Have you ever worried about the status of your intellectual property rights if the licensor filed bankruptcy? Outside of bankruptcy, it was settled law that a licensor who breaches cannot revoke its rights under a contract, absent some special contract terms or unique aspect of law. In a bankruptcy, however, revocation was a serious concern in entertainment law and the fashion industry, for example. Days ago, the U.S. Supreme Court clarified your rights and ended any chance of debtors licensing away their intellectual property rights, declaring bankruptcy, and then re-trading them.
In Mission Product Holdings, Inc. v. Tempnology, LLC, nka Old Cold LLC, 2019 WL 2166392, the Supreme Court addressed the issue of whether a debtor-licensor’s rejection of a contract deprives the licensee of its rights to use the trademark. The Supreme Court held that it does not. Succinctly put, “A rejection breaches a contract but does not rescind it.” Accordingly, those rights conveyed by the contract survive the breach and remain in place.
This case arises in the context of a licensing agreement but should apply equally to all contracts with debtors. Tempnology primarily manufactured workout clothing designed to keep you cool and marketed those products under the brand name “Coolcore.” It used trademarks to distinguish its gear from the competition. Tempnology entered into a contract with Mission Product Holdings which gave Mission an exclusive license to distribute certain Coolcore products in the U.S. It also granted Mission a non-exclusive license to use the Coolcore trademarks. Before the agreement expired, Tempnology filed a voluntary petition under Chapter 11 of Title 11 of the U.S. Code a/k/a the Bankruptcy Code. Tempnology then asked the bankruptcy court to allow it to “reject” the licensing agreement.
The bankruptcy court approved the rejection, thereby relieving the debtor of any obligation to continue to perform and giving counterparty Mission a pre-petition claim for damages. Tempnology wanted more. Tempnology sued for declaratory judgment asking the court to determine that rejection was tantamount to rescission in that it terminated the rights it granted Mission to use Coolcore trademarks. While the bankruptcy court agreed with Tempnology, the Bankruptcy Appellate Panel for the First Circuit disagreed. The First Circuit Court of Appeals rejected the BAP’s analysis and an opinion out of the Seventh Circuit, and reinstated the bankruptcy court’s decision.
Numerous courts have struggled with the ramifications of a debtor’s rejection of a contract pursuant to Section 365 of the U.S. Bankruptcy Code. Over time, two views emerged. Some courts concluded that a contract breach should have the same consequences as a breach outside of bankruptcy. Under this scenario, a breach allows the counterparty a suit for damages while leaving intact the rights the counterparty received under the agreement. Other courts have held that a contract breach is more akin to a rescission in a non-bankruptcy environment. In this paradigm, the counterparty still has a suit for damages but the rejection terminates the entire agreement and corresponding contractual rights conferred upon the counterparty.
As Professor Baird wrote and Justice Kagan quoted for the majority: “A debtor’s property does not shrink by happenstance of bankruptcy, but it does not expand, either.” This principle applies equally to personal property contracts as it does to license agreements. In fact, the hypothetical Justice Kagan weaves throughout the opinion is that of a law firm’s lease of a copier. Thus, we are guaranteed to see various applications of Tempnology as debtors and creditors explore the boundaries of this latest Supreme Court decision.
About the Author: Scott Cohen has practiced commercial bankruptcy, creditors’ rights, and insolvency litigation for 27 years. He is a Board Certified Specialist in Business Bankruptcy Law and a past Bankruptcy Section Chair of the State Bar of Arizona.
Disclaimer: This blog is not legal advice and is only for general, non-specific informational purposes. It is not intended to cover all the issues related to the topic discussed. If you have a legal matter, the specific facts that apply to you may require legal knowledge not addressed by this blog. If you need legal advice, consult with a lawyer.