Over a year ago, we wrote about the intersection between trademarks and bankruptcy. Specifically, we described a scenario in which a licensor files bankruptcy and chooses to ‘reject’ the license agreement. Under the Bankruptcy Code, the licensee may continue to exercise its rights (and carry out its corresponding duties) with respect to all intellectual property licensed to it under the agreement. But the Bankruptcy Code does not include trademarks within its definition of intellectual property. Courts have been left to address what happens if the license includes trademarks.
The debtor-licensor’s rejection of the executory contract is a breach of the contract. In at least one circuit, this means nothing more than that the licensor has breached the agreement. The licensee still retains its rights (including its right to use the licensor’s trademarks), just like it would outside of bankruptcy. Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012).
By contrast, the US Court of Appeals for the First Circuit recently treated rejection of the executory trademark license agreement as a termination of the contract, depriving the licensee of the right to use the licensed trademarks. Mission Prod. Holdings, Inc. v. Tempnology, LLC (In re Tempnology, LLC), 879 F.3d 389 (1st Cir. 2018). This latter approach follows the reasoning of Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985), which predated the amendments to the Bankruptcy Code allowing intellectual property licensees to retain the rights (and obligations) associated with licensed intellectual property rights once the debtor-licensor has rejected the executory contract. Lubrizol involved a technology (not trademark) license.
The court in Tempnology case reasoned that allowing the licensee to retain its rights under the trademark license would not allow the debtor-licensor to be free of performance obligations because the debtor-licensor would still have to monitor use of the mark. In asking the Supreme Court to hear the case, the licensee in Tempnology, Mission Products, argued (in part) that the right to monitor did not necessarily create the duty to monitor.
At least two organizations filed amicus briefs encouraging the Supreme Court to accept the case. The International Trademarks Association (INTA) encouraged the Supreme Court to adopt the Sunbeam reasoning because treating rejection as a breach, but not termination, best promotes the strength and stability of the trademark system. A group of law professors similarly urged the Supreme Court to accept the case, noting that the First Circuit’s interpretation of the omission of trademarks from the definition within the Bankruptcy Code goes too far. Rather than giving courts the opportunity to decide the implications of the debtor-licensor’s breach in each case pursuant to non-bankruptcy law, it effectively created a uniform rule that requires the same result (termination) in each case, thus undermining the policy reason for allowing courts to decide the issue on a case by case basis.
On October 26, 2018, the Supreme Court granted certiorari and agreed to hear the case. Argument has yet to be scheduled. But this case presents the opportunity for the Supreme Court to resolve a split between circuits and eliminate uncertainty in the marketplace at the intersection of trademarks and bankruptcy.