Rejection Time: On February 20th The Supreme Court Hears Oral Argument On The Big Question In The Tempnology Case — Does A Trademark Licensee Lose Its Rights Upon Rejection?

By Bob Eisenbach on February 13, 2019

Posted in Business Bankruptcy Issues, Recent Developments

The Big Question. What is the effect of rejection of a trademark license by a debtor-licensor? Over the past few years, this blog has followed the Tempnology case out of New Hampshire raising just that issue. The case has gone from the bankruptcy court, to the Bankruptcy Appellate Panel, and then to the First Circuit. Last August, I wrote about how the case could be headed to the Supreme Court. In late October, the Supreme Court granted review and has set oral argument for February 20, 2019.

Here’s the question on which the Supreme Court granted certiorari:

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.

A Supreme Court Preview Article. In anticipation of next week’s oral argument, I wrote an article on the case and it’s just been published by the American Bar Association’s Supreme Court Preview publication, which as its name implies previews each pending case coming up on the Supreme Court’s calendar.

The new article discusses the key facts, issues, and arguments presented by the parties and amici to the Supreme Court, along with background on the legal context and potential significance of the case.
For a detailed look at the case and these issues, you can access the full article using this link.

The Circuit Split. The case seems likely to resolve the split between the First and Fourth Circuits on the one hand, and the Seventh Circuit on the other hand, on the impact of rejection of a trademark licensee. Let’s review the history:

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 bankruptcy court in Tempnology followed the Lubrizol decision and held that Tempnology’s rejection terminated the rights of the licensee, Mission Products Holdings, to use the trademarks.
On appeal, the First Circuit Bankruptcy Appellate Panel reversed, following Sunbeam and not Lubrizol.
Then, on further appeal, the First Circuit Court of Appeals went the other way, unequivocally following Lubrizol and not Sunbeam.

The Supreme Court Briefs. In addition to briefs from debtor-licensor Tempnology and licensee Mission Products, the case has attracted six amicus briefs, including from the United States. Four amici support the licensee and two support neither party. However, all six call for reversal of the First Circuit’s position that rejection of a trademark license terminates the licensee’s rights under the license. For your further reading pleasure, each of the briefs from the parties and the amici are at the links below:

Is Rejection Just A Breach Or Something More? Sifting through all the arguments, the key issue is what effect rejection of an executory contract under Section 365 has on the counterparty’s rights. Does rejection function merely as a breach that frees the estate from future affirmative performance obligations? Or, does it render the contract unenforceable by the counterparty—other than the right to file a pre-petition rejection damages claim under Section 502(g)—thereby terminating all other rights and remedies under the rejected contract absent a statutory exception like Section 365(n)? If the former, the Supreme Court will likely reverse and endorse the Sunbeam approach or something similar. If the latter, it will likely affirm and adopt the Tempnology/Lubrizol approach.

Oral Argument Is February 20th. At the February 20th oral argument, the two parties, and the United States, have been allocated time to argue. Stay tuned for what could be a very interesting oral argument—and of course, ultimately the Supreme Court’s decision.