On May 20, 2019, the Supreme Court handed down a landmark decision regarding bankruptcy and trademarks. In Mission Products Holdings, Inc. v. Tempnology, LLC nka Old Cold LLC. No. 17-1657, the Court ruled that the rejection of an executory contract in a bankruptcy is only a breach of the contract and not its revocation. This ruling, which reversed a ruling from the First Circuit Court of Appeals, has profound implications. It is now settled that, where a bankrupt licensor exercises its right to reject a contract containing a license of any intellectual property or trademark, the license isn’t terminated. Simply, the rights of the licensee survive rejection of the license agreement.
Before this decision most of the case law held that rejection of a contract had the effect of revocation; licensees could not continue to use marks and intellectual property they invested in. This was contrary not only to several articles by esteemed law professors, but also to a ruling in In Re Drexel Burnham Lambert Group, Inc., 148 B.R. 1002 (S.D.N.Y. 1993), that thoroughly analyzed the history and purpose of the power to reject contracts. These contradictions did not go unnoticed by Barack Ferrazzano Bankruptcy & Creditor Rights Group co-chair, William J. Barrett, who would develop and present the argument that became the core of the Supreme Court’s recent decision.
It was 1994, when Bill first dealt with a bankrupt’s effort, by rejecting an agreement, to destroy vested rights of another party. The entire bankruptcy case settled before Bill had a chance to argue the rejection versus revocation issue in any court, but he was fascinated that the legal issue went to the very root of the nature of federal bankruptcy law and its role in a system where rights are defined by non-bankruptcy law.
It would be another 18 years before Bill was able to again take a case directly raising the rejection versus revocation issue. In 2012, Barack Ferrazzano represented Chicago American Manufacturing Company, which became the successful party in Sunbeam Products, Inc. v. Chicago American Mfg. 686 F.3d 372 (“Sunbeam”). In the Sunbeam case, the plaintiff argued the rejection of a supply agreement that granted a supplier a trademark license, in effect, terminated the license. After the supply agreement’s rejection, Sunbeam, which had purchased all of the bankrupt’s property from the bankruptcy trustee, sued the supplier for trademark infringement and to enjoin further use of the trademarks.
The case reached the Seventh Circuit Court of Appeals, where Bill urged the court to reject rulings of other courts, including the Lubrizol Enterprises v. Richmond Metal Finishers, Inc. 756 F.2d 1043 (4th Cir. 1985), decision of the Fourth Circuit Court of Appeals, and recognize instead that the rejection of a contract containing a trademark license did not have the effect of terminating the license. The Seventh Circuit adopted Barrett’s stance, holding that the rejection of a contract by a bankrupt, including a contract containing a trademark license, did not terminate the license or the rights granted under it to the non-bankrupt party.
At the time, the U.S. Supreme Court declined to hear the Sunbeam case. But then in 2018 the First Circuit Court of Appeals refused to follow Sunbeam and reverted to Lubrizol where it was held that the rejection of a license agreement destroys the license. This First Circuit decision created a conflict among the circuits, one the Supreme Court recently resolved in Mission Product Holdings, Inc. v. Tempnology, LLC No. 17-1657. The appellant, the non-bankrupt licensee of a trademark that had been rejected by the bankrupt, called for the Supreme Court to adopt the Seventh Circuit’s position. Relying primarily on the ruling in Sunbeam obtained by Bill, the Supreme Court came down squarely on the side of the licensee, holding that the rejection of a license agreement does not terminate the license granted under the agreement to the licensee. This is now the settled law of the land and will have a profound impact on cases that sit at the intersection of bankruptcy and trademark law.
To learn more about the precedence-setting Supreme Court case, visit the following links: