Our January 22, May 23, June 28, July 13, August 3, September 11 and October 29, 2018 posts discussed the First Circuit’s January 12, 2018 decision in Mission Product Holdings, Inc. v. Tempnology, LLC[1] and the pending appeal therefrom to the Supreme Court.[2]

In December 2018, the petitioner filed its brief in the Supreme Court, as did six amici curiae (including the U.S. Department of Justice).  Four of the amici (including DoJ) support the position of the petitioner, and two support neither side.  On January 9, the respondent filed its brief.  Oral argument is scheduled for February 20, and a decision is expected before the end of the term this summer.

If the outcome is reversal and perhaps in any event, this blogger believes that an intellectually honest and satisfying decision must address at least these issues:

1. What exactly are the consequences of the rejection under Section 365 of every executory contract that is not entitled to special treatment under subsection (h), (i) or (n)?  The Code tells us that rejection “constitutes a breach of such contract . . . immediately before the date of the filing of the petition” (§ 365(g)), but what else is it?  We know it is more than a pre-petition breach (which Sunbeam[3] denied, and some of the briefs for reversal say it is nothing more)--it had been understood since long before the adoption of the Bankruptcy Code that rejection is the contractual analogue of a trustee’s abandonment of tangible property--but exactly what are its consequences in addition to a pre-petition breach?
2. Are the rights of the licensee under a trademark license “property” as that term is used in the Bankruptcy Code or the Fifth Amendment to the Constitution?  The Fifth Amendment protects against deprivations of “property” “without just compensation” (among other things), but mere contract rights are not entitled to analogous constitutional protection from infringements occurring under federal law.[4]  As a result of this distinction, the Bankruptcy Code is far more protective of the property rights of non-debtors than of their contract rights (e.g., the right to “adequate protection” of interests in “property” under the various subsections of §363).
3. What exactly are the implications of Congress’ omission of trademarks from the definition of “intellectual property” that is applicable to Section 365(n)?  When Congress enacted §365(n) and its companion definition of “intellectual property” in the Intellectual Property Bankruptcy Protection Act of 1987, P.L. 100-506, in 1988 to spell out some of the major consequences of the rejection of IP licenses, it deliberately and expressly (in the legislative history) omitted trademarks.  The Supreme Court has often attributed interpretive significance to intentional legislative omissions.  What are the implications of this omission?
4. What are the implications of the completely foreseeable fact that many bankrupt trademark licensors, if their licensees remain entitled to continue to use the licensed marks notwithstanding rejection, will be unable to perform their legal duty to police the use of the marks?  It seems to this blogger that a court interpreting what (if any) are a licensee’s post-rejection rights cannot ignore the fact that many licensors will not have the resources to perform their duty to police the licensee’s use of the mark (and may no longer even be in existence after their bankruptcy cases have concluded), although Sunbeam seems to have ignored it.

As our prior posts have said, a decision in this case could become one of the most consequential on bankruptcy in decades.  We will continue to monitor the case and report on developments.

[1]  879 F.3d 389 (1^st Cir. 2018), petition for cert. granted, No. 17-1657 (Oct. 26, 2018). 

[2]  This post assumes that its readers are familiar with the prior posts.

[3]  Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7^th Cir. 2012).

[4]  Article I, Section 10 forbids state laws “impairing the obligation of contracts.”