SCOTUS Resolves Circuit Split: Trademark License Rejection in Bankruptcy Does Not Terminate Licensee’s Usage Rights
By Emily R. Parker* and David G. Barker
The U.S. Supreme Court recently held in Mission Product Holdings v. Tempnology that a trademark licensor cannot revoke the right of a licensee to use a trademark by terminating a license agreement in bankruptcy. Mission licensed a trademark from Tempnology, which terminated the license after filing bankruptcy in 2015. The First Circuit held that Tempnology permissibly rejected the agreement in bankruptcy and terminated Mission’s right to use the mark. Mission appealed because the First Circuit’s decision conflicted with the Seventh Circuit decision in Sunbeam Products v. Chicago American Manufacturing, which held that a bankruptcy debtor’s rejection of a licensing agreement does not terminate the licensee’s right to use the mark.
This long-standing circuit split stems from different interpretations of the U.S. Bankruptcy Code § 365. Under § 365(n), if the debtor rejects a license, the licensee can elect to retain its rights to the intellectual property. However, the Bankruptcy Code has a special, limited definition of “intellectual property,” which does not mention trademarks. The First Circuit interpreted this omission to mean that a trademark licensee enjoys none of § 365(n)’s special protections and can lose its license if the licensor files bankruptcy. In contrast, the Seventh Circuit focused on § 365(g), which says that rejection of an executory contract constitutes a breach of such contract by the debtor. The Seventh Circuit reasoned that, outside of bankruptcy, breach does not terminate a licensee’s right to use the intellectual property. So too, in bankruptcy, a licensee’s right-to-use should remain despite rejection of the license.
The Supreme Court resolved the circuit split, agreeing with the Seventh Circuit and reversing the First Circuit. Justice Kagan explained:
The question is whether the debtor-licensor’s rejection of that contract deprives the licensee of its rights to use the trademark. We hold it does not. A rejection breaches a contract but does not rescind it. And that means all the rights that would ordinarily survive a contract breach, including those conveyed here, remain in place.
This 8-1 decision gives trademark licensees the right to continue using a mark even if the licensor rejects the underlying agreement in bankruptcy.
In her concurrence, Justice Sotomayor alluded to the possibility of licensors including “special terms” in trademark licenses to allow usage rights to be rescinded in bankruptcy. Based on her comments, licensors likely will test the bounds of those “special terms” in the coming years. Practitioners should carefully consider those terms in trademark licensing agreements.
*Emily R. Parker is a summer associate in Snell & Wilmer’s Phoenix office, working under the supervision of David G. Barker. She is anticipated to graduate from Arizona State University Sandra Day O’Connor College of Law in May 2020.