From the Top: Supreme Court Agrees to Consider Impact of Trademark License Agreement Rejection in Bankruptcy

On October 26, 2018, the U.S. Supreme Court granted a writ of certiorari in Mission Products Holdings, Inc. v. Tempnology, LLC, No. 17-1657, 2018 WL 2939184 (U.S. Oct. 26, 2018). In granting the petition, the Court agreed to consider whether, under section 365 of the Bankruptcy Code, a debtor-licensor's rejection of a trademark license agreement, which constitutes a breach of such a contract under section 365(g), "terminates rights of the licensee that would survive the licensor's breach under applicable non-bankruptcy law." This question, arising out of a 1988 amendment to the Bankruptcy Code, has recently split the circuits.

In Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers, Inc.), 756 F.2d 1043 (4th Cir. 1985), the U.S. Court of Appeals for the Fourth Circuit held that, if a debtor rejects an executory intellectual property license, the licensee loses the right to use any licensed copyrights, trademarks, and patents. In 1988, in response to the ruling, Congress amended the Bankruptcy Code to add section 365(n), which permits licensees of "intellectual property" to continue using licensed property under certain circumstances. However, those protections do not expressly extend to trademark licensees because the Bankruptcy Code's definition of "intellectual property" does not include trademarks. For this reason, courts have disagreed about the impact of rejection of a trademark license in bankruptcy.

Some courts, including the Seventh Circuit, have ruled that rejection of a trademark license does not necessarily mean that the licensee cannot continue to use the licensed trademarks. See Sunbeam Products, Inc. v. Chicago Am. Manuf., LLC, 686 F.3d 372 (7th Cir. 2012); In re SIMA Int'l, Inc., 2018 WL 2293705 (Bankr. D. Conn. May 17, 2018); In re Crumbs Bake Shop, Inc., 522 B.R. 766 (Bankr. D.N.J. 2014).

The First Circuit held to the contrary in Mission Products Holdings, Inc. v. Tempnology, LLC (In re Tempnology, LLC), 879 F.3d 389 (1st Cir. 2018), ruling that the omission of trademarks from the scope of section 365(n) means that a trademark licensee is stripped of any continuing right to use a licensed trademark upon rejection of the license agreement. Accord In re HQ Glob. Holdings, Inc., 290 B.R. 507 (Bankr. D. Del. 2003).

By agreeing to review the First Circuit's ruling, the Supreme Court will have an opportunity to resolve the circuit split on this issue.

The Court declined to review the second question presented by the Tempnology petition—namely, whether an exclusive right to sell certain products "practicing a patent" in a particular geographic territory is a "right to intellectual property" within the meaning of section 365(n) of the Bankruptcy Code.

A more detailed discussion of section 365(n) and the rejection of trademark licenses in bankruptcy is available here.

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