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Trademark Licenses . . . Again (Update No. 1)

Our January 22 post discussed “a long-running issue concerning the treatment of trademark licenses in bankruptcy” and its resolution in the January 12 decision of the First Circuit in Mission Product Holdings, Inc. v. Tempnology, LLC.[1]  Mission Product Holdings filed a petition for certiorari in the Supreme Court on June 11.[2]

The petition sets up the conflicting views of the effect of rejection of a trademark license of the First Circuit in Tempnology (as well as the Fourth Circuit in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc.[3]), on the one hand, and the Seventh Circuit in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC,[4] on the other, and relies primarily on the arguments articulated in Sunbeam for the asserted error of Tempnology.[5] 

The petition asserts unequivocally that “[r]ejection of an executory contract is merely a breach”[6] despite the absence of support for “merely” in the text of the Bankruptcy Code.  It also analogizes a trademark license rejected by the licensor to a real property lease rejected by the lessor, claiming that, even in the absence of the invocation of Section 365(h), the lessee could not be evicted from the leased premises, citing only a citation-free ipse dixit in Sunbeam to that effect.  I cannot recall a single reported case involving an actual rejected lease and holding that the lessee is entitled to remain in possession notwithstanding rejection and without the benefit of Section 365(h).

Somewhat surprisingly, the petition spends little time discussing the issue that carried such weight for the First Circuit, namely the policing obligations of a trademark licensor as long as a licensee is using the mark.  “[T]rademark licensing is permitted so long as the licensor maintains adequate control over the nature and quality of goods and services sold under the mark by the licensee.”[7]  A licensor has “the affirmative duty of policing in a reasonable manner the activities of his licensees.”[8]  Failure to police the licensee “can often result in . . . ‘abandonment’ and invalidity” of the mark.[9]  And the petition does not note at all that the existence of these obligations is a principal reason that Congress excluded trademarks from the definition of “intellectual property” when it added Sections 101(35A) (definition of “intellectual property”) and 365(n) to the Code via the Intellectual Property Bankruptcy Protection Act of 1987, P.L. 100-506, in 1988.  Congress believed then that trademark licenses--

raise issues beyond the scope of this legislation. In particular, trademark, trade name and service mark licensing relationships depend to a large extent on control of the quality of the products or services sold by the licensee.  Since these matters could not be addressed without more extensive study, it was determined to postpone congressional action in this area and to allow the development of equitable treatment of this situation by bankruptcy courts.[10]

It surely was not the intent of Congress that rejected trademark licenses would be treated as if Section 365(n) applied to them (despite their very deliberate omission from the definition of “intellectual property”[11]) or, as Mission Product Holdings seems to be arguing, receive even more indulgent treatment than the forms of intellectual property included in Section 101(35A) and thus expressly protected by Section 365(n).

Tempnology’s response to the petition is due on July 12.

 

[1]  879 F.3d 389 (1st Cir. 2018). 

[2]  Id. petition for cert. filed, No. 17-1657 (June 11, 2018).

[3]  756 F.2d 1043 (4th Cir. 1985).

[4]  686 F.3d 372 (7th Cir.), cert. den. 568 U.S. 1076 (2012).

[5]  The cert. petition also poses a second issue for review concerning whether an exclusive right to sell a patented product is a “right to intellectual property” within the scope of Section 365(n) of the Bankruptcy Code.  Since it cites no circuit split on the issue, it seems even more unlikely that cert. would be granted on this issue than on the main issue on which the First and Fourth Circuits are directly at odds with the Seventh.

[6]  Petition for cert. at 3.  Also, “[r]ejection is nothing more than” a breach of contract.  Id. at 22.

[7]  3 McCarthy on Trademarks and Unfair Competition § 18-42, at 18-105 (5th ed. 2018).

[8]  Dawn Donut Co. v. Hart’s Food Stores, Inc., 267 F.2d 358, 367 (2d Cir. 1959).

[9]  McCarthy § 18-48, at 18-131.

[10]  Senate Report on P.L. 100-506, at 5.

[11]  Sunbeam apparently doesn’t agree with that, since “an omission is just an omission.”  686 F.3d at 375.