Intellectual Property

Leaving A Mark II: Why Trademark Licensees Need To Beware The Holding In Mission Products Holdings v. Tempnology, LLC

Although SCOTUS has spoken, trademark licensees should not just breathe a sigh of relief.

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It feels good when you go on the record that the Supreme Court of the United States will probably rule a certain way, but being right has its consequences.  I previously wrote about Mission Products Holdings v. Tempnology, LLC (the ”Mission Products case”) here, and what it may mean for trademark licensees.  In the Mission Products Holdings case, the issue was whether trademark licensees retain rights to such trademarks after rejection of the license by the licensor in bankruptcy.  With a split of authority in the lower courts, this issue was granted review by SCOTUS, and on May 23, 2019, the Court ruled that trademark licenses do, in fact, retain trademark rights post-rejection.  That said, there is more here than meets the eye, and trademark licensees are not out of the woods yet.

I have previously written about the history of Section 365(n) here, so I won’t get into “how” we got to this place.  Suffice it to say that Congress enacted 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.”  This has the effect of permitting a licensee to elect to retain the rights under the license agreement as existed prior to the initiation of bankruptcy proceedings for the remainder of the license term after a rejection of the license agreement by the trustee/debtor-in-possession. See 11. U.S.C. Section 365(n)(1)(B). The problem that gave rise to the present situation is simple: Trademarks are not listed as “intellectual property” under the Bankruptcy Code, given the unique issues presented by the nature of trademarks themselves.

Unlike other forms of intellectual property, trademark owners have an obligation to control the quality of goods or services provided under the licensed trademark. This requirement is consistent with the licensor’s duty to police its trademarks to guard against infringement and improper use.  Absent such “quality control,” the license becomes a “naked license” because the product or service would no longer represent the level of quality expected of such product or service under such trademark(s).  Such a “naked license” impacts the trademark owner’s ability to enforce such trademark(s), and in the worst cases, results in the loss of trademark rights (and any attendant trademark registrations).  That said, you can see the problem here in the bankruptcy context — requiring the licensor to maintain quality control of trademarks under licenses it has rejected in bankruptcy seems fairly problematic.  This issue among others eventually led to the present case and SCOTUS agreeing to take up the issue… and take it up they did.

In resolving the Mission Products Holdings case, SCOTUS appears to have followed the plain language of Section 365 by treating the licensor’s rejection of the license as a breach.  In writing for the majority, Justice Kagan acknowledged how “parties and courts of appeals have offered [SCOTUS] two starkly different answers” in dealing with this issue (i.e., termination causing a contractual breach versus termination of the entire agreement and corresponding rights to the licensed trademark(s)), but ultimately stated the following: “Rejection of a contract—any contract—in bankruptcy operates not as a rescission but as a breach.”  SCOTUS rejected Tempnology’s arguments that Congress would have added trademarks as part of the “intellectual property” definition under Section 365.  In fact, Justice Sotomayor (in a concurring opinion) pointed out that “the Court’s holding confirms that trademark licensees’ post-rejection rights and remedies are more expansive in some respects than those possessed by licensees of other types of intellectual property.”  Ultimately, this makes sense — a debtor can reject the license, but such rejection under “Section 365 does not grant the debtor an exemption from all the burdens that generally applicable law—whether involving con-tracts or trademarks—imposes on property owners.”

Although SCOTUS has spoken, trademark licensees should not just breathe a sigh of relief — I would argue that trademark licensees now need to be more diligent than ever in negotiating trademark licenses.  Why?  Because a licensor can draft certain terms into the license that specifically termination rights in the event of bankruptcy that may limit rights post-rejection.  As Justice Sotomayor states:

[T]he Court does not decide that every trademark licensee has the unfettered right to continue using licensed marks post rejection. The Court granted certiorari to decide whether rejection “terminates rights of the licensee that would survive the licensor’s breach under applicable non-bankruptcy law.’ …The answer is no, for the reasons the Court explains. But the baseline inquiry remains whether the licensee’s rights would survive a breach under applicable non-bankruptcy law. Special terms in a licensing contract or state law could bear on that question in individual cases.

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I don’t know about you, but I read the holding to mean that licensees better be careful when negotiating trademark licenses so that specific terms don’t bite them in the event of a future licensor bankruptcy — and that’s not all.  Trademark licensors are no doubt reading this holding as well, and they will be taking advantage of it by inserting more protective language in the event of future bankruptcy, as well as potentially adjusting the terms of licenses and corresponding acope.  Make no mistake — trademark licensors already have a certain amount of leverage due to the rights they hold and will likely approach license negotiations very differently going forward.

From my perspective, the Mission Products Holdings case represents the right ruling, but be wary of the wrong takeaways.  Licensees can rest assured that their license rights should remain intact in the event the trademark licensor files for bankruptcy; however, they are not out of the woods.  Without question, trademark licensee need to take heed in negotiating trademark licenses so that they can ensure contractual rights are not necessarily limited.  If your company (or client) doesn’t do so, such failure will likely leave a mark far bigger than your company (or client) might think, and in more ways than they want to know.

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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