Bankruptcy Update Blog

Trademark Licenses . . . Again (Update No. 8): The Supreme Court Decides! (Part 2)

Our May 22 post reported on the Supreme Court’s May 20 decision in Mission Product Holdings, Inc. v. Tempnology, LLC,[1] an 8-1 decision holding that the rejection of a trademark license in which the debtor is the licensor does not terminate the license.  Rather, the rights of the licensee survive the rejection, and it may continue to use the licensed mark.

Our January 11 post had posited that, in the case of reversal (which is what occurred), “an intellectually honest and satisfying decision” must address at least four issues noted in that post.  Well, how did the Supreme Court do on the four issues?  Let’s take a look:

1.  What exactly are the consequences of the rejection under Section 365 of every executory contract that is not entitled to special treatment under subsection (h), (i) or (n)?

The Court was clear: the consequences of rejection are the same as the consequences of a breach outside of bankruptcy, because that is what rejection is (and nothing more than that).[2]  But what are the consequences of a breach consisting of rejection?  The answer must be found in “non-bankruptcy contract law.”[3]  Every rejection will, at least to some extent, require an inquiry into applicable “non-bankruptcy contract law” to determine its full consequences.

2Are the rights of the licensee under a trademark license “property” as that term is used in the Bankruptcy Code or the Fifth Amendment to the Constitution?

The Court did not explicitly address this question at all.  The outcome for all executory contracts (including trademark licenses) is, in large effect, that the non-debtor party’s executory rights thereunder will be treated as if they were some sort of property.

3.  What exactly are the implications of Congress’ omission of trademarks from the definition of “intellectual property” that is applicable to Section 365(n)?

This is one the Court answered, in effect, with one word: None.  Licensees under rejected trademark licenses will now be treated at least as favorably as the licensees under rejected licenses of intellectual property of the kinds to which subsection (n) is expressly applicable, and perhaps even more favorably.[4] 

Section 365 has another omission that may have had interpretive significance which the Court rejected.  Over the years Congress has adopted subsections dealing with several specific forms of rejected executory contracts, apparently to rescue them from automatic termination--real property leases in (h), contracts to sell real property or a timeshare interest under (i) and (j), and intellectual property licenses other than trademark licenses under (n), even referring to them as exceptions--but not others.[5]  If automatic termination was never the effect of rejection, what did Congress think it was doing when it enacted (h), (i), (j) and (n)?  The Court chose to attribute no interpretive significance of these subsections for all forms of executory contract not covered by them.[6]  They are merely a “mash-up of legislative interventions”[7] enacted to counteract judicial failures to discern and apply the general rule of rejection-equals-only-breach.

That, in turn, raises another question for another day and perhaps Congressional action: why should the non-debtor party to a contract to which any of (h), (i) or (n) applies now invoke the applicable subsection to effect a preservation of its rights and be subject to its limitations and conditions?  Why not simply invoke the general rule that rejection does not automatically work a termination?  There is nothing in (h), (i) or (n) that makes them the exclusive pathway to the preservation of a rejected executory contract of the type dealt with therein.

4.  What are the implications of the completely foreseeable fact that many bankrupt trademark licensors, if their licensees remain entitled to continue to use the licensed marks notwithstanding rejection, will be unable to perform their legal duty to police the use of the marks? 

The Court did not address this question other than to say that to address it would have amounted to “allow[ing] the tail to wag the Doberman.”[8]  Will the non-debtor party to a rejected trademark license ever actually opt for the preservation of its rights to use the mark knowing the risk that the mark’s owner (whatever entity that turns out to be when the bankruptcy dust has all settled) will be unable to police its use of the mark and thereby endanger the protection of the mark under non-bankruptcy trademark law?  This, perhaps more than any other, is a question that may cry out for Congressional action.

 

[1]  139 U.S. 1652, rev’g 879 F.3d 389 (1st Cir. 2018).

[2]  139 U.S. at 1661, 1663 (“Rejection is breach, and has only its consequences.”).

[3]  The Court said that “non-bankruptcy contract law” is “the first place to go in divining the effects of a rejection” since it “can tell us the effects of breach” (id. at 1662), but it never explicitly states where the second place might be.  There may be a hint that the text of the parties’ agreement may be the second place, but it’s not at all clear that the rejecting (i.e., breaching) debtor would have any right to insist that the non-debtor party is bound by the provisions of the agreement specifying the consequences of the debtor’s breach.

[4]  E.g., a licensee electing to preserve its license on the terms provided in subsection (n) is deemed to waive certain offset rights and any Section 503(b) claim.  § 365(n)(2)(C).  Does a preserving trademark licensee waive anything?  That’s a question for another day.  Perhaps Congress will decide to step in and resolve these issues, although its track record in doing so in this area is not exactly stellar.   Justice Sotomayor mentioned this issue in her concurring opinion.  See 139 U.S. at 1666-67 and our May 22 post at n.10.

[5]  Respondent’s brief in the Supreme Court also points to Section 1113 as a Congressional creation of an exception for collective bargaining agreements after NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984).  The Court did not mention Bildisco or Section 1113.

[6]  Respondent’s brief cited RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (2012); Hibbs v. Winn, 542 U.S. 88 (2004); and Andrus v. Glover Constr. Co., 446 U.S. 608 (1980), among others, for rules for interpreting statutory exceptions and omissions.  The Court did not mention any of them.  Respondent might also have mentioned the ancient Roman maxim that is often misleadingly referred to as “the exception proves the rule” (better: “the exception confirms the rule in cases not excepted”).

[7]  139 U.S. at 1664.

[8]  Id. at 1665-66.