By: Katie M. HollowellDevin Ricci, and Eric Lockridge

A recent United States Supreme Court decision handed down in May addressed what occurred when contract, bankruptcy, and intellectual property laws intersected.[1] In Mission Products Holdings, Inc. v. Tempnology, LLC nka Old Cold, LLC, the Supreme Court was presented with the question of whether a debtor’s rejection of an executory contract rescinded the rights conveyed with that contract. Holding that a rejection of the contract is a breach, the Supreme Court found, using traditional contract principles, that the rights at issue survive the debtor’s breach.

The rights at issue were Mission Products Holdings, Inc.’s (“Mission”) non-exclusive rights to use Tempnology, LLC’s (“Tempnology”) trademarks. As part of an exclusive distribution licensing agreement in 2012, Tempnology granted Mission a non-exclusive trademark license to use in distributing Tempnology’s products. The parties’ agreement was set to expire in July 2016, but in 2015 Tempnology filed a Chapter 11 Petition for Relief. Chapter 11 of the United States Code (the “Bankruptcy Code”) allows a debtor or its trustee to “reject” an executory contract, meaning the debtor can cease performing under the contract.[2] Tempnology took advantage of this provision and requested the Bankruptcy Court’s approval to reject its contract with Mission.

An executory contract, according to the Supreme Court, is one in which “performance remains due to some extent on both sides.” When a debtor rejects the executory contract, it will repudiate any further performance. The Supreme Court held, according to 11 U.S.C. § 365(g), that rejection of the contract constituted a breach.

The parties agreed on two consequences of Tempnology’s rejection: (1) Tempnology could cease its performance and (2) Mission could assert a pre-petition claim in Tempnology’s bankruptcy for damages. Mission’s claim would be pre-petition because upon rejection, the breach is deemed to occur immediately before the Petition for Relief was filed.[3] But, Tempnology contended one more consequence flowed from its rejection – Mission’s rights to use its trademark terminated. The Bankruptcy Court agreed, and terminated Mission’s trademark license. The Bankruptcy Court Appellate Panel disagreed and reversed, which in turn was reversed and the Bankruptcy Court’s decision reinstated by the First Circuit. The First Circuit agreed with the Bankruptcy Court that Mission’s license had terminated upon rejection.

The Supreme Court, however, held that 11 U.S.C. § 365(g) states rejection constitutes a breach and “breach” is not a specialized bankruptcy term. Thus, the consequences of rejection are those that occur upon breach in normal contract law – a contract granting a license that is breached does not revoke the license or prevent the licensee from doing what the license allows. Interestingly, the Supreme Court qualified this holding, stating that the license continues subject to any special contractual term or applicable state law.

Furthermore, the Supreme Court found Tempnology’s argument that special considerations of trademark law meant the license should terminate to be unavailing. The Supreme Court looked to 11 U.S.C. § 365’s illustrative provisions, such as the one in 11 U.S.C. § 365(n), applicable to patent law.[4] The Supreme Court noted that these provisions were enacted in response to special situations and were Congress’s response to particular cases. Their enactment did not erase the general rule in 11 U.S.C. § 365(g) that rejection constitutes breach. The Supreme Court reversed the First Circuit’s decision, holding Mission’s trademark licensing right survived Tempnology’s rejection of the contract.

The Supreme Court’s holding could have interesting implications for contract drafting techniques involving trademark and other intellectual property rights in the event the licensor ends up in bankruptcy. How the Supreme Court would rule when faced with a particular contract provision governing such a situation remains to be seen. But the case serves as a lesson to practitioners to consider carefully the ramifications of rejection of an executory contract in bankruptcy.

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[1] Mission Products Holdings, Inc. v. Tempnology, LLC nka Old Cold, LLC, 587 U.S. ___ (2019).

[2] See 11 U.S.C. § 365(a).

[3] 11 U.S.C. § 365(g)(1).

[4] See, e.g., 11 U.S.C. §§ 365(h), (i), and (n).