SCOTUS rules on post-bankruptcy trademark licensing
The US Supreme Court has today held that a debtor-licensor’s rejection of a trademark licence agreement in bankruptcy is a breach, rather than a rescission of contract, meaning that the other party to the contract retains its rights under the licence agreement.
The US’s highest court issued its decision in Mission Product Holdings v Tempnology after hearing oral arguments on the matter in February.
Mission, an athletic-wear maker, and Tempnology, which had sold cooling fabrics, entered into a licensing agreement in 2012. The agreement gave Mission an exclusive licence to distribute Tempnology products.
As the Supreme Court today said, “this case arises from a licensing agreement gone wrong”.
In 2015, Tempnology filed for bankruptcy and moved to terminate the agreement, preventing Mission from using Tempnology’s trademarks in connection with the distribution of clothing and accessories.
The Bankruptcy Court confirmed Tempnology’s rejection of the agreement and held that it terminated Mission’s rights to use Temponology’s trademarks, but the Bankruptcy Appellate Panel reversed this decision.
However, on appeal, the US Court of Appeals for the First Circuit sided with the Bankruptcy Court, and reinstated the initial decision.
The Supreme Court was asked to determine whether a debtor-licensor’s rejection of a trademark licence agreement in bankruptcy results in the termination of the licence agreement.
“Outside bankruptcy, a licensor’s breach cannot revoke continuing rights given to a counterparty under a contract,” the Supreme Court today said. “And because rejection ‘constitutes a breach’, the same result must follow from rejection in bankruptcy.”
“The debtor can stop performing its remaining obligations under the agreement. But the debtor cannot rescind the licence already conveyed. So the licensee can continue to do whatever the licence authorises.”
“A rejection breaches a contract but does not rescind it,” concluded the court.
The decision means that a debtor-licensor’s rejection of a trademark licence agreement in bankruptcy has the same effect as a breach of that contract outside of bankruptcy, and therefore the rejection itself cannot rescind the rights previously granted by the contract.
In an 8-1 ruling, the Supreme Court reversed the judgment of the First Circuit and remanded the case for further proceedings.
Justice Neil Gorsuch, in a dissenting opinion, questioned what Mission intended to gain from the proceedings.
“After the bankruptcy court ruled, the licence agreement expired by its own terms, so nothing we might say here could restore Mission’s ability to use Tempnology’s trademarks,” he said.
Gorsuch added: “Tempnology did nothing that could lawfully give rise to a damages claim”, as the company had simply exercised its constitutional right to ask the bankruptcy court for a ruling on a question of law.
Kenneth Parker, partner at Haynes and Boone, said the decision is "a win for trademark owners because it increases the overall certainty that many licence agreements will remain enforceable". "That increased certainty, in turn, will allow trademark owners to get greater value for outbound trademark licences," Parker added. Did you enjoy reading this story? Sign up to our free daily newsletters and get stories like this sent straight to your inbox.
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