Supreme Court: Bankruptcy Does Not Prevent Licensees from Using Trademarks

For almost 30 years, owners and licensees of intellectual property had no firm answer to this important question: if the owner of a trademark rejects a license agreement in bankruptcy, does the licensee then lose its right to use the mark? The United States Supreme Court has now settled that question in favor of licensees in Mission Product Holdings, Inc. v. Tempnology, LLC (U.S. May 20, 2019), by ruling that the owner may not, by rejecting the license, extinguish the licensee's right to use the licensed mark.

Bankruptcy gives debtors the power to "reject" many types of contracts, including, generally, licenses of intellectual property, like trademarks. By rejecting a contract, the debtor walks away from its performance obligations under the contract; rejection is treated as a breach of the contract and leaves the other party—here, the licensee—with a general unsecured claim in the bankruptcy case for damages arising from the breach. With a license, however, an additional question remains: does rejection by the licensor also extinguish the licensee's right to continue using the licensed intellectual property?

This issue has long simmered in bankruptcy law. In 1985, a federal court of appeals answered that question by ruling that the rejection of a patent license in bankruptcy meant that the licensee lost the right to use the patent. Congress then stepped in to reverse what many considered that ruling's harsh impact on licensees, by amending the Bankruptcy Code to provide that, when a licensor rejects a license of intellectual property, the licensee may still continue to use the property and pay the required royalties. But that amendment was silent as to trademarks, and that silence gave rise to conflicting lower-court decisions, which the Supreme Court finally resolved in Tempnology.

The debtor in the Supreme Court’s decision, Tempnology, had developed clothing and accessories that stayed cool even during exercise (hence the "temp–" in its name). Tempnology had licensed to Mission Product the right to use its patents to produce those products, as well as the right to sell them under its "Coolcore" and "Dr. Cool" trademarks.

After Tempnology filed for bankruptcy relief, it rejected that license and argued that the rejection eliminated Mission's right to use the marks. Mission objected, based on a 2012 decision from the Seventh Circuit, which held that a debtor-owner of intellectual property has no greater rights in bankruptcy than it does outside of it. The Seventh Circuit reasoned that if, outside of bankruptcy, the licensor could not use its own breach of the license to extinguish an innocent licensee's right to use intellectual property such as a trademark, it could not do so in bankruptcy. But the bankruptcy court and, ultimately, the Court of Appeals for the First Circuit agreed with Tempnology, holding that Mission's rights as a licensee had been extinguished by rejection of the license agreement.

The Supreme Court reversed, agreeing with the licensee, Mission Products. The Court focused on the text of section 365(g) of the Bankruptcy Code, which states that rejection of a contract "constitutes a breach" of that contract. Because the term "breach" has no specialized meaning under the Bankruptcy Code, the Court applied the long-established principle of bankruptcy law that property rights are determined by non-bankruptcy law—which, in this case, meant contract law.

In looking to basic contract law, the Court observed that a breach does not terminate a contract and, therefore, it follows that rejecting a license agreement does not terminate that agreement. While a particular license or state law may provide for a different outcome, if non-bankruptcy law would not allow the licensor to extinguish the licensee's rights on account of the licensor's own breach, then the licensor's rejection of a license in bankruptcy could not extinguish those rights.

The Court acknowledged that special features of trademark law might impose a continuing duty on a mark's owner to monitor the mark's use and exercise control over the quality of goods sold under it. However, the Court would not allow such "trademark-specific" concerns to override the plain, "rejection-equals-breach," language of the Bankruptcy Code.

The ruling in Tempnology provides both licensors and licensees of trademarks with a clear rule—bankruptcy itself cannot terminate a licensee's ability to use a trademark. But, even with that clarity, both parties to a license agreement may still alter the effect of that rule by bargaining for a different result in their agreement.

For more information on the Tempnology decision or other related matters, please contact your Quarles & Brady attorney or:

• Christopher Combest: (312) 715-5091 / christopher.combest@quarles.com
• E. King Poor: (312) 715-5143 / king.poor@quarles.com