The United States Supreme Court has rendered a decision that represents a victory for licensees of trademarks throughout the country when faced with a bankrupt licensor.
For many years the treatment of trademark licenses in bankruptcy has been unsettled and varied, depending on the circuit in which the bankruptcy case was filed. However, the Supreme Court’s recent decision provides great protections to licensees of trademarks. In practical terms, the Supreme Court held the decision by a licensor company in bankruptcy to “reject” a trademark licensing agreement does not revoke the licensee’s right to continue using the trademark.
Tempnology, LLC (“Tempnology”) manufactured clothing and accessories for users to stay cool during exercise; and marketed those products under the brand name “Coolcore,” using trademarks (in the form of logos and labels), to distinguish their products from others. Tempnology entered into a contract with Mission Product Holdings, LLC (“Mission”) in 2012, giving Mission, among other things, a non-exclusive license to use Coolcore trademarks in the United States, and around the world. However, Tempnology filed Chapter 11 bankruptcy in 2015, and ultimately received approval from the Bankruptcy Court to reject the agreement with Mission pursuant to Section 365(g) of the Bankruptcy Code.
Tempnology argued that the rejection of the agreement, among other things, terminated the rights it granted Mission to use the Coolcore trademarks. The First Circuit Court of Appeals agreed with Tempnology; however, the First Circuit’s decision was in direct contradiction to the Seventh Circuit Court of Appeals’ holding in a different case. As a result, the Supreme Court heard the case to resolve the split between the Circuit Courts.
The Supreme Court determined, “[t]he question is whether the debtor-licensor’s rejection of that contract deprives the licensee of its right to use the trademark. We hold it does not. A rejection breaches a contract but does not rescind it. And that means all the rights that would ordinarily survive a contract breach, including those conveyed here, remain in place.”
Tempnology argued that allowing Mission to continue to use the trademark would contradict the goals of the Bankruptcy Code, as Tempnology would have to “exercise quality control over the goods and services sold” under a license, thereby impeding Tempnology’s ability to reorganize. In dismissing Tempnology’s argument, the Supreme Court reasoned, “[t]he Code of course aims to make reorganizations possible. But it does not permit anything and everything that might advance that goal.”
Licensees of trademarks can now take solace in the fact that if a licensor enters into bankruptcy, the licensor’s rejection of the underlying agreement will not deprive the licensee of the ability to continue to use the trademark.