Supreme Court Says Rejection of Trademark License Does Not Extinguish Rights

Reuel Ash

Ulmer & Berne, LLP

Cincinnati, Ohio

In an important ruling, the Supreme Court held earlier this week that a trademark licensee can continue to use a bankruptcy debtor’s trademark license even where the debtor-licensor rejects the license. Mission Product Holdings, Inc. v. Tempnology, LLC, 2019 Westlaw 2166392 (U.S. May 20, 2019)   This decision should be welcome news to the business community, because the decision will provide a uniform standard governing a licensee’s right to use a rejecting debtor’s trademark license, which is especially significant given the rapid growth of intellectual property’s role in the domestic economy over the past several years. 

The ruling puts trademark licensees in bankruptcy on equal footing with non-debtor licensees of users of patents, copyrights, and trade secrets, which since 1988 have enjoyed continued use of that intellectual property even where the bankruptcy debtor owner of the intellectual property rejects those contracts.  Congress codified such continued use by amending the Bankruptcy Code in 1988 to add Section 365(n), in response to the Fourth Circuit’s decision of Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4^th Cir. 1985).  That case held that a debtor’s rejection of a license agreement terminated the licensee’s rights to use the intellectual property and provided only money damages to the licensee.  Such a result was consistent with Code Section 365(g)(1), which provides the non-debtor party solely with pre-petition damages for breach of contract when the debtor rejects that contract.  Congress’ enactment of Section 365(n) fixed that problem for non-debtor holders of patents, copyrights, and trade secrets whose licenses are rejected in bankruptcy. Congress’ 1988 fix, however, did not extend to trademark licensees, since only patents, copyrights, and trade secrets came within the ambit of the Bankruptcy Code's definition of intellectual property in Code Section 101(35A), which excluded trademarks. 

The Supreme Court’s 8-1 decision, authored by Justice Elena Kagan, reversed the First Circuit and resolved a circuit split by providing trademark licensees with the same protection under the Bankruptcy Code as the other licensees of intellectual property.  The Supreme Court restored the licensee’s rights under the license, explaining that the debtor’s rejection of the license agreement constituted a breach, but not a recission or termination of the agreement.  The Supreme Court explained that a debtor has no greater rights in bankruptcy than outside of bankruptcy, and that the result of a breach in bankruptcy is the same as it is under non-bankruptcy law, which does not give the debtor a unilateral right to vitiate the licensee’s rights under the agreement.  According to the Supreme Court, the licensee, Mission Product, could continue to use the license as provided under the agreement, which would have been the result had the debtor breached the license agreement outside of bankruptcy.