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Trademarks and Bankruptcy – The Difficult Mission to Harmonize Continues
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By Andrew C. Helman, Marcus | Clegg; Portland, Maine and John G. Loughnane, Nutter McClennen & Fish LLP; Boston, Massachusetts
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NEWSLETTER ARCHIVE
Volume 48, Issue 2
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In Mission Product Holdings, Inc., v. Tempnology LLC (In re Tempnology LLC)1, the Bankruptcy Appellate Panel for the First Circuit recently held that a debtor-licensor’s rejection under § 365 of the Bankruptcy Code of a trademark license agreement did not “vaporize” the rights of the non-debtor licensee. As a result, if a licensee’s non-bankruptcy rights include the ability to continue to use a trademark despite the licensor’s breach, then rejection by a debtor-licensor will not automatically terminate those rights.
The BAP’s decision is important because it adopted the reasoning of Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012), which, broadly speaking, held that rejection is a breach of contract but does not terminate a trademark license or strip the non-debtor licensee of its post-breach rights under applicable non-bankruptcy law. This should provide solace for trademark licensees grappling with inconsistent judicial views of their post-rejection rights due the Bankruptcy Code’s omission of trademarks from the type of intellectual property licenses protected under § 365(n).
Even though a further appeal is pending, Tempnology is an important decision not only for bankruptcy lawyers but also for intellectual property and transactional lawyers. The decision highlights the need, at the outset of a licensing transaction, for parties to negotiate and clearly memorialize their rights and obligations in the event of a breach by the other party. Clear drafting is always important, but it takes on added significance when bankruptcy law leaves parties to their non-bankruptcy rights. Bankruptcy Code § 365’s Basics Before turning to the facts of the case, it is helpful to review a few provisions of § 365 of the Bankruptcy Code in order to understand the issues that were before the BAP.
Broadly speaking, § 365 governs the rights and obligations of debtors and executory contract counter-parties.2 For example, § 365(a) authorizes a trustee or debtor-in-possession (DIP) to assume or reject any executory contract or unexpired lease of the debtor, and § 365(g) details the effect of rejection in most instances. In particular, § 365(g) provides that “rejection . . . constitutes a breach of such contract or lease” as of the date that is “immediately before the date of the filing of the petition[.]”3 In other words, once a contract is rejected, it is as though the debtor has breached the contract and cannot be compelled to perform.
Congress has provided special rules for those pre-petition contracts in which a non-debtor obtains an interest allowing it to possess or use property of a debtor, such as licensees of certain types of intellectual property, lessees of real or personal property, and purchasers of real property. Broadly speaking, this group of non-debtor contract parties can either continue to use the property in which they claim an interest, or they can treat the contract as terminated under certain circumstances.4
More specifically, following rejection of a license agreement,5 a licensee of a debtor’s “intellectual property” (as defined in the Bankruptcy Code) can treat the license as terminated if the trustee’s or DIP’s rejection “would entitle the licensee to treat such contract as terminated by virtue of its own terms, applicable nonbankruptcy law, or an agreement made by the licensee with another entity[.]”6 Alternatively, the licensee can elect “to retain its rights (including a right to enforce any exclusivity provision of such contract, but excluding any other right under applicable nonbankruptcy law to specific performance of such contract) under such contract and under any agreement supplementary to such contract, to such intellectual property (including any embodiment of such intellectual property to the extent protected by applicable nonbankruptcy law)” for the balance of the parties’ contract.7
While a licensee exercising the latter option, commonly known as a § 365(n) election, is free to use the licensed intellectual property without interference from a trustee or DIP, it must continue to make any contractually-required royalty payments.8
The rub is that § 365(n)’s protections are limited to the forms of “intellectual property” included within the Bankruptcy Code’s definition for that term—a “(A) trade secret; (B) invention, process, design, or plant protected under title 35; (C) patent application; (D) plant variety; (E) work of authorship protected under title 17; or (F) mask work protected under chapter 9 of title 17; to the extent protected by applicable nonbankruptcy law.”9 Notably, trademarks are excluded from this definition. The Facts And Procedural Posture of Tempnology Before the BAP The basic dispute in Tempnology centered on the effect of the debtor-licensor’s rejection of a license agreement with its licensee, Mission Product Holdings, Inc. (“Mission”), in connection with a sale of substantially all of the debtor’s assets shortly after filing a voluntary petition for reorganization under chapter 11.10
Mission objected to the debtor’s sale motion and rejection motion and argued that any sale of the debtor’s assets would be subject to its rights under the parties’ license agreement.11 More specifically, Mission contended that its § 365(n) election allowed it to retain its license to certain of the debtor’s intellectual property (including trademarks). Mission also contended that its election allowed it to retain certain exclusive product distribution rights.12
The bankruptcy court entered an order granting the debtor’s rejection motion subject to Mission’s “election to preserve its rights under 11 U.S.C. § 365(n).”13 The debtor subsequently filed a motion to clarify the scope of Mission’s post-rejection rights. Specifically, the debtor sought an order determining that Mission’s rights were limited to the non-trademark intellectual property license between the parties.14 The debtor further sought a ruling that the exclusive product distribution rights and any rights to use the debtor’s trademarks did not survive rejection.15 Mission objected based on the contention “that its § 365(n) election also protected its exclusive product distribution rights and the right to use the Debtor’s trademark . . . for the remainder of the wind-down period.”16
Following a non-evidentiary hearing, the bankruptcy court granted the debtor’s motion and ruled that:
(1) Mission’s election pursuant to § 365(n) protected Mission[’s] rights as non-exclusive licensee only as to any patents, trade secrets, and copyrights as were granted to Mission in section 15(b) of the Agreement (the section identifying the property subject to the IP License); (2) Mission’s election pursuant to § 365(n) provided no protectable interest in the Debtor’s trademarks or trade names; and (3) Mission’s election pursuant to § 365(n) provided no protectable interest in the Debtor’s “Exclusive Products” and the “Exclusive Territory” as those terms were defined in the Agreement.17
In so ruling, the bankruptcy court reasoned that (A) the licensee’s distribution rights were unrelated to the intellectual property license itself and, therefore, unprotected under § 365(n); and that (B) § 365(n) did not protect the licensee’s trademark rights because Congress excluded trademarks from the definition of “intellectual property” in § 101(35A) the Bankruptcy Code.18 The bankruptcy court rejected the reasoning of cases like In re Crumbs Bake Shop, Inc., 522 B.R. 766 (Bankr. D.N.J. 2014), which hold that it is “improper to draw a negative inference” from the omission of trademarks from § 101(35A) and that “bankruptcy courts must exercise their equitable powers on a case-by-case basis to determine whether trademark licensees may retain their rights under § 365(n).” 19 Mission appealed from the bankruptcy court’s order.
Reprinted with permission from the ABI Journal, Vol. XXXVI, No. 4, April 2017.
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