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SCOTUS Rules a Trademark Licensee Can Have Its Cake and Eat It Too, Post Chapter 11 “Rejection” by the Licensor, or, Is It Just a Game of “Smoked” Chicken with Congress?

May 21, 2019 | Sebaly Shillito + Dyer

Prior to Monday, May 20, 2019, the rights of a trademark licensee to continue to use the mark after the licensor “rejected” the license in bankruptcy remained an unresolved legal issue with licensees left scrambling. If the Chapter 11 Debtor “rejects” the license contract, then must the licensee immediately stop all sales of products bearing the mark and “get in line” with other unsecured creditors for its damages? Or, can they continue to sell products bearing the mark when the trademark owner expressed to desire to monitor the proper and effective use? In Mission Products Holdings, Inc. v. Tempnology, LLC, 587 U.S. __ (2019), the Supreme Court finally, hopefully, resolved these questions in favor of the licensee.

Justice Kagan was understated in describing this case as a “licensing agreement gone wrong,” just like any trademark license involving a bankrupt trademark owner. Tempnology, LLC manufactured clothing designed to stay cool during exercise by the wearer. It marketed the clothing under the name Coolcore® through various designs and logos. In 2012, Tempnology entered into a contract with Mission Products Holdings, Inc. (“Mission”); it gave Mission an exclusive license to distribute specific Coolcore® products and a non-exclusive license to use the Coolcore® trademarks in the U.S. and elsewhere. Of course, with any trademark license, the licensor must retain certain monitoring and quality control rights in order to enforce its marks against others.

One year before the Mission license was set to expire, Tempnology filed a Petition for Reorganization under Chapter 11 of the Bankruptcy Code. The Bankruptcy Code provides the reorganizing debtor substantial rights, including the ability to “accept” or “reject” any then-existing contracts that remain to be fully performed, called “executory contracts.” If the executory contract is beneficial to the debtor going forward, then it can “accept” the contract, fulfill its obligations, and retain the benefit of the other party’s performance. If, on the other hand, the debtor believes the contract is not a “good deal,” then it may “reject” the contract and repudiate all of its further contractual obligations. Essentially – and this is important to the Court’s reasoning – the bankrupt debtor can legally “breach the contract” and relegate the other party to a claim for damages just like any other unsecured creditor who likely receives pennies on the dollar for their claim.

But, until Mission Products courts across the U.S., and even the Mission Products courts below, were unclear regarding the effects such a “legal breach” would have on a contract involving the licensing of a trademark. Tempnology did not want Mission to sell merchandise bearing its Coolcore® logos while it tried to reorganize. So, it sought, and obtained, an order from the Bankruptcy Court that its “rejection” of the license revoked all of Mission’s rights to use the trademarks. The Bankruptcy Appellate Panel disagreed, relying upon non-binding 7th Circuit authority. The Panel found that rejection does, in fact, convert unfulfilled obligations to an unsecured claim for damages; but, it does not “vaporize” Mission’s rights. In Re Tempnology LLC, 559 B.R. 809, 820 (Bkrtcy. App. Panel CA1 2016). Thus, it reversed the Bankruptcy Court and Mission could continue to use the Coolcore® marks even though the license agreement was “rejected.”

However, as forecast above, the next reviewing court reversed that reversal. In Re: Tempnology LLC, 879 F.3d 389 (1st Cir. 2018). The First Circuit struggled with the mandates of trademark law requiring the owner of the mark to monitor and exercise quality control over the use of its mark by a licensee or risk losing the continued validity of its mark. The First Circuit reasoned that Congress’s intended purpose of the right of a reorganizing debtor to reject executory contracts was to relieve the estate from burdensome obligations that could hamper its ability to reorganize. And, imposing monitoring obligations upon a reorganizing debtor was directly at odds with that purpose.

The Supreme Court finally resolved this controversy and Circuit split, reversed the reversal of the reversal, and found in favor of Mission. Even though Mission, in the tortured path of the remaining year of its license, chose not to continue to sell products bearing the Coolcore® marks, the Court rejected Tempnology’s argument that the case was moot. The opinion includes an interesting discussion on mootness beyond the scope of this article. The Court centered its reasoning under the plain language of 11 U.S.C. § 365(g) that rejection of an executory contract “constitutes a breach of such contract,” but it does not automatically rescind the contract and prevent the other party from enjoying its rights. For example, when a bankrupt landlord “rejects” a lease, the lessee is not immediately evicted, but may chose to remain in the leasehold as long as it fulfills its obligations of rent, etc. Similarly, a rejected license agreement does not automatically require the licensee to cease and desist from its right to market and sell goods or services bearing the marks

Justice Gorsuch provided a rousing “lone wolf” dissent that there is no “case in controversy” because Mission elected not to sell products bearing the marks until the license expired; thus, this is the wrong case to address the issue. But, the Court’s 8-1 ruling made clear that a trademark licensee who acquired rights under a standard license agreement may continue to exercise its rights to sell the products, or provide the services, bearing the mark even after the bankrupt debtor rejected the agreement. The plain language of the statute and the analogy of a law firm renting a copier are sound. [A law firm that leases a copier with a maintenance agreement may choose to continue to use the copier after rejection in bankruptcy; the debtor cannot just take the copier back, but no longer needs to provide maintenance.]

But, the Court, and the dissent, completely failed to address the practical consequences of the argument that a bankrupt debtor seeking to reorganize must undertake the burdens of policing the use of its mark to ensure quality control. Assume ABC, Inc. purchases a license to sell BBQ chicken under the well-established trademark “Mango Tango Rubbed and Smoked Bubba-Q Chicken.” It operates successfully in its location for a few years with its owners investing their life’s savings into this smoked chicken. Then suddenly, the owner of the mark files bankruptcy and rejects the license. Under the SCOTUS ruling – assuming no trade secrets, vendor restrictions, etc. are infringed – ABC, Inc, may be able to continue to sell under the “Mango Tango Rubbed and Smoked Bubba-Q Chicken” name; and the Debtor is theoretically responsible for policing its mark to ensure that it may emerge from bankruptcy with its brand intact. Query whether that is the purpose of Chapter 11 of the Bankruptcy Code or merely an unintended consequence of a decision beholden to the “plain language of the statutes?” This decision is a call for Congress to act by a Supreme Court who will not legislate by the judiciary.

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