19 February 2019Trademarks

SCOTUS to decide future of TM after licensor declares bankruptcy

On Wednesday, the  US Supreme Court will hear arguments in a case between athletic-wear maker  Mission Product Holdings and Tempnology, a company which previously sold cooling fabrics.

In 2012, Mission and Tempnology entered into a licensing agreement which granted Mission Product an exclusive licence to distribute Tempnology products. But, in 2015, Tempnology filed for bankruptcy and moved to terminate the agreement.

In Mission Product Holdings v Tempnology, the Supreme Court will decide whether a debtor-licensor’s rejection of a trademark licence agreement in bankruptcy results in complete termination of the licence agreement.

If the court ultimately decides in favour of Mission, it would be “sending a clear message that trademark licensors cannot use bankruptcy law to get out of a licence”, lawyers told WIPR.

Oren Warshavsky, a co-leader of  BakerHostetler's international asset tracing and recovery team in New York, said this would be “a strong result for existing and potential licensees, as the court would be holding that a trademark is a property interest that the debtor-licensor cannot take back in bankruptcy”.

Warshavsky said this is particularly important as according to the International Trademark Association, trademarks are the most widely used form of registered IP and are often among a debtor’s key assets.

Naresh Kilaru, a partner at  Finnegan, Henderson, Farabow, Garrett & Dunner in Washington, DC, said a ruling in favour of Mission Product would essentially create a “pro-licensee” stance within bankruptcy law.

“It would ensure that trademark licences remain intact and the status quo is maintained even after a bankruptcy petition is filed,” Kilaru said.

But, a ruling in favour of Tempnology would make licensees much more cautious about licensing trademarks, as many licences require licensees to pay for advertising and promotion, Kilaru said.

“If a licensee is required to make these investments and then also has to bear the risk of its licence being unilaterally terminated in bankruptcy, this could very well have a chilling effect on certain types of licensing arrangements,” Kilaru said.

A ruling in favour of Tempnology “would favour the debtor-licensor, especially if the debtor emerges from bankruptcy and is able to re-negotiate the licence on more favourable terms,” Kilaru added.

Additionally, in situations where the trademark is sold off as part of the bankruptcy estate, it may benefit creditors, according to Kilaru.

“A trademark which is not subject to any pre-existing licences may potentially have more value,” he said.

Megan Bannigan, counsel at  Debevoise & Plimpto n in New York, said that one question the court is likely to explore is whether a previous ruling in this case by the Seventh Circuit would result in a “naked” trademark licence.

Previously the Seventh Circuit held that although Tempnology’s decision to terminate the agreement eliminates its obligation to perform under the agreement, Mission’s right to continue to use the trademark for the duration of the agreement still stands.

A naked licence is when a trademark owner licenses a mark without the necessary controls over the use of the mark.

But, this could lead to the invalidation of Tempnology’s trademark if it fails to fulfil its duty of policing how the mark is used by Mission, Bannigan said.

Jon Schiffrin, a partner at  Schiffrin & Longo in Virginia, said a ruling in favour of Tempnology would “not serve the public interest”.

“If the Supreme Court somehow rules that rights in the trademark remain with the debtor-licensor, but that licensor has not done anything to maintain the trademark, consumers may believe the wrong company has been providing the products and services,” Schiffrin said.

He said the court should rule that the rights in the trademark reside in the company that has maintained control over the trademark, based on who spent money promoting the mark and who has overseen the quality of the product under the mark.

By rewarding the debtor-licensor, the court would be rewarding “sloppy brand management and lead consumers to purchase products that are not consistent with the brand they are used to,” he added.

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More on this story

21 February 2019   The US Supreme Court yesterday heard oral arguments in Mission Product Holdings v Tempnology in which it will consider whether a debtor-licensor’s rejection of a trademark licence agreement in bankruptcy results in complete termination of the licence agreement.
21 May 2019   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.