In Mission Product Holdings, Inc. v Tempnology, LLC (Supreme Court 2019), the Supreme Court addressed whether a rejection by a licensor in a bankruptcy proceeding “terminates rights of the licensee that would survive the licensor’s breach under applicable nonbankruptcy law.” The Supreme Court answered no to this question, holding that a rejection breaches a contract but does not rescind it.
Tempnology entered into an agreement with Mission that granted Mission a non-exclusive license to use Tempnology’s Coolcore trademarks. Before the expiration of this agreement, Tempnology filed for Chapter 11 bankruptcy and asked the Bankruptcy Court to allow it to reject this agreement.
The Bankruptcy Court approved the rejection, which meant that Tempnology could stop performing under the agreement and that Mission could assert a claim for damages resulting from Tempnology’s nonperformance. The Bankruptcy Court also agreed with Tempnology’s assertion that under a traditional view of Section 365 of the Bankruptcy Code, this rejection also terminated the rights it had granted Mission to use the Coolcore trademarks.
The Bankruptcy Appellate Panel reversed this holding based on a prior decision by the Court of Appeals for the Seventh Circuit that held that rejection of a contract “constitutes a breach” of that contract. The Appellate Panel explained that outside of bankruptcy, the breach of an agreement does not eliminate those rights that the agreement had already conferred on the non-breaching party.
The Court of Appeals for the First Circuit rejected the Appellate Panel’s decision and reinstated the Bankruptcy Court’s decision terminating Mission’s trademark license. The Court of Appeals reasoned that special features of trademark law required that the trademark license be terminated. Specifically, the majority reasoned that if a licensee can keep using a mark after an agreement’s rejection, the licensor will need to carry on its monitoring activities which would frustrate the principal aim of a rejection — namely, to release the debtor’s estate from burdensome obligations.
The Supreme Court rejected the Court of Appeals reasoning holding that a rejection breaches a contract but does not rescind it. The Supreme Court noted that according to the plain language of Section 365, a rejection “constitutes a breach of a contract,” deemed to have occurred “immediately before the date of the filing of the petition.”
The Supreme Court further noted that Section 365 reflects a general bankruptcy rule that the estate cannot possess anything more than the debtor itself did outside bankruptcy. This rule prevents a debtor in bankruptcy from recapturing interests it had given up, namely the rights to the trademark license.
Tempnology’s main argument rested on the negative inference drawn from the fact that Section 365(n) provides that licensees of some intellectual property rights retain contractual rights after rejection. The specific intellectual property rights including patents but do not trademarks. In response, the Supreme Court noted that in enacting Section 365(n), Congress did nothing to alter the natural reading of Section 365 that rejection and breach have the same result.
Tempnology also argued that a trademark licensor’s duty to monitor and “exercise quality control over the goods and services sold” required that rejection of the agreement also revoke the trademark license. The Supreme Court noted that in allowing rejection of an agreement, Section 365 does not grant the debtor an exemption from all the burdens that generally applicable law, including contracts and trademarks, imposes on property owners.
This ruling changes the traditional view of bankruptcy and emphasizes the need to clearly define in the trademark license agreement what happens to trademark license rights under various circumstances, including bankruptcy.