Earlier today, the Supreme Court finally answered the question of whether a trademark licensee is protected when the trademark owner/licensor files a bankruptcy petition and rejects the trademark license in accordance with section 365 of the Bankruptcy Code. To cut to the chase, trademark licensees won.
In its 8-1 decision in Mission Product Holdings, Inc. v. Tempnology LLC, Justice Kagan, writing for the Court, held that rejection of a trademark license did not result in the trademark licensee losing its rights under the license. Instead, citing to section 365(g) of the Bankruptcy Code and the Seventh Circuit’s decision in Sunbeam Prods. v. Chicago Am. Mfg., LLC, 686 F.3d 372 (2012), the Supreme Court held that rejection of the trademark license constitutes only a breach of the license and not a rescission or termination of the license. And, while a debtor who breaches a trademark license (through rejection) can stop performing under that license, the debtor cannot rescind the license already conveyed and the licensee can continue to do what the license authorizes.
In its ruling, the Supreme Court rejected the so-called “negative inference” drawn by a majority of bankruptcy courts that the omission of trademarks from the definition of “intellectual property” in the Bankruptcy Code meant that trademark licenses once rejected are terminated. Further, the Supreme Court found no support in section 365 to create a “special rule” for trademarks given the existing need for a trademark owner to monitor and exercise quality control over the goods and services sold under a license.
In her concurring opinion, Justice Sotomayor wrote that the Supreme Court’s holding did not decide that each and every trademark licensee now has the “unfettered right” to continue using licensed marks post-rejection since the issue before the Court was only whether rejection terminates the rights of a licensee that would survive a licensor’s breach under nonbankruptcy law. Further, Justice Sotomayor highlighted the obligations imposed by section 365(n) on intellectual property licensees post-rejection (e.g., the obligation to continue to pay post-rejection royalties if they want to keep using the licensed intellectual property) and she opened the door to Congress to tailor similar post-rejection provisions for trademark licensees.
The importance of Mission Product cannot be overstated. While prior to today the post-rejection rights of trademark licensees were questionable and largely dependent upon where the bankruptcy case was filed, today’s holding makes clear that rejection of a trademark license does not rescind the license. Instead, the trademark licensee, post-rejection, has the same rights they would have had outside of bankruptcy had the licensor breached the license. But, as Justice Sotomayor wrote, Congress may now need to come in and provide further clarity on the post-rejection obligations of a trademark licensee.