By David G. Oberdick, Intellectual Property Group Chair
The Bankruptcy Code allows debtors to reject certain existing contracts, but that option doesn’t extend to trademark licensing agreements, the U.S. Supreme Court ruled recently.
In these agreements, the owner, or licensor, of a trademark – a word, phrase, logo, slogan, design or any other identifier that distinguishes a product or brand – will license the right to use the trademark to another party, or licensee. The agreement dictates how a trademark can be used (typically with quality control provisions) and generally lasts for a scheduled term. In return for the license, the licensor often receives a percentage of revenue from all sales or other commercialization involving the trademark.
Owners may want to license their trademarks to expand their business, moving their brand to new markets while another business handles the work (such as in a franchise relationship). The latter party, as licensee, benefits by using a well-known symbol to grow its own business. As a result, some licensees may become dependent on certain trademarks, and losing the licensee rights to the trademarks could negatively impact sales and market share. Bankruptcies by the trademark holder, therefore, can be potentially devastating to a licensee.
In Mission Product Holdings, Inc. v. Tempnology, LLC., Mission had entered an agreement in 2012 to distribute sports apparel under clothing manufacturer Tempnology’s “Coolcore” brand, using associated trademark logos and labels, until 2016. Tempnology went bankrupt in 2015, however, and asked a bankruptcy court to allow it to reject the agreement with Mission. In response, Mission requested damages for lost profits resulting from the rejection of the agreement and through the scheduled end of the agreement.
The Bankruptcy Code gives a debtor company the ability to reject contracts to free the company of obligations while it restructures, but there is an exception for intellectual property contracts whereby such contracts cannot be rejected. Although trademarks generally are considered to be intellectual property, the Bankruptcy Code’s definition of “intellectual property” only includes trade secrets, patents and copyrights, and does not mention trademarks. As a result, the bankruptcy court agreed with Tempnology that, by a “negative inference,” trademarks are not included in the exception.
An initial appeal resulted in a reversal of the decision of the bankruptcy court, and, on further appeal, the United States Court of Appeals for the First Circuit reinstated the decision of the bankruptcy court. The case thereafter made its way to the Supreme Court, and the question presented was seen by the International Trademark Association as “the most significant unresolved legal issue in trademark licensing.”
The Supreme Court, in an 8-1 decision on May 20, held that the intellectual property exception to the option of rejecting contracts include a trademark license. Justice Elena Kagan stated in the majority opinion that “a rejection breaches a [trademark] contract but does not rescind it. And that means all the rights that would ordinarily survive a contract breach, including those conveyed here, remain in place.”
The majority argued against the “negative inference,” with Justice Sonia Sotomayor citing a Senate report in her concurring opinion that lawmakers did not “intend any inference to be drawn concerning treatment of executory contracts.” The justices also rebuffed Tempnology’s numerous arguments for why the case was moot, although Justice Neil Gorsuch dissented on that point.
The International Trademark Association observed that the Supreme Court’s ruling settles a contentious and important matter. Going forward, companies that enter bankruptcy protection and have license agreements for their trademarks in effect must be aware those trademark rights remain in place for the licensee through the full term of the license.
If you have any questions about how this ruling affects you or other questions and concerns over intellectual property law, please reach out to David G. Oberdick at [email protected].