On Friday, October 26, 2018, the U.S. Supreme Court granted certiorari in what could be a landmark decision concerning trademark issues in bankruptcy. In Mission Product Holdings, Inc. v. Tempnology LLC, the Court will resolve a Circuit Court split and determine whether a debtor-licensor can strip away the rights of its trademark licensees by rejecting its trademark licensing agreements as part of its bankruptcy case.
Under Section 365(a) of the Bankruptcy Code, debtors who are parties to executory contracts and unexpired leases may choose to "reject" certain contracts and free the estate from their burdensome nature. With respect to leases and technology licenses, the Bankruptcy Code provides some added protections for contract counter-parties. For example, upon rejection of a real property lease by a debtor-lessor, a tenant in possession may elect either to treat the lease as terminated and exit the premises or remain in possession until the expiration of the lease term (and any extensions) upon certain conditions. See, 11 U.S.C. § 365(h).
Likewise, the Bankruptcy Code protects a licensee of intellectual property whose license agreements are rejected by a debtor-licensor. Upon rejection of an intellectual property license, the licensee has a choice to make. Under Section 365(n), a licensee of intellectual property must determine if it wants to treat the license as terminated or, alternatively, retain its rights as licensee through the duration of the license agreement, plus any extensions. So, what's the issue with trademarks? Under the Bankruptcy Code, the definition of "intellectual property" includes several types of intellectual property, such as copyrights, patents and trade secrets — but fails to include "trademarks" in the definition. Consequently, there is a split among the Circuits concerning whether the provisions of the Bankruptcy Code protecting the rights of licensees of "intellectual property" should extend to trademarks.
The Mission Product decisions in the lower courts have been wildly inconsistent. Initially, the Bankruptcy Court held that because trademarks were not within the definition of intellectual property, the protections set forth in Section 365(n) were inapplicable to trademark licenses. On appeal at the First Circuit's Bankruptcy Appellate Panel, however, the court relied on the reasoning of the Seventh Circuit in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 382 (7th Cir. 2012) and held that although the Bankruptcy Code's protections did not, by their terms, protect trademark licenses, a trademark licensee's rights did not "vaporize" upon rejection by the debtor; instead, the rejection constituted a breach under the agreement and the licensee's rights would be governed by the terms of the agreement and non-bankruptcy law. On further appeal, however, the First Circuit reversed the BAP decisions and held that, upon rejection, a trademark licensee would be left with a pre-petition claim for damages, but nothing more.
The Supreme Court is now faced with a divergent split within the Circuits. The First Circuit has given a literal reading of the Bankruptcy Code, interpreting the omission of "trademarks" from the definition of intellectual property to be fatal to a trademark license upon rejection. The Seventh Circuit, on the other hand, has extended rights of trademark licensees by interpreting a rejection of a trademark license as a breach of contract, providing the licensee with whatever its contractual rights are upon such a breach under applicable non-bankruptcy law. And, in the Third Circuit, a concurring opinion in In re Exide Techs., 607 F.3d 657 (3d Cir. 2010), has suggested that extending the protections under Section 365(n) to trademark licenses may be appropriate under equitable principles.
Given the extreme outcomes that pertain upon rejection in the various Circuit Courts, the Supreme Court's decision — whether to extend protections to trademark licensees or not — will have a significant impact on the entire business community. S&W’s Bankruptcy and IP group will continue to monitor the Mission Product case through briefing, argument and, ultimately, decision.
