Monday, 10 June 2019 15:49

The Supreme Court Holds that the Rights of Trademark Licensees Survive Even After A Bankrupt Licensor’s Trustee Rejects the Licensing Contract Pursuant to §365(a) of the Bankruptcy Code

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In Mission Product Holdings Inc. v. Tempnology LLC, the Supreme Court addressed a Circuit Split on whether a bankruptcy trustee can terminate a trademark license agreement, thereby allowing a trademark licensee to lose their rights to continue using the trademark under the license contract. The Supreme Court held that the debtor-licensor’s rejection of the contract does not deprive a trademark licensee of its rights to use the trademark thereafter.

Section 365(a) of the Bankruptcy Code allows a bankruptcy trustee to assume or reject a debtor’s pre-bankruptcy executory contracts, depending on whether the benefits of continued performance of the contract outweigh the burdens to the bankruptcy estate. Section 365 of the Bankruptcy Code enables a debtor to “reject any executory contract,” which is a contract that neither party has finished performing.  The section provides that a debtor’s rejection of a contract under that authority “constitutes a breach of such contract.” At issue in this case were the implications of a breach of such contract. While it was acknowledged that the licensee would have the right to a claim for damages for such a breach of contract, which may perhaps be valueless in light of the bankrupt state of the licensor, it was not clear whether the trademark licensee still had the right to use the trademark after such breach.

In interpreting the meaning of a breach of the contract, some lower circuits took the position that a rejection has the same consequence as a contract rescission, which allows a damages claim, but terminates the whole agreement along with all rights it conferred. However, the Supreme Court disagreed with this position, and held that such rejection does not mean that a trademark licensee will lose their rights to use the trademark under the contract. Specifically, Justice Kagan in her majority opinion stated, “A rejection breaches a contract but does not rescind it. And that means all the rights that would ordinarily survive a contract breach, including those conveyed here, remain in place.”

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