The twists and turns of the In re Tempnology LLC bankruptcy case have been a frequent subject on this blog for good reason. The case addresses whether a trademark licensee, whose licensor files bankruptcy and rejects the license agreement, retains any rights to use the trademark — or instead is out of luck.
A Wild Ride. The licensee in that case, Mission Product Holdings, Inc. (“Mission”), has been on something of a roller coaster ride for the past few years:
- First, Mission lost its rights under the trademark license after a November 2015 Bankruptcy Court decision;
- Mission’s fortunes rose dramatically when it was permitted to keep its trademark license rights after the November 2016 First Circuit Bankruptcy Appellate Panel decision;
- That outcome didn’t last long because Mission again lost its trademark rights when in January 2018 the First Circuit Court of Appeals issued its decision reversing the Bankruptcy Appellate Panel’s decision and affirming the Bankruptcy Court decision.
- Rather than repeat the details here, please follow the links above for a full discussion of each Tempnology decision and the underlying facts.
The Circuit Split. Propelling Mission on this roller coaster ride has been a circuit split about the impact of rejection of a trademark licensee.
- Back in 1985, the Fourth Circuit issued a seminal decision on the effect of rejection, Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985). The Fourth Circuit held that rejection of a license terminates the licensee’s rights to use the previously licensed intellectual property.
- In response to Lubrizol, Congress enacted Section 365(n) of the Bankruptcy Code to protect licensees of enumerated types of intellectual property from the impact of rejection. However, unlike patents, copyrights, and trade secrets, trademarks were not included in the definition of “intellectual property” in Section 101(35A) of the Bankruptcy Code. Most courts have held that trademark licensees have no protection under Section 365(n).
- After almost thirty years of calm, a circuit split started in 2012 when the Seventh Circuit issued its decision in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 382 (7th Cir. 2012). In Sunbeam, the Seventh Circuit expressly rejected Lubrizol and held that rejection of a trademark license did not terminate the licensee’s rights to use the trademarks. The court held that under Section 365(g) of the Bankruptcy Code, rejection operates as a breach by the debtor but not as a termination of the contract.
- The First Circuit Bankruptcy Appellate Panel followed Sunbeam and not Lubrizol. On further appeal, however, the First Circuit Court of Appeals went the other way, unequivocally following Lubrizol and not Sunbeam.
A Cert Petition. In the face of this major circuit split, in June 2018 Mission filed a petition for a writ of certiorari, asking the U.S. Supreme Court to review the First Circuit’s decision. (As a side note, the Supreme Court denied cert in the Sunbeam case.) Mission’s cert petition posed two questions:
- Whether, under §365 of the Bankruptcy Code, a debtor-licensor’s “rejection” of a license agreement—which “constitutes a breach of such contract,” 11 U.S.C. §365(g)—terminates rights of the licensee that would survive the licensor’s breach under applicable nonbankruptcy law.
- Whether an exclusive right to sell certain products practicing a patent in a particular geographic territory is a “right to intellectual property” within the meaning of §365(n) of the Bankruptcy Code.
It’s the first question that goes to the heart of the Lubrizol/Sunbeam/Tempnology circuit split: what is the effect of rejection on a trademark licensee’s rights?
A Friend Of The Court Emerges And The Supreme Court Shows Interest. This key issue drew an amicus curiae brief from the International Trademark Association in support of Mission. After Tempnology itself declined to respond to the cert petition, the Supreme Court requested that it file a response. Could the request be a hint that the Supreme Court will seriously consider granting cert and reviewing one or both of these questions? Tempnology has until September 7, 2018 to file its response and the case has been “distributed for conference” on September 24, 2018. Reading Supreme Court tea leaves is always uncertain, but we might learn whether the Supreme Court will hear the case after the September 24 conference.
Are More Than Just Trademark Licenses At Stake? Although the Tempnology case is first and foremost about a trademark license, if the Supreme Court were to hear the case and issue an opinion on the impact of rejection, that decision could have consequences beyond just trademark licenses.
- If the Court were to follow Sunbeam and hold that rejection does not terminate a licensee’s rights, would that decision apply to patent, copyright, and trade secret licensees as well?
- Would those licensees still need to follow Section 365(n)’s provisions, including the requirement for a licensee electing to retain its rights to the intellectual property to continue paying royalties, or could they argue that rejection was a material breach excusing royalty payment obligations?
Trademark licensees and those interested in the impact of rejection generally will want to stay tuned for further developments. If the Supreme Court grants cert, this could get interesting.