? While the Fourth Circuit had held that a debtor-licensor’s rejection of an agreement to license intellectual property terminated the licensee’s right to continue using the intellectual property, the Seventh Circuit had held that rejection of a trademark license did not terminate the licensee’s right to use the debtor’s trademarks.

The petition presents the following two questions:

  1. Whether, under §365 of the Bankruptcy Code, a debtor-licensor’s “rejection” of a license agreement which “constitutes a breach of such contract,” 11 U .S.C. §365(g)-terminates rights of the licensee that would survive the licensor’s breach under applicable non-bankruptcy law.
  2. Whether an exclusive right to sell certain products practicing a patent in a particular geographic territory is a “right to intellectual property” within the meaning of §365(n) of the Bankruptcy Code.

The Supreme Court’s grant of review is limited to the first question. Until it rules, trademark licensors and licensees will still be uncertain if their licenses will survive a challenge in bankruptcy. We will update this as arguments proceed.


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