The U.S. Supreme Court decided recently to uphold a licensee’s right to continue using trademarks despite the bankrupt licensor’s rejection of the underlying license agreement. As a result, bankrupt brand owners cannot use bankruptcy law to unilaterally revoke a trademark license. In Mission Product Holdings, Inc. v. Tempnology, LLC, n/k/a Old Cold LLC, the Supreme Court, settling a conflict among the circuits, reversed a decision of the First Circuit Court of Appeals and embraced the reasoning of the Seventh Circuit, which permits a licensee of trademarks to retain its use of the marks even if the licensor rejects the license in bankruptcy.
The Court’s ruling addresses a long-standing dispute over the trademark issue. Among the powers enjoyed by a debtor in bankruptcy is the ability to “reject” burdensome contracts. When a debtor rejects a burdensome contract, the debtor does not have to perform the contract. “Rejection” is deemed by statute as a “breach” of the contract immediately before the filing. This leaves the licensee with a bankruptcy claim that typically is unpaid, or hardly paid at all.
But what about the licensee’s right to continue to use the trademark? The Supreme Court ruled that the deemed breach of a license agreement caused by a rejection is not the equivalent of a rescission, which would take away the licensee’s rights. Looking to the effect of a breach of a license agreement under state law, the Supreme Court held that a mere breach by the licensor does not deprive the licensee of use of the mark through the term of the license.
The Supreme Court rejected decisions which deprive the licensee of continued use of the mark. Those decisions recognized that Congress created a statutory exception permitting licensees to continue to use “intellectual property” after a rejection, but refused to apply this carve-out to trademarks because trademarks were not included in the definition of “intellectual property.” It also rejected the policy argument that a debtor should be permitted to shed all of its obligations, including its obligation to monitor and defend the mark.
Instead, the Supreme Court followed the statute, which treats rejection as a breach, permitting the licensee to continue using trademarks.
