Trademark Licenses . . . Again (Update No. 2)
Our June 28 post discussed the petition for certiorari in the U.S. Supreme Court seeking review of the First Circuit’s January 12 decision in Mission Product Holdings, Inc. v. Tempnology, LLC.[i] We noted that the respondent’s response to the petition was due on July 12.
The respondent’s response to the petition was not filed on July 12, and its time to do so has apparently been extended to August 8. In the meantime, however, an amicus curiae brief in support of the petition was filed by the International Trademark Association (INTA) on July 11. The INTA brief makes two major points--
(1) There is a stark conflict between circuits, within circuits and within individual courts[ii] on a major issue of bankruptcy and intellectual property law that the Supreme Court has its first opportunity since 2012 to resolve and clarify. The circuit split, and the more general disagreement underlying it on the fundamental question of what precisely are the consequences of the rejection of an executory contract in bankruptcy, has injected considerable uncertainties and distortions into trademark licensing negotiations, administration and litigation, with deleterious consequences for an important segment of the economy. It is highly desirable that the Court grant cert. and resolve all these splits and uncertainties and end the resulting forum-shopping.[iii] It is hard to argue with this point.
(2) In resolving the circuit split, the Court should adopt the Sunbeam[iv] position on the issue because it would better “promote the overall health of the trademark system,” and is more equitable, than the Lubrizol[v]/Tempnology position would,[vi] which is certainly arguable.
The Amicus Brief recognizes more clearly than the petition did that a decision for the Sunbeam position would require the Court to do some legislative-like work to bring the law of trademark licensing and bankruptcy into synch, which is the same recognition that led Congress to exclude trademarks from the definition of “intellectual property” when it added Sections 101(35A) (definition of “intellectual property”) and 365(n) to the Bankruptcy Code in 1988 in the first place. It appears that INTA is proposing that a trademark licensor’s obligation to police the quality of the trademarked goods or services would remain in place notwithstanding rejection of the license but that those obligations might be shifted, apparently by contract, to the licensee (despite all we have learned during and after the financial crisis as to the unreliability of self-policing).
Trademark licensors have continuing statutory obligations to maintain quality control over the licensee’s use of the licensed trademark to preserve their rights in the trademark. That, however, is not the sort of contractual obligation that may be terminated through rejection. That is because the continuing obligation of a trademark owner to maintain quality control is based on statute, see 15 U.S.C. § 1055, wholly independent of any contractual obligations, rejected or otherwise.
As a statutory obligation, the requirement that the licensor assert quality control over its licensee’s use serves a broader public purpose beyond the contractual obligations that might be at issue when a debtor-licensor decides whether to reject a contract in bankruptcy. . . . Any burden on the debtor-licensor to ensure that its licensee maintains quality controls is lessened by the licensee’s contractual obligations to maintain quality control, including in the bankruptcy context.[vii]
But no one--not Sunbeam, the First Circuit dissenter or the parties in Tempnology nor INTA in the Amicus Brief--has proposed how this is going to work. Who, in the short- and the long-term, is going to perform these statutory obligations in a bankruptcy context, especially a Chapter 7 context? How could a Chapter 7 trustee be expected to perform these obligations, the failure to perform which risks the future existence of the trademark? After rejection (but not termination of the right to continue to use the mark, per the Sunbeam position), will the licensee continue to pay the royalties that would have been due in the absence of rejection? Compare Bankruptcy Code § 365(n)(2)(B). If the answer is that, in the long-term, the statutory obligations will be performed by the successor owner of the trademark (presumably after a § 363 sale of the mark by the debtor-in-possession or Chapter 7 trustee), what pre-sale performance infirmities and liabilities will the successor owner be subject to in the absence of statutory authority to protect it from them? And in the absence of statutory authority to obligate the licensee to continue to pay royalties post-rejection at the pre-rejection rate, how can a prospective successor owner know with reasonable certainty what to bid for the mark? These are the questions (perhaps among others) that Congress should have wrestled with in its “more extensive study” [viii] of the difficult intersection of trademark and bankruptcy law. It seems to me that the Supreme Court cannot adopt the Sunbeam position without also providing answers to these questions. But so far the lower courts, the parties and the amicus (along with the failure of Congress to address the issue in the 30 years since the Intellectual Property Bankruptcy Protection Act of 1987, P.L. 100-506) have provided it with no assistance in arriving at those answers if it decides to grant the petition.
[i] 879 F.3d 389 (1st Cir. 2018), petition for cert. filed, No. 17-1657 (June 11, 2018).
[ii] Tempnology itself was a 2-1 decision.
[iii] Brief of Amicus Curiae The International Trademark Association (“Amicus Brief”), at 8-14, 24-27.
[iv] Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir.), cert. den. 568 U.S. 1076 (2012).
[v] Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985).
[vi] Amicus Brief at 14-24. The Amicus Brief does not address or take a position on the second issue for review posited by the cert. petition, namely 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.
[vii] Amicus Brief at 18-20.
[viii] Senate Report on P.L. 100-506, at 5.