On October 26, 2018, the U.S. Supreme Court granted certiorari to review Mission Product Holdings Inc. v. Tempnology, LLC. The question before the Supreme Court is whether, under 11 U.S.C. § 365 (“§ 365”) of the Bankruptcy Code, a debtor”™s rejection of a license agreement terminates the obligations of the agreement, including the loss of a trademark license. In answering the question, the Supreme Court will finally answer “the most significant unresolved legal issue in trademark licensing,” that has split the U.S. Federal Circuits.
Briefly, the two competing interpretations of § 365 stem from Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc. (“Lubrizol”), and Sunbeam Prods. Inc. v. Chicago Am. Mfg., LLC (“Sunbeam”). In Lubrizol, the U.S. Court of Appeals for the Fourth Circuit (“Fourth Circuit”) held that a rejection of a license agreement terminates the obligations of the agreement, including the loss of a trademark license. Conversely, in Sunbeam, the U.S. Court of Appeals for the Seventh Circuit (“Seventh Circuit”) held that a rejection of a license agreement relieves the parties of the obligations, but does not terminate the licensee”™s right to continue using the trademark for the duration of the agreement.
Tempnology, LLC (“Tempnology”) is a company that owned and filed for several patents directed to chemical-free cooling fabrics. Tempnology marketed the products covered by their patents using the COOLCORE and DR. COOL trademarks. In 2012, Tempnology entered into a non-exclusive marketing and distribution agreement with Mission Product Holdings Inc. (“Mission”) for all products covered under the COOLCORE and DR. COOL trademarks. In addition, Tempnology granted Mission a non-exclusive, non-transferable, limited license to use the COOLCORE and DR. COOL trademarks and respective logos. Furthermore, the agreement allowed either party to terminate without cause, which would trigger a two-year phase-out period. In June 2015, Mission exercised its right to terminate the agreement without cause, which led to a series of arbitrations. Then, in September 2015, Tempnology filed a voluntary petition for Chapter 11 bankruptcy and moved to reject the agreement in bankruptcy court.
The bankruptcy court adopted the Lubrizol approach and concluded that Mission retained its non-exclusive license to use Tempnology”™s patents for the remainder of the phase-out period, but the trademark license agreement was terminated. Mission appealed to the Bankruptcy Appellate Panel for the First Circuit (“BAP”). The BAP reversed the bankruptcy court”™s finding the Sunbeam approach was controlling; therefore, while the trademark license was rejected, Mission retained mark rights of the debtor Tempnology. Subsequently, Tempnology appealed to the U.S. Court of Appeals for the First Circuit (“First Circuit”).
On further appeal, the First Circuit upheld the bankruptcy court”™s ruling by adopting the Lubrizol approach and rejecting the BAP”™s reliance on the Seventh Circuit”™s approach in Sunbeam. The First Circuit reasoned that applying the Sunbeam approach may produce a situation that conflicts with public policy. Specifically, the First Circuit noted a licensor, under a license agreement, must continue to “monitor and exercise control over” the use of its trademarks or it risks losing the trademark. Therefore, under Sunbeam, a licensor is forced to choose between continuing its obligations under the terminated license agreement and risking the permanent loss of its trademarks. Mission timely filed a petition for a writ of certiorari at the Supreme Court. Certiorari was granted.
Finally, the Supreme Court will resolve this issue that has plagued trademark licensing. More importantly, the Supreme Court will provide trademark owners with clarity on how to protect themselves if a licensor files for bankruptcy. While it is still uncertain how the Supreme Court will decide this case, recent Supreme Court intellectual property cases may provide some insight. For instance, as noted in the firm”™s Summer 2018 Newsletter, in WesternGeco LLC v. ION Geophysical Corp., the Supreme Court defined a seemingly ambiguous part of a statute by giving it meaning in view of the statute as a whole. If the Supreme Court proceeds in the same fashion, then it may come to the same conclusion as the First Circuit.