The U.S. Supreme Court this week issued an important ruling for trademark licensees when their bankrupt licensors reject those licenses. The Supreme Court’s May 20, 2019 decision is Mission Prod. Holdings v. Tempnology, No. 17-1657, slip op. 1. The issue was whether a debtor-licensor’s rejection of a trademark license agreement deprives the licensee of the right to continue using the trademark. In a victory for licensees, the Court held that it did not — the licensee’s rights were not terminated, resolving a disagreement among lower courts.
In Chapter 11 bankruptcy cases, debtors generally can assume or reject “executory contracts” — those where neither party has completed its performance. Where a bankrupt licensor rejects a license agreement, an issue arises as to what rights the licensee still has, i.e. does it just have the ability to file a claim in the case or does it also get to continue using the license? Congress had enacted a provision to specifically protect the right of licensees of certain types of intellectual property to continue using the licenses, but had not included trademarks in that protection. The Supreme Court did not decide whether Congress intentionally or inadvertently treated trademarks differently. Instead, it based the ruling simply on the meanings of rejection and breach, for any type of contract.
In an 8-1 decision, the Court found that rejection of a license agreement by a debtor-licensor constitutes a breach and not a rescission of the contract, leaving the rights of the licensee intact. Section 365(a) of the Bankruptcy Code provides a debtor-licensor the opportunity to reject a contract, while §365(g) explains what that means: a rejection constitutes a breach. As Justice Elena Kagan wrote for the majority, “breach is neither a defined nor a specialized bankruptcy term.” Thus, it means the same thing inside the Bankruptcy Code as it does outside.
Comparing rejection to the breach of a contract in other contexts, Justice Kagan noted it is not the breaching party that determines whether or not to terminate the whole agreement, but the injured party that is entitled as of right to the benefit under the contract. The same follows for the licensee that has been granted use of a trademark by a debtor-licensor. While it may be prudent for the debtor-licensor to reject the agreement, the resulting breach does not terminate the agreement. The debtor-licensor can stop performing any remaining obligations under the agreement, but cannot rescind the license already granted. The licensee may make the choice to continue using the license or terminate the agreement, but rejection does not return both parties back to their original positions before the agreement.
Finally, the Court held that the special features of trademark law do not limit the goals of the Bankruptcy Code. The licensor-debtor had argued a debtor would have to spend scarce resources to monitor a trademark or its value would naturally decline and the debtor would be at risk of losing a valuable asset, impeding reorganization. Using this line of reasoning, the Supreme Court recognized that this would allow one aspect of trademark law to govern “pretty much nearly every executory contract,” or, as Justice Kagan put it, “that would allow the tail to wag the Doberman.” Ultimately rejection, an already powerful tool, cannot be used as an escape from generally applicable law. We note that trademark licensee rights are not expanded — the right to use the license still ends when the regular term of the license ends. Ironically, Congress’ special protections for other licensees came at a price, in that they could not withhold payment to the debtor licensor for the license they continued to use. Trademark licenses arguably may evade this requirement under this ruling.
Special thanks to Summer Associate Aaron Vance.