Bankruptcy Treatment of Trademark Licenses

Worth mentioning if a licensee or licensor of a mark is facing bankruptcy, is a 2019
Supreme Court decision.  Mission Product Holdings, Inc. v. Tempnology, LLC, 139 S.Ct. 1652 (2019).  Decided 8–to–1 following a split among the circuits, the Court resolved the effect of a debtor in bankruptcy’s attempted rejection of a trademark license.

The question was would the rejection constitute a breach of contract, or a recission that would bar the licensee from ongoing use of the licensed mark?  The stakes are high for most licensees that want to continue to do business using the licensor’s mark.

It was treated as a breach. Section  365(n) of the Bankruptcy Act allows patent and copyright licensees to continue use regardless of the licensor’s rejection of the contract if they continue to honor the license, and of course pay royalties as they become due.  365(n) fails to mention trademarks, and the debtor asserted that Congress, by naming patents and copyrights must have not intended to include trademark licensees.

Disagreeing, the Court concluded that because 365(n) reads, “Rejection constitutes a breach of [an executory] contract, and the breach does not revoke the trademark license or stop the licensee from doing what the license allows.”  The Court wrote that although the debtor may be able to end its obligations under the license, the debtor can’t rescind the license already conveyed.  The licensee can continue to do what the license allows; usually brand goods of consistent quality with the licensed mark.

The Court pointed out that the debtor may breach the license with impunity and avoid its contractual obligations, but it does have a duty to preserve the value of the bankruptcy estate’s assets, such as preserving the mark and its value.  This language would appear to make clear that the debtor/licensor must still undertake some obligations related to its mark in order to preserve the value of the mark.  That might include enforcement, renewal and the like.

A concurring opinion, however, pointed out that under some circumstances, state law and contract provisions could alter the result.  This is a must-read opinion for those who draft trademark licenses.