Trademark License Survives Bankruptcy Supreme Court Rules

In an 8-1 decision, the Supreme Court ruled that a company’s bankruptcy does not allow it to rescind a trademark licensing agreement it had entered with a licensee. In so ruling, the court settled an issue that had split the federal appellate circuits and congress over the handling of trademarks licenses in bankruptcy.

The case stems from a 2012 license agreement between New Hampshire-based Tempnology LLC and New York-based Mission Product Holdings Inc. over the exclusive rights for U.S. distribution of Tempnology’s apparel and accessory products, which were designed to stay cool when worn during exercise. The products, chemical-free towels, socks, and headbands, were sold under the brand names Coolcore and Dr. Cool. The license also included the nonexclusive right for Mission Product Holdings to use Tempnology’s trademarks.

In 2014, the parties’ relationship soured, which led to the filing of arbitration. In arbitration, the arbitrator ruled that Mission Product Holdings was entitled to maintain its distribution and trademark rights through July 2016, even though it did not intend to place any further orders with Tempnology. In 2015, Tempnology filed for Chapter 11 bankruptcy, claiming that Mission Product Holdings had “starved” it of income. In bankruptcy, Tempnology attempted to rescind the license agreement under Section 365 of the Bankruptcy Code.

At the time Tempnology made the request to rescind the license agreement, the law in the various circuits was not settled, which likely prompted the high court to take on the issue in the first place. The First Circuit had long followed the Fourth Circuit’s 1985 ruling in Lubrizol Enterprises v. Richmond Metal Finishers, Inc., which held that a debtor-licensor could abrogate a licensee’s rights by rejecting the license agreement pursuant to Section 365(a) of the Bankruptcy Code. Congress later overruled Lubrizol as it related to patents and copyrights but refused to do so with regard to trademarks, insisting that more study of the issue was required due to the unique ongoing obligations of mark owners in policing their marks.

Tempnology, the licensor, urged the court to accept the logic of the First Circuit and that it had properly ruled that trademark licenses are swept into the bankruptcy estate just like any other “executory” contract, leaving the licensee with only a pre-petition claim for damages for breach of contract.

Mission Product Holdings, the licensee, argued, on the other hand, that it should not lose the trademark rights that it bargained for, urging the Supreme Court instead to adopt the Seventh Circuit’s position in Sunbeam Products v. Chicago American. In Sunbeam, Judge Frank Easterbrook wrote that bankruptcy did not permit licensors to abrogate license agreements but instead licensees should be free to continue using the marks they had bargained for.

Justice Elena Kagan, writing for the majority, sided with Mission Product Holdings and put the circuit split over Lubrizol to rest when it comes to trademarks writing that, “Congress’s repudiation of Lubrizol for patent contracts does not show any intent to ratify that decision’s approach for almost all others.” Rather, adopting the reasoning of Sunbeam, Kagan wrote that, “The debtor can stop performing its remaining obligations under the agreement, but the debtor cannot rescind the license already conveyed. So the licensee can continue to do whatever the license authorizes.”

Justice Neil Gorsuch, the lone dissenter in the decision, wrote that the case should have been dismissed as improvidently granted because Mission Product Holding’s license had expired, meaning that there was no existing controversy as required by Article III, Section 2’s cases and controversies requirement for justiciability.

The court’s full opinion is available here.

The Intellectual Property Law attorneys at Lubin Austermuehle have over thirty years of experience litigating complex trademark, class action, copyright, trade secret, non-compete agreement, libel suits, and many different types of business and commercial litigation disputes.  Super Lawyers named Illinois commercial law trial attorney Peter Lubin a Super Lawyer and Illinois business dispute attorney Patrick Austermuehle a Rising Star in the Categories of Class Action, Business Litigation, and Consumer Rights Litigation. Our Evanston and Naperville trademark law, copyright, intellectual property, and business dispute lawyers and attorneys handle emergency business lawsuits involving copyrights, trademarks, injunctions, and TROS, covenant not to compete, franchise, distributor and dealer wrongful termination and trade secret lawsuits and many different kinds of business disputes involving shareholders, partnerships, closely held businesses and employee breaches of fiduciary duty. We also assist Oak Brook and Wheaton area businesses and business owners who are victims of fraud. You can contact us by calling at 630-333-0333.  You can also contact us online here.

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