On May 20, 2019, the U.S. Supreme Court ruled that a bankrupt debtor’s “rejection” of a trademark licensing agreement does not terminate the licensee’s rights. This was under a part of the Bankruptcy Code that provides for reorganization, usually involving a corporation or partnership.
Tempnology, LLC, licensed Mission Product Holdings, Inc. to use Tempnology’s trademarks in the distribution of clothing and accessories. Prior to expiration of the license, Tempnology filed for Chapter 11 bankruptcy and, with court approval, rejected its license agreement with Mission. Tempnology then sought a ruling that its rejection of the license agreement also terminated Mission’s rights to use Tempnology’s trademarks. The bankruptcy court and First Circuit agreed.
The Supreme Court reversed, finding that the licensee could continue to act under the licensing agreement and use whatever trademark rights had been granted. The Court rejected Tempnology’s view that in bankruptcy, rights under a trademark licensing agreement must end upon rejection of the agreement. The Court also rejected Tempnology’s argument that absent termination of rights, “the debtor will have to choose between expending scarce resources on quality control and risking the loss of a valuable asset.”
Resolving a split among different courts, the Supreme Court ruled that “rejection breaches a contract but does not rescind it. And that means all the rights that would ordinarily survive a contract breach” remain in place. Thus, upon rejection the debtor "can stop performing its remaining obligations under the agreement. But the debtor cannot rescind the license already conveyed. So the licensee can continue to do whatever the license authorizes."
The Supreme Court found that the rights granted in a license survive rejection or breach, provided special terms in the licensing contract or state law do not hold otherwise.
The Supreme Court’s ruling means that if a franchisor finds itself in bankruptcy, licensing rights granted to franchisees will survive the franchisor’s rejection of the franchise agreement in bankruptcy court. However, franchisees should understand the scope of their rights under their agreement with the franchisor and any relevant state law prior to signing the franchise agreement. As Justice Sotomayor noted, the Supreme Court did not decide “that every trademark licensee has the unfettered right to continue using licensed marks post rejection.” The “baseline inquiry” is “whether the licensee’s rights would survive a breach under applicable non-bankruptcy law.”
