Intellectual Property

Leaving A Mark III: Final Thoughts On Trademark Licenses In Bankruptcy Under Mission Products Holdings v. Tempnology, LLC

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They say that the third time is the charm — I don’t know how applicable that phrase may be in most circumstances, but in this case, it may be right on point. I previously wrote on the Supreme Court of the United States (SCOTUS) opinion in Mission Products Holdings v. Tempnology here and here. I recently had the great pleasure of being invited to participate on a panel at the American College of Bankruptcy 10th Circuit Educational Program in Santa Fe, NM to give my intellectual property perspectives on the Mission Products Holdings ruling. Specifically, I spoke along with Bob Keach, outside counsel for Mission Products Holdings (as well as a Fellow of the American College of Bankruptcy and Past-President of the American Bankruptcy Institute) and the Hon. Robert H. Jacobvitz, Chief Judge of the US Bankruptcy Court for the District of New Mexico, all moderated by Paul Fish (also a Fellow of the American College of Bankruptcy). Needless to say, this was an exceptional group of bankruptcy lawyers and I am honored to have been a part of this panel to speak “IP” on this topic. More importantly, I left with some final takeaways from the Mission Products Holdings case that are worth some additional thought.

My previous writings go through the background of Mission Products Holdings, so I won’t rehash them here. That said, a quick summary won’t hurt: As a direct result of the 4th Circuit’s ruling in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. (4th Cir. 1985), 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: Trademarks are not listed as “intellectual property” under the Bankruptcy Code, due to the unique issues presented by the nature of trademarks themselves, such as the requirement of the trademark owner to maintain quality control over goods/services under the trademark provided by a licensee. Failure to maintain such quality control can result in 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). The effect: invalidation of the license and, in the worst cases, loss of trademark rights (and any attendant trademark registrations). Therefore, permitting a licensee to continue use post-rejection would foreseeably require the licensor to continue its quality control obligations on a license it rejected.

Thankfully, this issue was granted certiorari and clarified by SCOTUS. Addressing a plain reading of Section 365(g), a SCOTUS majority led by Justice Kagan held that “a debtor’s rejection of an executory contract in bankruptcy has the same effect as a breach outside bankruptcy…[and] cannot rescind rights that the contract previously granted.” As a result, the SCOTUS majority held “that construction of Section 365 means that the debtor-licensor’s rejection cannot revoke the trademark license.” By all accounts, this plain meaning approach to Section 365 (along with an excellent analysis) confirmed that Section 365(n) supplements (rather than supplants) Section 365(g). As a result, trademark licensees have some clarity where the licensor enters bankruptcy and the debtor-in-possession or trustee chooses to reject the license. As a panel, we all agreed that such a direct approach to statutory construction was refreshing and that SCOTUS got this one right. That said, open issues (beyond those I previously addressed) definitely remain that should be considered carefully by counsel. Here are a few of the most prominent ones we discussed with respect to trademarks:

  1. Trademarks Are Not Part of Section 365(n), But.… By interpreting Section 365(g), the justices did not incorporate trademarks into Section 365(n). Justice Sotomayor’s concurring opinion, however, noted that the decision does not mean “every trademark licensee has the unfettered right to continue using licensed marks post rejection”. Why? Because such rights may be limited by “applicable non-bankruptcy law”. For example, Section 365(n) requires continued royalty payments by the licensee in the event the licensee opts to continue use post-rejection, but without any deduction for damages. This may or may not apply in an individual case depending upon the application of applicable non-bankruptcy law.
  1. No Clarity for Exclusivity. Where trademark licenses confer exclusivity to the licensee, Section 365(n) permits the licensee to maintain such exclusivity post-rejection (within a given territory or field of use). As aforementioned, however, trademarks are not a part of Section 365(n). As rejection is to be treated as a breach under Section 365(g), does this mean that the licensee cannot maintain such exclusivity post-rejection? From my perspective, “applicable non-bankruptcy law” may be instructive here, but the issue is unresolved.
  1. Equitable Remedies Post-Rejection Remain Unresolved. The Mission Products Holdings case is helpful, but it did not address the handling of equitable remedies following a debtor’s rejection of the license, such as specific performance, rights of first refusal, confidentiality and covenants not to compete. Although one may look to “applicable non-bankruptcy law” for guidance, it should be noted that Section 101(5) of the Bankruptcy Code states that a “claim” includes certain equitable remedies “for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.”  Not all equitable rights are dischargeable in bankruptcy — what if the “claim” does not give rise to a right of payment? Good question, with no simple answer.

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These are just some of the issues discussed, and I am sure that some (or all) of them will eventually be addressed through the courts. In the meantime, trademark holders and licensees will approach negotiations with a keener eye towards quality control and termination provisions. Further, purchasers (such as, for example, brand aggregators) would be wise to perform extra due diligence when reviewing company portfolios to ensure that any trademark licenses will not create impediments to value and intended monetization. Without question, the Mission Products Holdings case has left an indelible mark upon the law involving trademark licenses post-rejection — just make sure it doesn’t leave a big mark on the trademark assets of your company (or client) as well.

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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