It Ends Now - US Supreme Court Decides on Trademark Licence Expiry on Bankruptcy

An often overlooked facet of business is the aftermath of bankruptcy, particularly in commercial arrangements that don't directly involve a debt to the solvent third party. An example of such an arrangement is trademark licencing, where the party licensing a trademark merely enjoys the benefit of using the mark, and does not have any monies owed to them through the use of the mark (to put things very simply by way of example). One question that hasn't been fully answered in the US is what happens to the licence after the licensor goes bankrupt. The Court of Appeals has been torn on the issue of whether the company going bankrupt can effectively cancel the licence, which has now been looked at by the Supreme Court, who handed their decision in late May.

The case of Mission Product Holdings Inc. v Tempnology LLC concerned the brand "Coolcore", which was owned by Tempnology. The mark had been licenced to Mission in the US and worldwide and also exclusively allowed them to distribute certain Coolcore products in the US. Tempnology filed for bankruptcy during the licence term, and subsequently requested the 'rejection' (i.e. revocation) of the licence through the US Bankruptcy Court. Mission challenged the rejection of the licence, with the matter ultimately ending up with the Supreme Court.

Under section 365(a) of the US Bankruptcy Code the debtor gives a debtor the option, subject to court approval, to "assume or reject any executory contract", i.e. a contract that neither party has finished performing prior to the bankruptcy proceedings. Any rejection of a contract under the provision is an immediate breach of that agreement under contract law, giving the other party the possible route of seeking damages as a result of that breach.

Michael's strategy was no longer a desirable option

In considering the actual meaning of the provision, the Court set out that the section is there to preserve the rights owned by the company before bankruptcy in bankruptcy, and similarly cannot expand on those rights in the same vein. Any trustee in bankruptcy would, therefore, retain those rights and obligations even once bankruptcy proceedings have begun. The Court continued that "…If trustees (or debtors) could use rejection to rescind previously granted interests, then rejection would become functionally equivalent to avoidance… [and] would roll back a prior transfer". The Court was therefore very careful in protecting granted rights, even in the event of bankruptcy.

The Court also rejected Tempnology's argument that, due to exceptions being present in section 365 (providing for protection after 'rejection' to specific parties), that all other parties would therefore not be protected in the same way, including trademark licensees.

Ultimately, the Court therefore held that, under section 365(a), a rejection of a trademark licence under the provision would amount to a breach of contract, and therefore the company cannot rescind that the contract previously granted.

The decision gives needed clarity due to a split in the Court of Appeals Circuits, but does raise further uncertainties that will need to be answered in the future. This writer understands that those would include the scope of non-debtor parties' post-rejection rights under law outside of bankruptcy. In any event, the decision will have a big impact on any bankruptcy proceedings, and companies will have to take heed if any bankruptcy involves trademark licences.