Following up on our Winter 2019 Newsletter, on May 20, 2019, the Supreme Court reversed the U.S. Court of Appeals for the First Circuit”™s decision in Mission Product Holdings, Inc. v. Tempnology, LLC, holding that a licensor”™s rejection of a trademark license in bankruptcy constitutes a breach, but does not terminate the license under § 365 of the Bankruptcy Code (“§ 365”).
Consistent with its precedent, the Supreme Court first analyzed the text of § 365. In doing so, the Supreme Court noted that § 365(g) makes clear that a “rejection” in bankruptcy law is the equivalent of a “breach of an executory contract” in contract law. Since the Bankruptcy Code did not provide a definition of the term “breach,” the Supreme Court relied on § 365(g) to apply the generic contract law definition. Accordingly, the Supreme Court stated that in an executory contract under contract law, the executor gives continuing rights which cannot be unilaterally revoked. In other words, a breach in contract gives the non-breaching party the choice to terminate or continue the agreement.
Applying its findings of contract law to § 365 as a whole, the Supreme Court reasoned if a licensor breaches a trademark license, the breach does not revoke the license. Rather, the licensee has the option to continue performing its remaining obligations or to terminate the license. The Supreme Court further noted that maintaining the license after the licensor”™s rejection is consistent with the Bankruptcy Code”™s general goal to prevent licensors from undermining the bankruptcy process.
The Supreme Court next turned to Tempnology”™s argument that the unique features of trademark law require termination of the trademark license when a licensor breaches the contract due to bankruptcy. For example, Tempnology relied on the trademark licensor”™s duty to monitor and “exercise quality control over the goods and services sold” under a license. Therefore, Tempnology argued that unless rejection of a trademark licensing agreement terminates the licensee”™s rights to use the mark, the debtor will have to choose between expending limited resources on quality control and risking the loss of a valuable asset.
In response, the Supreme Court first observed that Tempnology”™s trademark-specific construction was at odds with its reading of § 365. Specifically, Tempnology”™s reading of § 365 required treating “trademark agreements identically to most other contracts.” Nonetheless, the Supreme Court noted § 365 was a general provision directed to all executory contracts, but Tempnology”™s argument was trademark-specific. Further, the Supreme Court pointed out that § 365 did not even mention trademarks. Therefore, the Supreme Court found that a trademark-specific construction of § 365 was inappropriate.
Thus, the Supreme Court found that under § 365, a licensor”™s rejection of an executory contract in bankruptcy has the same effect as a breach outside bankruptcy. Accordingly, the Supreme Court held that a licensor”™s rejection under § 365 cannot revoke the trademark license previously granted.