In Mission Product Holdings Inc. v. Tempnology LLC,1 the Supreme Court, in an 8-to-1 decision, held that bankrupt trademark owners cannot use bankruptcy law to unilaterally revoke a trademark license. The Court summarized the question at issue and held that:
Section 365 of the Bankruptcy Code enables a debtor to “reject any executory contract”—meaning a contract that neither party has finished performing. . . . The section further provides that a debtor’s rejection of a contract under that authority “constitutes a breach of such contract.” . . .
Today we consider the meaning of those provisions in the context of a trademark licensing agreement. The question is whether the debtor-licensor’s rejection of that contract deprives the licensee of its rights to use the trademark. We hold it does not. A rejection breaches a contract but does not rescind it. And that means all the rights that would ordinarily survive a contract breach, including those conveyed here, remain in place.
The Court noted that Chapter 11 of the Bankruptcy Code provides a structure for reorganizing a bankrupt business. The bankruptcy estate comprises all the debtor’s assets and rights. The estate is used to pay the creditors’ claims, and it is administered by either a trustee or the debtor itself. The trustee or debtor approved by the court can accept or reject any executory contract. A contract is executory if “performance remains due to some extent on both sides.”
The Court held as follows:
What is the effect of a debtor’s (or trustee’s) rejection of a contract under Section 365 of the Bankruptcy Code? . . . Today, we hold that both Section 365’s text and fundamental principles of bankruptcy law command the first, rejection-as-breach approach. We reject the competing claim that by specifically enabling the counterparties in some contracts to retain rights after rejection, Congress showed that it wanted the counterparties in all other contracts to lose their rights. And we reject an argument for the rescission approach turning on the distinctive features of trademark licenses. Rejection of a contract—any contract—in bankruptcy operates not as a rescission but as a breach.
The Court added:
A rejection does not terminate the contract. When it occurs, the debtor and counterparty do not go back to their pre-contract positions. Instead, the counterparty retains the rights it has received under the agreement. As after a breach, so too after a rejection, those rights survive.
The Court also explained:
And because rejection “constitutes a breach,” § 365(g), the same consequences follow in bankruptcy. 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 Court also discarded the opinion that the goal of restructuring in bankruptcy should enable debtors to avoid having to monitor their trademarks during the restructuring process, and specifically held:
[A] debtor’s rejection of an executory contract in bankruptcy has the same effect as a breach outside bankruptcy. Such an act cannot rescind rights that the contract previously granted. Here, that construction of Section 365 means that the debtor-licensor’s rejection cannot revoke the trademark license.
Justice Sotomayor agreed with the majority that a debtor’s choice to reject an executory contract serves as a breach of the contract as opposed to unwinding the rejected contract as if it never existed and joined the Court’s opinion in full. Justice Sotomayor concurred, and highlighted features of the Court’s holding.
The sole dissent was authored by Justice Gorsuch, who said the Court lacked jurisdiction because the license agreement expired in 2016, and, therefore, Mission has no means of recovery.
Why it matters:
The Supreme Court’s decision holds that the decision to cease a trademark licensing agreement, either in or outside of bankruptcy, is a breach of that agreement and not a rescission. The Court’s decision favors nondebtor licensees by enabling licensees to continue using a trademark through the term of the license even if the licensor has declared bankruptcy.
1Mission Product Holdings Inc. v. Tempnology LLC, ---- S.Ct. ----, 2019 WL 2166392 (2019).