Tuesday, October 08, 2019

A Debtor Licensor of a Trademark Cannot Rescind Use of the Trademark License by Rejecting it in Bankruptcy

By Bill Siegel

Licensees of Trademarks can breathe a sigh of relief:  A Debtor cannot use the Bankruptcy Code as a sword by rejecting a trademark license thereby preventing the licensee from using the trademark.

The U.S. Supreme Court, in Mission Product Holdings Inc. v. Tempnology LLC, 17-1657 (Sup. Ct.), resolved a conflict between U.S Circuit Courts of Appeals and held that even though a Debtor, as a licensor of a trademark, rejects the license, the licensee can continue to use the license per the existing license agreement. 

Executory Contracts
Licenses are deemed executory contracts which require some level of performance by both parties.  A Debtor in bankruptcy has the right to reject an executory contract.  The conflict among the courts regarded whether rejection of an executory trademark license a) constituted a rescission of the license or b) had no impact on the licensee’s continued use.

Whereas the Bankruptcy Code specifically allows a licensee to continue to use a patent even though the Debtor rejected it, the Bankruptcy Code is silent as to trademarks.  Some courts held that if the Bankruptcy Code did not specifically address the trademarks, Congress must have intentionally excluded trademarks, which then gave rise to conflicting rulings between the Circuit Courts. 

The SCOTUS Opinion
First, the Supreme Court focused on the effect of rejecting an executory contract and held that rejection gives rise to a breach, not a rescission.

In the majority opinion, Justice Kagan analogized the Debtor rejecting a copy machine lease.  Under these circumstances, the lessee could continue to use the copier, but the Debtor was relieved from having to service it.  In the same vein, a rejection of the trademark license would not constitute a revocation of the license.  Instead, the Debtor would be relieved from any duties imposed on it arising from the license.  The licensee, in turn, would have the right to continue to use the trademark and may very well have damages arising from the breach.  Justice Kagan further noted that rescission is an extreme remedy and should only be used in “exceptional cases in which trustees ... may indeed unwind pre-bankruptcy transfers.” 

The Debtor in Mission Product Holdings unsuccessfully argued that by omitting trademarks from Section 365(n), which dealt specifically with patents, Congress intended for rejection of a patent to be treated differently than rejection of a trademark.  Again, Justice Kagan focused on rejection being a breach and thus any attempt by Congress to address patents but not trademarks did not change the fact that rejection and breach are synonymous. 

The Debtor then unsuccessfully argued that allowing a licensee to continue to use a trademark after rejection would hamper the Debtor’s ability to reorganize.  Justice Kagan countered by saying, “The Code of course aims to make reorganization possible. But it does not permit anything and everything that might advance that goal.” 

The key takeaway is knowing your rights as a licensee of a trademark when a Debtor rejects the license.  That said, beware.  Licensors of trademarks may attempt to address this issue by asserting a remedy of rescission of the license -- if it is rejected in bankruptcy.  

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