The First Circuit Bankruptcy Appellate Panel recently issued a decision recognizing the rights of trademark licensees when the trademark’s owner files for bankruptcy.

In Mission Product Holdings, Inc. v. Tempnology LLC, 559 B.R. 809 (BAP 1st Cir. 2016), the First Circuit BAP examined what intellectual property rights can be preserved in bankruptcy if a debtor-licensor rejects a licensing agreement. The First Circuit BAP’s decision purported to follow the Seventh Circuit Court of Appeal’s 2012 decision in Sunbeam Products Inc. v. Chicago American Manufacturing LLC, 686 F.3d 372 (7th Cir. 2012), ruling that a trademark licensee can retain its licensing rights if a debtor rejects the licensing agreement.

In Mission Product, a Chapter 11 debtor (Tempnology) that developed chemical-free cooling fabrics moved to reject its trademark licensing agreement with Mission Product Holdings (Mission), a company that markets and distributes athletic products. Tempnology asserted that its rejection of the licensing agreement meant that Mission had no right to use Tempnology’s trademark and logo. The bankruptcy court agreed with Tempnology and ruled against Mission.

The bankruptcy court relied on the Fourth Circuit’s 1984 decision in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985). In Lubrizol, the Fourth Circuit held that the rejection of an intellectual property license deprives the licensee of the rights previously granted under the license. Under Lubrizol, rejection of an intellectual property license terminates the license, so a non-debtor licensee has no ongoing rights after rejection.

After Lubrizol, Congress amended the Bankruptcy Code to allow a licensee under newly added Section 365(n) to elect to retain its licensing rights in “intellectual property” if the debtor-licensor rejects the licensing agreement. When Congress added Section 365(n) to the Bankruptcy Code, it also added a definition of “intellectual property,” which is found in Section 101(35A) of the Bankruptcy Code. Section 101(35A) does not specifically state that “trademarks” are included in the definition of “intellectual property.” On this basis, some courts have found that Section 365(n) does not apply to trademark licenses in bankruptcy.

The bankruptcy court in Mission Product adopted this reasoning and found that Tempnology’s rejection of its trademark license agreement with Mission meant that Mission did not retain rights to use Tempnology’s trademarks and logos after rejection. The First Circuit BAP reversed the bankruptcy court.

The First Circuit BAP agreed with the bankruptcy court’s determination that trademarks are not included within the definition of “intellectual property” under Section 101(35A) of the Bankruptcy Code; thus, Mission could not avail itself of Section 365(n) of the Bankruptcy Code. The First Circuit BAP, however, disagreed with the bankruptcy court about the effect of Tempnology’s rejection of the license agreement.

Applying the Seventh Circuit’s rationale in Sunbeam Products, the First Circuit BAP concluded Tempnology’s rejection of the license agreement did not terminate the agreement but rather constituted a breach of the agreement. Thus, Tempnology’s rejection of the license agreement “did not vaporize Mission’s trademark rights under the Agreement.” Whatever post-rejection/post-breach rights Mission retained in the trademark are governed by the terms of the licensing agreement and applicable non-bankruptcy law.

Mission Product addresses issues important to companies and industries where trademark licenses play a key role in business strategies. Both licensors and licensees, and parties that make loans to such parties, would be wise to continue to monitor the impact the First Circuit BAP’s decision has on this field.