The Supreme Court issued its much-anticipated ruling yesterday in the First Circuit case of Mission Product Holdings, Inc. v. Tempnology, LLC, resolving a circuit split that had developed on “whether [a] debtor‑licensor’s rejection of an [executory trademark licensing agreement] deprives the licensee of its rights to use the trademark.”1 And it answered that question in the negative; i.e., in favor of licensees.
In our blog post From Gucci to Knock-off: How Bankruptcy Leaves Trademark Licensees at Risk, we examined the First Circuit’s holding that a licensee would not retain its rights under a trademark licensing agreement if the debtor-licensor rejected the license in bankruptcy, in comparison with a Seventh Circuit ruling that held to the contrary.2 The Supreme Court granted certiorari in October 20183 and heard oral argument on February 20, 2019.
In an 8-1 opinion authored by Justice Kagan — with Justice Sotomayor concurring and Justice Gorsuch dissenting4 — the Supreme Court reversed the First Circuit ruling and sided with the Seventh Circuit’s reasoning. Very simply put, the court held that the clear language of section 365(g) of the Bankruptcy Code — that “the rejection of an executory contract . . . constitutes a breach of such contract” — means rejection should be treated as a breach. In other words, the consequences to a non-debtor counterparty of rejection are the same as the consequences resulting from breach of that contract outside of bankruptcy under non-bankruptcy law (but with general unsecured claims for damages). In so holding, the court rejected the contrary viewpoint that a rejection acted more like a contract rescission or termination5 Specifically, the court ruled that “[a] rejection does not terminate the contract. When a rejection occurs, the debtor and counterparty do not go back to their pre-contract positions. Instead, the counterparty retains the rights it has received under the agreement. As after a breach, so too after a rejection, those rights survive.”6
The court stated that the same applied to trademark license agreements and that “because rejection ‘constitutes a breach,’ § 365(g), the same consequences follow in bankruptcy. The debtor can stop performing its remaining obligations under the agreement. But the debtor cannot rescind the license already conveyed.”7 Said differently, because a trademark licensee could retain the right to use the trademark post-breach outside of bankruptcy, it could retain those rights post-rejection. The court rejected the view that because the Bankruptcy Code provides specific language regarding the rights of certain counterparties to retain rights post-rejection under such rejected contracts (section 365(h) for certain lessees and section 365(n) for certain licensees to intellectual property other than trademarks), no other types of counterparties could retain their rights post-rejection. Instead, other counterparties’ rights are governed by the clear language of the general provision section 365(g).
Conclusion and Take-Away
This opinion provides some much-needed clarity concerning the impact of rejection on trademark licensing agreements. Like all decisions, this one will benefit some parties and hurt others. Trademark licensees are the real winners here; they have more certainty that no matter what happens to their licensor financially, they can keep their rights to use the trademark. Debtors and their other creditors are the ones who will suffer the most, as this decision could negatively impact the value of debtors’ estates in certain cases. Specifically, debtors now can no longer use bankruptcy to take back a trademark and either use it exclusively for themselves or license it exclusively to someone else. And the decision is not limited to trademark licensing agreements; anytime a non-debtor counterparty would be able to retain certain rights post-breach under applicable non-bankruptcy law, it will now be able to retain them post-rejection, thereby decreasing ever so slightly the power the tool of rejection otherwise provides debtors, in bankruptcy.