Intellectual Property

Leaving A Mark: What Mission Products Holdings, Inc. V. Tempnology, LLC May (Or May Not) Mean For Trademark Licenses In Bankruptcy

Based on oral arguments, how SCOTUS will rule on this issue is anyone’s guess.

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When it comes to bankruptcy, what happens when a debtor exercises its statutory right to reject a contract? When it comes to trademarks, this has been a question that has plagued the intersection of intellectual property and bankruptcy law for decades.  Recently, the Supreme Court of the United States (SCOTUS) heard oral arguments in Mission Product Holdings Inc. v. Tempnology, LLC to deal with this very issue — specifically, “[w]hether, under §365 of the Bankruptcy Code, a debtor-licensor’s “rejection” of a license agreement which ‘constitutes a breach of such contract,’ 11 U .S.C. §365(g)-terminates rights of the licensee that would survive the licensor’s breach under applicable non-bankruptcy law.”  Although this may seem a remote possibility for your company or client, it is an issue that intellectual property counsel must take into account when crafting protections for any intellectual property portfolio relying on licenses to critical intellectual property.

Here is some context that should help frame the issue.  As a general matter, when a company enters bankruptcy all of the assets of that company become part of the bankruptcy estate.  When those assets include intellectual property licensed to licensees, the trustee in bankruptcy (or Chapter 11 debtor-in-possession) “may assume or reject any executory contract or unexpired lease of the debtor” under 11 U.S.C. § 365(a). Although exclusive intellectual property licenses have generally been regarded as executory contracts (i.e., contracts in which the terms are set to be fulfilled at a later date before it becomes fully executed), non-exclusive licenses are not so easily categorized because the licensor can grant rights in the subject intellectual property to others by definition, arguably allowing from rejection of ongoing debtor/licensor obligations under the license but not otherwise affecting previously granted intellectual property rights under the license.

This issue controversially addressed by the Fourth Circuit in Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers, Inc.)in 1985, holding that the rejection of a non-exclusive technology license agreement terminated all of the licensee’s rights under that agreement.  This position can significantly impact a licensee that relies upon the licensor to maintain the licensed technology, and can otherwise force the licensee to acquire a license to another platform (usually at significant expense).  A contrary position was found by the Seventh Circuit in 2012 in Sunbeam Products v. Chicago Manufacturing LLC., which held that In rejection of the trademark license terminates the debtor-licensor’s obligations under the license (including the obligation to police use of the mark), but not the licensee’s right to continue using the licensed mark under the terms of the license agreement. You can guess where this was heading.

Congress attempted to address this issue by the enactment of Section 365(n) of the Bankruptcy Code to clarify that “the rights of an intellectual property licensee to use the licensed property cannot be unilaterally cut off as a result of the rejection of the license pursuant to section 365 in the event of the licensor’s bankruptcy.”  The effect?  In the event of a rejection of the license agreement by the trustee/debtor-in-possession, the licensee could now elect to retain its rights under the license agreement for the remainder of the license term, as such rights existed prior to the initiation of bankruptcy proceedings. See 11. U.S.C. Section 365(n)(1)(B). The problem?  Trademarks are not listed as “intellectual property” under the Bankruptcy Code.

Why exclude trademarks?  Congress appeared concerned about the licensor’s continued quality control obligations under a trademark license that required more study — if included, a licensee’s retention of rights in trademarks post-rejection would require the licensor to fulfill such obligations even though it rejected the license.  Under U.S. law, trademark owners have a duty to police their trademarks to guard against infringement and thereby protect the viability (and enforceability) of the brand.  Without such quality control, the there is a “naked license” to the trademark(s), which impacts the licensor’s duty to police its trademark(s) that can eventually render such trademark(s) unenforceable. As a result, Congress seems to have left this issue to the courts, and given a split of authority in the lower courts, SCOTUS granted certiorari in Mission Products Holdings and will be weighing in soon.

If oral arguments in Mission Product Holdings, Inc. v. Tempnology, LLC are any indication, SCOTUS may be leaning towards permitting licensees to maintain the right to use licensed trademarks post-rejection under limited circumstances.  From what I can gather from the oral arguments, there was an emphasis in questioning regarding quality control obligations of the trademark licensor, and how trademarks differ from other types of intellectual property.  In weighing a licensee’s rights being terminated through no fault of the licensee (i.e., due to the licensor’s rejection) versus the licensor’s quality control obligations, it would seem to me that at least some of the justices appreciate the differences between such quality control duty and the licensee’s right to continued use of the trademark. This appears to bode well for trademark licensees, but we’ll have to see.

How SCOTUS will rule on this issue is anyone’s guess — it may draw a clear line for trademark licensors and licensees in the event of bankruptcy (a good thing), or leave a blot on the issue by finding that the issue is moot (a bad thing). No matter which way SCOTUS rules, however, trademark owners and licensees need to take heed — this decision may go either way, but there is little question it is sure to leave a mark.

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Tom Kulik is an Intellectual Property & Information Technology Partner at the Dallas-based law firm of Scheef & Stone, LLP. In private practice for over 20 years, Tom is a sought-after technology lawyer who uses his industry experience as a former computer systems engineer to creatively counsel and help his clients navigate the complexities of law and technology in their business. News outlets reach out to Tom for his insight, and he has been quoted by national media organizations. Get in touch with Tom on Twitter (@LegalIntangibls) or Facebook (www.facebook.com/technologylawyer), or contact him directly at tom.kulik@solidcounsel.com.

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