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By David Taylor

Trademarks and service marks (collectively “marks” for brevity purposes) are synonymous with brand names, although a mark can be a word, name, symbol, sound, color, scent, shape or the like used to identify a particular source of a product or service.  One of the rights conferred by a mark is the right to license others to use the mark.

But what happens when the licensor enters bankruptcy?  Is the licensor required to continue licensing the mark?  Or can the licensor unilaterally terminate the license, even over the licensee’s objections?  Given the ubiquitous presence of marks in the marketplace (over 600,000 trademark applications for registration were filed in the U.S. Patent & Trademark Office in FY 2018 alone), the issue of mark termination in bankruptcy is not uncommon.  Further, the issue can arise with modern franchising, which often depends on trademark licenses.  Indeed, the treatment of mark licenses in bankruptcy has been characterized by the International Trademark Association (INTA) as “the most significant unresolved legal issue in trademark licensing.”

The U.S. Supreme Court took up the issue of whether a trademark licensor declaring bankruptcy (or its trustee) can revoke a license under the Bankruptcy Code in Mission Prod. Holdings, Inc. v. Tempnology, LLC, — U.S. —, No. 17-1657, 2019 WL 2166392 (May 20, 2019).  According to the petition for writ of certiorari, Tempnology, LLC developed chemical-free cooling fabrics, and used those fabrics to produce specialized clothing and accessories, which Tempnology marketed using multiple marks, including “Coolcore.”  In November 2012, Tempnology entered into a Co-Marketing and Distribution Agreement with Mission Product Holdings, Inc. (“Mission”) whereby Mission was granted a worldwide, non-exclusive (except for exclusivity in the United States), perpetual license to use the marks in association with Tempnology’s products.  While the parties were engaged in arbitration with one another over termination of the Agreement, Tempnology filed a voluntary petition for Chapter 11 bankruptcy.

Section 365(a) of the Bankruptcy Code gives a debtor such as Tempnology the option, subject to court approval, to assume or reject any executory contract.  The bankruptcy court granted Tempnology’s motion under Section 365(a) of the Bankruptcy Code to “reject” the Agreement, repudiating any further performance of Tempnology’s duties.  Tempnology argued, and the bankruptcy court agreed, that its rejection of the Agreement also terminated the rights it had granted Mission to use the marks. On appeal, the Bankruptcy Appellate Panel (BAP) for the First Circuit reversed.  On further appeal, a divided First Circuit disagreed with the BAP and reinstated the bankruptcy court’s decision terminating Mission’s license.

In an 8-1 decision written by Justice Kagan to which Justice Gorsuch dissented on the ground of mootness, the Supreme Court sided with Mission and reversed the First Circuit.  The Court held that Tempnology’s rejection of the Agreement had the same effect as a contract breach outside of bankruptcy: it gave Mission a claim (as an unsecured creditor) for damages while leaving intact Mission’s right to use the marks under the Agreement.  In the Court’s words, “[r]ejection of a contract – any contract – in bankruptcy operates not as a rescission but as a breach…. [T]he breach does not revoke the license or stop the licensee from doing what it allows.”

The Court rejected Tempnology’s argument that its ability to reorganize under the bankruptcy laws would be impeded if it was required to monitor Mission’s quality control, which it argued was necessary to protect its marks against possible abandonment due to naked licensing.  The Court found that the Bankruptcy Code, while providing a debtor like Tempnology with “a powerful tool,” does not grant the debtor an exemption from all the burdens that generally applicable law (whether involving contracts or trademarks) imposes on property owners.

Although not directly addressed by Justice Kagan’s decision, trademark licensing agreements often have terms that address the remedies available to the parties should one enter bankruptcy.  Such terms sometimes provide for the very relief that Tempnology was looking for here, e.g., they allow the licensor to terminate the agreement and revoke a trademark license if it enters bankruptcy.  Justice Sotomayor’s concurring opinion, while acknowledging that the Court did not grant certiorari on this particular issue, suggested that (in her view) such clauses are enforceable, finding that “[s]pecial terms in a licensing contract or state law could bear on that question [of whether the licensee’s right would survive a breach under applicable nonbankruptcy law] in individual cases.”  Accordingly, the Mission decision should not deter practitioners from continuing to include carefully worded bankruptcy-related terms in their licensing contracts.

David Taylor is a partner with the law firm of Berenato & White, LLC in its Bethesda office.  The firm concentrates its practice in the area of intellectual property.