Supreme Court Brings Clarity to Trademark Licensing Risks
The U.S. Supreme Court provided much-needed clarity on the effect bankruptcy has on the licensor’s right to revoke a trademark license. On May 20, 2019, SCOTUS decided, in an 8-1 decision, that “A debtor’s rejection of an executory contract under Section 365 of the Bankruptcy Code has the same effect as a breach of that contract outside bankruptcy. Such an act cannot rescind rights that the contract previously granted.” Mission Product Holdings, Inc. v. Tempnology, LLC NKA Old Cold LLC No. 17-1657 (U.S. May 20, 2019).
Tempnology, LLC exclusively licensed its “Coolcore” trademarks to be used in connection with athletic apparel to Mission Product Holdings, Inc. Later, Tempnology filed for Chapter 11 bankruptcy and asked the bankruptcy court to reject the trademark license, which would require Mission Product Holdings to cease using the “Coolcore” trademarks. The bankruptcy court and First Circuit approved the rejection, finding that holding a licensor to the obligations under a trademark license agreement, including the licensor’s duty to monitor the use of its trademarks by third parties, would cause an undue burden on the licensor in a bankruptcy proceeding. Such a burden would run contrary to the intent of the Bankruptcy Code, which is meant to relieve debtor’s contractual burdens.
SCOTUS reversed the decision and found that, while Tempnology breached its contract with Mission Product Holdings when it sought rejection in the bankruptcy proceeding, the license to use the trademark was a conveyance that could not be rescinded under Bankruptcy Code Section 365. This is a big win for trademark licensees who, under the bankruptcy court’s previous ruling would stand to lose all rights to the use of a licensed trademark. Such use rights could affect a licensee’s business and crater the licensee in the blink of an eye. Under the SCOTUS ruling, licensees are secure in knowing the license will remain as originally contemplated by the parties in the event of a bankruptcy.
On the other hand, trademark owners that license their trademarks are now on alert that license obligations under a license agreement may not be rescinded when bankruptcy is filed. Instead, the trademark owner will remain responsible for all ongoing obligations related to the license, including the duty to monitor all use of its trademark. It is important that:
- all parties to a license agreement carefully contemplate the trademark license terms and obligations that will survive bankruptcy before entering such an agreement,
- parties interested in purchasing a trademark portfolio from a debtor remain diligent of any previous license agreements and
- licensors choose their licensees with the utmost care since they will be with you in good times and in bad.
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