The Oral Argument. The Supreme Court held oral argument earlier today in the Mission Products v. Tempnology case, on the issue of the effect of rejection by a licensor of a trademark license on the licensee’s rights. For the full background on the case and the arguments of the parties and amici, please read this post from last week. However, for quick reference, this is the question presented:
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.
What follows are some initial impressions based on the questions and comments of the Justices during a wide-ranging oral argument. You can read the entire official oral argument transcript at this link.
- Overview. In short, those looking for a clear signal how the Court will rule are going to be disappointed. All Justices other than Justices Thomas and Kavanaugh asked questions, but it’s difficult to tell how the Court will rule based on the oral argument.
- Mootness. The Justices asked a number of questions about Tempnology’s mootness argument. If the questions are a guide, the Court does not seem inclined to hold that the case is moot. Justice Gorsuch was quite focused on that issue but later in the oral argument asked Tempnology’s counsel whether the facts presented at least “an acorn of injury” for Article III purposes.
- Quality Control. An important focus was the quality control requirement imposed on a trademark owner under trademark law. The Justices raised a number of questions about whether this obligation made trademarks, and trademark licenses, different from other contracts.
- Looking for analogies to the quality control requirement, Justices Breyer, Alito, and Kagan posed questions about leases (or an air-conditioned igloo, in Justice Breyer’s example). They asked whether the tenant would lose rights if the landlord’s failure to provide heat or maintain the property rendered it uninhabitable.
- The Justices seemed interested in whether the lease scenarios helped to assess the impact of a licensor’s failure to control quality after rejection, especially if the trademark were abandoned.
- Although in the briefs the parties had agreed that outside of bankruptcy a breach by a trademark owner as licensor would not terminate a trademark licensee’s rights, at times the Justices seemed to question that premise.
- Exceptions to a General Rule? Another major area of interest was whether Sections 365(n), 365(h)(2), and 365(i)(2), under which the counterparty can elect to retain license or lease rights upon rejection, implies that these are exceptions to a general rule that rejection results in termination of the contract.
- In response to the argument that these subsections do not mean the general rule of Section 365 is termination, Justice Sotomayor commented that it “seems as all of these are exceptions by their nature, and that goes contrary to the general rule that if it’s an exception, the rule is different than the exception.” On several occasions she expressed concern that if the Sunbeam rule were followed, a trademark licensee would get more rights than would a licensee of other intellectual property under Section 365(n), given the trade-offs built into Section 365(n).
- On the other hand, Justice Ginsburg suggested that in enacting Section 365(n), Congress did not take any position on whether Lubrizol should apply in the trademark context.
- Rejection as Breach or More Than Breach. A central issue during oral argument was whether rejection is just a pre-petition breach or if it’s something more.
- Justice Kagan noted that Section 365(g) states that rejection “constitutes a breach” and asked whether a debtor or trustee could “unwind the entire deal” in bankruptcy upon rejection if, outside of bankruptcy, a licensor could not do so based on its own breach.
- Justice Sotomayor, during argument by the United States, observed that “rejection is not a contract term,” and described rejection instead as a “specialized term.” She also commented that we “generally reject the entire contract,” and not “one claim under a contract.”
- The Justices asked questions about whether a decision in this case could be limited to trademark licenses or whether the Court would have to interpret the meaning of rejection under Section 365 generally to reach a result.
- Overall, the Justices seemed to be struggling with how to square Section 365(g)’s language that rejection “constitutes a breach” with the fact that the section uses the bankruptcy-specific term “rejection” as opposed to a more common contractual term.
Conclusion. During an hour-long oral argument, the Justices raised questions about a number of bankruptcy and trademark law issues. What they did not do, however, was reveal any clear direction in how they will decide the case. Since no conservative/liberal split emerged, it would not be surprising to see an atypical combination of Justices voting together, assuming the decision is not unanimous. What that decision will ultimately be, and how the various Justices will vote, remains to be seen. Stay tuned.