Supreme Court Decides “the Most Significant Unresolved Issue in Trademark Licensing”
May 28, 2019
Prior to May 20, 2019, there was a split among circuit courts as to what happens to a trademark license when the trademark owner (licensor) declares bankruptcy. The International Trademark Association (INTA) called this circuit split “the most significant unresolved issue in trademark licensing.” In an 8-1 decision announced on May 20, 2019, in Mission Product Holdings, Inc. v. Tempnology, LLC, the Supreme Court resolved the circuit split and held that a licensee may continue to use a trademark subject to a trademark license agreement even after the licensor “rejects” (or breaches) the trademark license and discharges its obligations under the agreement. Thus, a trademark licensee’s rights should survive rejection of the trademark license, absent other contractual provisions or state laws to the contrary.
Under bankruptcy law, a debtor has the option to “reject” certain contracts (“executory contracts”) to alleviate itself of unperformed obligations. The Bankruptcy Code delineates specific rights retained by the counterparty for contracts involving certain categories of intellectual property, including contracts involving trade secrets, patents, and copyrights. Omitted from the list of special intellectual property cases are trademarks, which has led to a circuit split in how to deal with a trademark license that has been rejected by the bankrupt licensor. The Seventh Circuit had held that the trademark license survives rejection so that the licensee may continue to use the trademark even when the licensor has no further obligations under the agreement. The First Circuit, however, had held that not even the trademark license survives rejection because: (1) trademarks were not among the carveouts of the rule allowing debtors to reject executory contracts; and (2) allowing the licensee’s rights to continue under the rejected agreement is contrary to absolving the licensor from its obligation to exercise quality control over the licensing of its trademarks.
In resolving the circuit split, the Supreme Court endorsed the Seventh Circuit approach, holding that rejection of a trademark licensing agreement does not deprive the licensee of rights to use the trademark. The Supreme Court relied on the general rule in Section 365(g) of the Bankruptcy Code that rejection of an executory contract is a breach of the contract. As with the breach of any contract—even those outside the bankruptcy context—breach does not revoke the non-breaching party’s rights under the agreement. With respect to the special intellectual property cases under Section 365, the Court refused to read these provisions as subverting the general rule that rejection equals breach. Rather, the “carveouts” were each made to “embellish on or tweak the general rejection-as-breach rule.” The court also reasoned that while rejection may discharge the debtor of its financial burdens, bankruptcy law does not discharge the debtor of all burdens related to property ownership.
It is important to be mindful that trademark licensing agreements come with risks and rewards for both the licensor and licensee. Before entering into a trademark licensing agreement, it is crucial to understand the solvency of the contracting parties and develop a Plan B should the agreement terminate, or the contracting parties lose this important source of licensing revenue or brand recognition.
McNees has a team of experienced trademark attorneys and litigators who are available to counsel business owners about intellectual property protection and licensing agreements. We will continue to monitor and report on other developments in intellectual property law.
© 2019 McNees Wallace & Nurick LLC
McNees Intellectual Property Client Alert is presented with the understanding that the publisher does not render specific legal, accounting or other professional service to the reader. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using this material must always research original sources of authority and update this information to ensure accuracy and applicability to specific legal matters. In no event will the authors, the reviewers or the publisher be liable for any damage, whether direct, indirect or consequential, claimed to result from the use of this material.