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 from the questions and comments by the Justices during oral argument. You can read the entire official oral argument transcript at this link.

  • Overview. Those looking for a clear signal how the Court will rule are going to be disappointed. Although all Justices other than Justices Thomas and Kavanaugh asked questions, it’s difficult to tell where the Court will come out on the key issue.
  • Mootness. The Justices asked a number of questions about Tempnology’s argument that the case is moot. If the questions are a guide, it appears that the Court may be inclined to hold that the case is not moot. Justice Gorsuch was quite focused on that issue but later in the oral argument asked whether the facts presented at least “an acorn of injury” for Article III purposes.
  • Quality Control. One important focus was the impact of the quality control requirement imposed on a trademark owner under trademark law. The Justices raised a number of questions centered on whether this obligation made trademarks, and therefore trademark licenses, different from other contracts. The parties had agreed that outside of bankruptcy a breach by a trademark owner as licensor would not terminate a trademark licensee’s rights, but at times the Justices seemed to question that premise.
  • General Rule v. Exceptions. Another major area of interest was whether the existence of exceptions in Section 365, such as Sections 365(n), 365(h)(2), and 365(i)(2), implied that the general rule of the effect of rejection was to terminate the rejected executory 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).
  • Rejection as Breach. A core issue discussed in the oral argument was whether rejection is just a pre-petition breach–or something more.
    • Justice Kagan noted that Section 365(g) states that rejection “constitutes a breach” and asked why a debtor or trustee could “unwind the entire deal” in bankruptcy upon rejection but not when a licensor breached outside of bankruptcy.
    • Justice Sotomayor, during the argument by the United States, observed that “rejection is not a contract term,” and described rejection instead as a “specialized term.”
    • Overall, the Justices seemed to be struggling with how to square Section 365(g)’s language that rejection “constitutes a breach” with that section’s use of a bankruptcy-specific term, “rejection.”

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.

Image Courtesy of Flickr by Matt Wade

An official notice from the Judicial Conference of the United States was just published announcing that certain dollar amounts in the Bankruptcy Code will be increased about 6.2% this time for new cases filed on or after April 1, 2019. Follow this link for the Federal Register page with a chart listing all of the updated dollar amounts.  Among the most meaningful increases for Chapter 11 and other business bankruptcy cases:

  • The employee compensation and employee benefit plan contribution priorities under Sections 507(a)(4) and 507(a)(5) both increase to $13,650 from $12,850;
  • The consumer deposit priority under Section 507(a)(7) rises to $3,025 from $2,850;
  • The total amount of claims required to file an involuntary petition rises to $16,750 from $15,775;
  • The dollar amount in the bankruptcy venue provision, 28 U.S.C. Section 1409(b), which requires that actions to recover for non-consumer, non-insider debt be brought against defendants in the district in which they reside, has increased to $13,650 from $12,850;
  • The minimum amount required to bring a preference claim against a defendant in a non-consumer debtor case, specified in Section 547(c)(9), rises to $6,825 from $6,425; and
  • The total debt amount in the definition of small business debtor in Section 101(51D) will rise to $2,725,625.

Other adjustments will affect consumers more than business debtors. For example, the debt limit for an individual to qualify for a Chapter 13 bankruptcy case will rise to $1,257,850 of secured debt, and certain exemption amounts will also increase.

Although the changes aren’t that large, be sure to keep them in mind when assessing cases filed after April 1, 2019. Official bankruptcy forms will likely be updated as April 1st draws near.

 

Image Courtesy of Flickr by Pictures of Money

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:

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.

Almost every year amendments are made to the rules that govern how bankruptcy cases are managed — the Federal Rules of Bankruptcy Procedure. The amendments address issues identified by an Advisory Committee made up of federal judges, bankruptcy attorneys, and others. The rule amendments are ultimately adopted by the U.S. Supreme Court and technically subject to Congressional disapproval.

Key Rule Amendments Have A Certain Appeal. This year almost all of the rule amendments are to the set of Federal Rules of Bankruptcy Procedure governing appeals, those related to appeals, and others involving electronic filing. They have been revised to reflect changes made to the Federal Rules of Appellate Procedure and also the Federal Rules of Civil Procedure. Most amendments are fairly technical but here are some to note:

  • Rule 3002 has been amended to address procedures for handling payment changes in home equity lines of credit in consumer cases.
  • Rule 5005 has been amended to require electronic filing absent good cause and to make that a national rule. As the Advisory Committee commented, “Electronic filing has matured” and “The time has come to seize the advantages of electronic filing by making it mandatory in all districts, except for filings made by an individual not represented by an attorney.” Almost all filings are electronic now anyway so this is more of the rule reflecting current practice than requiring actual changes.
  • Rule 7004(a) has been tweaked to pick up the accurate cross-references to Federal Rule of Civil Procedure 4.
  • Rule 7062 applies Federal Rule of Civil Procedure 62 to adversary proceedings but clarifies that the stay of proceedings to enforce a judgment is only for 14 days in an adversary proceeding and not the 30 days in a district court case.
  • Rule 8002 has been amended to clarify, among other items, time requirements for filing a notice of appeal.
  • Rule 8006 now allows the bankruptcy court to file a statement on the merits of direct certification to the court of appeals when the parties make a joint certification.
  • Rules 8007 and 8010 discard the term “supersedeas bond” and instead use “security provided to obtain a stay of judgment” to account for changes to Federal Rule of Civil Procedure 62.
  • Several rules, including Rules 8011, 8013, 8015, 8016, and 8022 have been amended to reflect electronic filing and to limit the size of briefs using word counts rather than page limits.
  • Rule 8017 has been revised to address amicus briefs and their potential impact on the disqualification of a judge.
  • Rule 8018.1 has been added to allow a district court to treat an appeal from a bankruptcy court judgment — if the district court concludes the bankruptcy court lacked constitutional authority to enter the judgment — as proposed findings of fact and conclusions of law.
  • Rule 9025 has been revised to reflect the different types of security for appeals and their providers.

Give Me A Redline. If you’re like me, the best way to see the changes is to go through a redline. Follow the link in this sentence for the complete set of rule changes, including redlines showing the revisions made, as well as the Advisory Committee’s explanations for each amendment. The redline of the bankruptcy rule amendments starts at page 141 of the linked document, and it also includes the changes to the other federal rules.

Is It December Already? These rule amendments take effect on December 1, 2018, which is only days away, so read through them now and you will be ready when they take effect.

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:

The Circuit Split. Propelling Mission on this roller coaster ride has been a circuit split about the impact of rejection of a trademark licensee.

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:

  1. 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.
  2. 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.

The Tempnology Trademark Saga. When it comes to decisions on bankruptcy and trademark licenses, the In re Tempnology LLC bankruptcy case is the gift that keeps on giving.

  • The Original. It all started in November 2015. Following Tempnology’s rejection of an agreement containing a trademark licensee, the New Hampshire Bankruptcy Court ruled that the licensee could no longer use the licensed trademarks.
  • The Sequel. Then, in November 2016, the First Circuit Bankruptcy Appellate Panel (“BAP”) became the first appellate court to follow the Seventh Circuit’s 2012 decision in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 382 (7th Cir. 2012) on the effect of rejection of a trademark license — namely, that rejection did not terminate the licensee’s rights to use the trademarks.
    • In Sunbeam, the Seventh Circuit had expressly rejected the Lubrizol decision and its analysis of the effects of rejection (follow the link for a full discussion of the Sunbeam decision).
    • The Sunbeam court held that rejection is a breach by the debtor and does not terminate the agreement or “vaporize” the rights of the non-breaching party. Critically, the Seventh Circuit allowed the non-debtor trademark licensee to continue using the licensed trademarks despite the debtor’s rejection of the trademark license.
    • The BAP’s decision to follow Sunbeam raised the prospect that other courts might follow suit and start a trend away from Lubrizol.
  • The Final Installment. Fast forward to January 12, 2018 when, on appeal from the BAP, the U.S. Court of Appeals for the First Circuit issued a 2-1 decision, reversing the BAP and affirming the Bankruptcy Court’s decision. Follow this link for a copy of the First Circuit’s full 34 page majority opinion and 7 page concurring and dissenting opinion.
  • Keep reading for the juicy details but, to cut to the chase, the First Circuit unequivocally sided with Lubrizol on the impact of rejection, deepening the circuit split created by the Seventh Circuit’s Sunbeam decision.

Before turning to the First Circuit’s decision, let’s set the stage with a brief review of the underlying facts, a few more highlights from the Bankruptcy Court’s original decision, and the BAP’s subsequent take on these important issues.

The Bankruptcy Court’s Decision. In November 2015, the New Hampshire Bankruptcy Court issued a decision involving the effects of rejection by the debtor, Tempnology LLC, of a Co-Marketing and Distribution Agreement (“Agreement”). In re Tempnology, LLC, 541 B.R. 1 (Bankr. D.N.H. 2015). In the Agreement, Tempnology had granted Mission Product Holdings, Inc. (“Mission”) (1) a non-exclusive license to certain of Tempnology’s copyrights, patents, and trade secrets, (2) an exclusive right to distribute certain cooling material products that Tempnology manufactured, and (3) an associated trademark license. With one of its first motions in the bankruptcy case, Tempnology rejected the Agreement.

  • The Bankruptcy Court held that the non-exclusive license to Tempnology’s copyright, patent, and trade secret rights was a license of “intellectual property” as defined in Section 101(35A) of the Bankruptcy Code, and that Mission’s right to continue to use that IP was protected under Section 365(n). However, the Bankruptcy Court held that Mission’s exclusive distribution rights were not “intellectual property” under Section 101(35A) and were not protected under Section 365(n).
  • The Bankruptcy Court also held that because trademarks were not included in Section 101(35A)’s definition of intellectual property, Mission’s trademark license rights were not protected by Section 365(n).
  • On the impact of rejection, the Bankruptcy Court followed the Lubrizol decision and held that the rejection of the Agreement meant that Mission lost both the exclusive distribution rights and the trademark license rights.
  • The details on the Bankruptcy Court’s decision are at this prior post, entitled “A Reminder Of The Limits Of Section 365(n)’s Licensee Protection.”

The Bankruptcy Appellate Panel Decision. Mission appealed the Bankruptcy Court’s decision to the BAP. On November 18, 2016, the BAP issued a decision affirming in part and reversing in part the Bankruptcy Court’s decision. In re Tempnology LLC, 559 B.R. 809 (1st Cir. BAP 2016).

  • The BAP affirmed the Bankruptcy Court’s holding that the exclusive distribution rights in the Agreement were not intellectual property as defined in the Bankruptcy Code and were not protected by Section 365(n).
  • The BAP also agreed that Section 365(n) did not protect Mission’s rights as a trademark licensee, ruling that the Bankruptcy Court had correctly held that Section 101(35A)’s definition of “intellectual property” excludes trademarks.
  • On the trademark point, Mission urged the BAP to follow the equitable approach that Judge Ambro suggested in his concurring opinion in the Third Circuit’s decision in In re Exide Techs., 607 F.3d 957 (3d Cir. 2010). That would let bankruptcy courts fashion equitable protections for rejected trademark licensees.
  • The BAP declined to follow either that approach or the one taken by the New Jersey Bankruptcy Court in In re Crumbs Bake Shop, 522 B.R. 766 (Bankr. D.N.J. 2014), which had effectively applied Section 365(n) to trademarks. (For more on the Crumbs Bake Shop and Exide Techs. decisions, take a look at this earlier post.)
  • The BAP then considered the Seventh Circuit’s Sunbeam decision and, in a major shift, followed its analysis on the effect of rejection on a trademark license agreement. It thus held that Mission could continue to use the licensed trademarks.
  • For more information on the BAP decision, you can read this prior post, entitled “A Beam Of Sun For Trademark Licensees: Another Appellate Court Holds Rejection Does Not Terminate A Trademark Licensee’s Rights.”

The Main Event: The First Circuit’s Decision. With the background covered, let’s dig into the First Circuit’s decision. The BAP made Sunbeam front and center, so a big question was whether the First Circuit would follow Sunbeam and affirm the BAP’s decision, follow Lubrizol and affirm the Bankruptcy Court’s decision, or perhaps go with the equitable approach discussed by Judge Ambro.

A Notable Section 365(n) Analysis. Before turning to Sunbeam, the First Circuit started with a fairly extensive Section 365(n) analysis, worth examining given how few circuit court decisions address Section 365(n) at all.

  • The Court first agreed with the BAP and the Bankruptcy Court that neither the exclusive distribution rights nor the trademarks are “intellectual property” under Section 101(35A) and therefore neither has Section 365(n) protections.
  • The First Circuit likewise concluded that the exclusivity rights protected by Section 365(n) are limited to IP license rights only and do not extend to distribution rights.
  • The Court also held that a licensee’s right to the “embodiment of such intellectual property” in Section 365(n)(1)(b) is a limited concept (and a term of art) that does not extend to all the goods Mission sought to distribute:

A few common themes appear in these explanations. First, the pre-petition agreement must give the licensee access to the embodiment of intellectual property. Second, an embodiment of intellectual property is a tangible or physical object that exists pre-petition. Third, an embodiment of intellectual property is something inherently limited in number — it is a prototype or example of a product, but does not include all products produced using the intellectual property. Finally, we can infer that the purpose of this provision is to allow the licensee to exploit its right to the underlying intellectual property.

The Negative Covenant Issue. The First Circuit dismissed Mission’s arguments that the case implicated the enforceability of all negative covenants. The Court commented that the Bankruptcy Code might protect from rejection some negative covenants such as confidentiality, but only if they do not materially restrict the debtor’s reorganization, are closely tied to the IP license, and are necessary to implement the terms of the IP license.

The Equitable Treatment Discussion. After agreeing with the BAP (and also Sunbeam) that Sections 101(35A) and 365(n) do not protect trademark licensees, the Court held that courts could not use equitable considerations to protect trademark licensees.

  • The majority opinion rejected the dissent’s contrary view, which was based on Congress’s decision to defer action on trademark licenses in Section 365(n) “to allow the development of equitable treatment of this situation by bankruptcy courts,” as the Senate Report had stated.
  • The First Circuit held that when Congress intended courts to use equitable powers, it included specific language in the text of the relevant Bankruptcy Code section, and it had not done that in Section 365(n).
  • The Court also believed it would be difficult to weigh the equities, given the long-term nature of a trademark license relationship, and courts could misjudge how those burdens might play out in the future.

Taking On Sunbeam. The First Circuit’s biggest divergence from the BAP was on the issue of the effect of rejection under Section 365(g). The Court’s main rationale for following Lubrizol and not Sunbeam was its view that the Sunbeam approach would burden the debtor, as trademark owner, with monitoring and controlling the quality of the trademarked goods — duties imposed under trademark law — despite having already rejected the trademark license. It is worth reviewing the First Circuit’s analysis on this crucial point at some length:

Of course, to be precise, rejection as Congress viewed it does not “vaporize” a right. Rather, rejection converts the right into a pre-petition claim for damages. Putting that point of vocabulary to one side, and leaving open the possibility that courts may find some unwritten limitations on the full effects of section 365(a) rejection, we find trademark rights to provide a poor candidate for such dispensation. Congress’s principal aim in providing for rejection was to “release the debtor’s estate from burdensome obligations that can impede a successful reorganization.” Bildisco & Bildisco, 465 U.S. at 528. Sunbeam therefore largely rests on the unstated premise that it is possible to free a debtor from any continuing performance obligations under a trademark license even while preserving the licensee’s right to use the trademark. See Sunbeam, 686 F.3d at 377. Judge Ambro’s concurrence in In re Exide Technologies shares that premise. See 607 F.3d at 967 (Ambro, J., concurring) (assuming that the bankruptcy court could allow the licensee to retain trademark rights even while giving the debtor “a fresh start”).

Careful examination undercuts that premise because the effective licensing of a trademark requires that the trademark owner — here Debtor, followed by any purchaser of its assets — monitor and exercise control over the quality of the goods sold to the public under cover of the trademark. See 3 J. Thomas McCarthy, McCarthy on Trademarks & Unfair Competition § 18:48 (5th ed. 2017) (“Thus, not only does the trademark owner have the right to control quality, when it licenses, it has the duty to control quality.”). Trademarks, unlike patents, are public-facing messages to consumers about the relationship between the goods and the trademark owner. They signal uniform quality and also protect a business from competitors who attempt to profit from its developed goodwill. See Societe Des Produits Nestle, S.A. v. Casa Helvetia, Inc., 982 F.2d 633, 636 (1st Cir. 1992). The licensor’s monitoring and control thus serve to ensure that the public is not deceived as to the nature or quality of the goods sold. Presumably, for this reason, the Agreement expressly reserves to Debtor the ability to exercise this control: The Agreement provides that Debtor “shall have the right to review and approve all uses of its Marks,” except for certain pre-approved uses. Importantly, failure to monitor and exercise this control results in a so-called “naked license,” jeopardizing the continued validity of the owner’s own trademark rights. McCarthy, supra, § 18:48; see also Eva’s Bridal Ltd. v. Halanick Enters., Inc., 639 F.3d 788, 790 (7th Cir. 2011) (“[A] naked license abandons a mark.”); Restatement (Third) of Unfair Competition § 33 (“The owner of a trademark, trade name, collective mark, or certification mark may license another to use the designation. . . . Failure of the licensor to exercise reasonable control over the use of the designation by the licensee can result in abandonment . . . .”).

The Seventh Circuit’s approach, therefore, would allow Mission to retain the use of Debtor’s trademarks in a manner that would force Debtor to choose between performing executory obligations arising from the continuance of the license or risking the permanent loss of its trademarks, thereby diminishing their value to Debtor, whether realized directly or through an asset sale. Such a restriction on Debtor’s ability to free itself from its executory obligations, even if limited to trademark licenses alone, would depart from the manner in which section 365(a) otherwise operates.

The Court also raised the specter of a slippery slope:

And the logic behind that approach (no rights of the counterparty should be “vaporized” in favor of a damages claim) would seem to invite further leakage. If trademark rights categorically survive rejection, then why not exclusive distribution rights as well? Or a right to receive advance notice before termination of performance? And so on.

The First Circuit concluded its Sunbeam analysis this way:

In sum, the approach taken by Sunbeam entirely ignores the residual enforcement burden it would impose on the debtor just as the Code otherwise allows the debtor to free itself from executory burdens. The approach also rests on a logic that invites further degradation of the debtor’s fresh start options. Our colleague’s alternative, “equitable” approach seems similarly flawed, and has the added drawback of imposing increased uncertainty and costs on the parties in bankruptcy proceedings. For these reasons, we favor the categorical approach of leaving trademark licenses unprotected from court-approved rejection, unless and until Congress should decide otherwise. See James M. Wilton & Andrew G. Devore, Trademark Licensing in the Shadow of Bankruptcy, 68 Bus. Law. 739, 771-76 (2013).

Where Does Tempnology Leave Trademark Licensees? The First Circuit’s decision is bound to cause trademark licensees to worry anew about the risks of a licensor bankruptcy, after what had seemed to be a trend toward protecting trademark licensees. Although the circuit split remains, and at least two circuit judges have written separate opinions to argue for protecting trademark licensees through a court’s equitable powers, the First Circuit’s decision is a forceful endorsement of Lubrizol and the complete termination of a licensee’s trademark rights upon rejection.

Is there any hope for trademark licensees?

  • Other circuits, notably the Second and Third Circuits where many business bankruptcy cases are filed, have yet to weigh in.
  • Congress has from time to time proposed changes to Sections 101(35A) and 365(n) that would give some Section 365(n) protection to trademark licensees, but to date all of those bills have stalled.
  • With a now more prominent circuit split, the U.S. Supreme Court might consider taking up the issue, possibly even in the Tempnology case if a certiorari petition were filed. That said, cert petitions are rarely granted so the split could remain for some time.

Conclusion. The First Circuit’s decision to follow Lubrizol and reject Sunbeam reinforces the existing circuit split. Will its extensive trademark analysis be more persuasive to subsequent courts? It will be interesting to see how other courts, especially Courts of Appeals, come down on the effects of rejection and the rights of trademark licensees. Stay tuned.

 

Image courtesy of Flickr by Blondinrikard Fröberg

Just about every year amendments are made to the rules that govern how bankruptcy cases are managed — the Federal Rules of Bankruptcy Procedure. The amendments address issues identified by an Advisory Committee made up of federal judges, bankruptcy attorneys, and others. As the photo above reminds us, the rule amendments are ultimately adopted by the U.S. Supreme Court (and technically subject to Congressional disapproval).

Key Rule Amendments For Business Bankruptcy Cases. This year, the majority of rule amendments involve consumer cases. For example, one notable change should lead to the creation of a national form Chapter 13 plan whose use will be required — unless a local form Chapter 13 plan has been adopted in its place.

Since In The Red® is focused on business bankruptcy developments, this post will highlight only those rule amendments impacting business cases. Be sure to read all of the amendments (see link below) and, if relevant to you, review the changes affecting consumer bankruptcy cases, which are not discussed below.

With that caveat, these changes are of particular note for business bankruptcy cases:

  • Rule 1001 has been amended to note that the Federal Rules of Bankruptcy Procedures are not just to be construed but also “administered” and “employed by the court and the parties” to secure the just, speedy, and inexpensive determination of every case and proceeding. This is consistent with revisions previously made to the Federal Rules of Civil Procedure.
  • Rule 3002 has been amended in several important ways.
    • First, a secured creditor is now required to file a proof of claim to have an allowed secured claim. Failing to do so will not alone lead to the lien securing the claim being deemed void.
    • Second, the deadline for filing a proof of claim in a voluntary Chapter 7, Chapter 12, or Chapter 13 case is not later than 70 days after entry of the order for relief (or the date of the order of conversion to a Chapter 12 or Chapter 13 case). In an involuntary Chapter 7 case, the proof of claim deadline is not later than 90 days after the entry of the order for relief. The old 90 days after the “first date set for the meeting of creditors” language has been jettisoned. These amendments leave unchanged how deadlines for filing proofs of claim in Chapter 11 cases under Rule 3003(c)(3) are established.
    • Third, Rule 3002 contains other provisions in recognition that the claim deadline will now be earlier in Chapter 7, 12, and 13 cases. The court, on motion filed before or after the deadline expires, may extend the time for filing a proof of claim for not more than 60 days following the date a motion seeking additional time is granted in certain circumstances. Those cover situations where (1) a debtor fails timely to file the required Rule 1007(a) list of creditor names and addresses or (2) the notice was insufficient to provide the creditor with a reasonable time to file a proof of claim but only if the notice was mailed to a foreign address.
  • Rule 3007 has been revised to clarify that Rule 7004’s specific service requirements do not apply to most claim objections. Instead, service of the claim objection by first-class mail on the person most recently designated to receive notices on the original or amended proof of claim will suffice. Exceptions apply to claims by the United States, its officers or agencies, or an insured depository institution. For those claimants, Rule 7004’s service requirements will continue to apply. Rule 3007 also more expressly permits giving notice and only an opportunity to request a hearing, rather than requiring an actual hearing, a practice that has become common in many districts.
  • Rule 3012 now permits determination not only of the amount of a secured claim under Section 506(a) but also of the amount entitled to priority under Section 507, and either by motion or claim objection. As amended the rule now provides that the amount of governmental unit’s secured claim can only be determined by motion or claim objection after the governmental unit has either filed a proof of claim or the time for doing so has expired.
  • Rule 7001 has been revised to reflect the changes made to Rule 3012.
  • Rule 9009 now more clearly requires the use of Official Forms and limits the types of acceptable alterations, essentially to only minor revisions to expand or delete spaces or delete items checked with “no” or “none.”

Evidence Please. Two Federal Rules of Evidence have been amended as well. First, the “ancient document” hearsay exception in Rule 803(16) has been changed to remove the “at least 20 years old” language and insert insert “prior to January 1, 1998.” The Advisory Committee’s concern is that going forward the old language could be used to admit “vast amounts of unreliable electronically stored information.” Other revisions, to Federal Rules of Evidence 902(13) and 902(14), create procedures for establishing the authenticity of electronic records without a testifying witness.

Did Someone Mention A Redline? Everybody loves to see a redline, so follow the link in this sentence for the complete set of rule changes, including redlines showing the revisions made, as well as the Advisory Committee’s explanations for each amendment.

Get Ready. The amendments take effect on December 1, 2017 so read up now and be ready for the changes taking effect in business bankruptcy cases in just a few weeks.

Just about every year changes are made to the rules that govern how bankruptcy cases are managed — the Federal Rules of Bankruptcy Procedure. The revisions address issues identified by an Advisory Committee made up of federal judges, bankruptcy attorneys, and others.

Key Rule Amendments. This year the rule amendments address the continuing impact of the Stern v. Marshall case on bankruptcy proceedings, the effect of electronic service on response deadlines, and certain Chapter 15 procedures. Be sure to read all the amendments (see link below), but here are the changes of particular note in business bankruptcy cases:

  • Rules 1010, 1011, and 2002 have been revised to improve procedures in cross-border Chapter 15 cases, with a new Rule 1012 added to govern responses to Chapter 15 petitions.
  • Rule 7008 has been amended to remove the requirement that a party in an adversary proceeding state whether the proceeding is core or non core, leaving instead the requirement to state whether the party does or does not consent to entry of final orders or judgment by the bankruptcy court.
  • Rule 7012 has been revised in a similar fashion as Rule 7008.
  • Rule 7016 governing pretrial conferences has been changed to add a requirement for the bankruptcy court, on its own motion or that of a party, to decide whether to hear and determine the adversary proceeding, to hear it and issue proposed findings of fact and conclusions of law, or to take some other action.
  • Rule 9006(f) has been amended to remove service by electronic means, including ECF service, from the types of service allowing three added days to act or respond after being served. Put differently, if you’ve consented to electronic service, you no longer get to add three days for any response or action. Instead, the 7, 14, 21, and 28 day periods will apply directly.
  • Rule 9027 governing removal has been updated along the same lines as Rules 7008 and 7012 described above.
  • Finally, Rule 9033 has been amended to remove the core/non core language since even core proceedings may require a bankruptcy court to issue proposed findings of fact and conclusions of law in light of the Stern-related decisions.

Read All About It. So you can keep up-to-date, a copy of the amendments, in both clean and redline, is available by following the link in this sentence. (As a bonus, clean and redlines of the amendments to the Federal Rules of Appellate Procedure and the Federal Rules of Civil Procedure are also included.) The amendments to the Federal Rules of Bankruptcy Procedure start at page 117 of the linked document.

Ready, Set, Go. The amendments take effect on December 1, 2016. They govern all proceedings in bankruptcy cases commenced after that and all pending proceedings “insofar as just and practicable.” I take that to mean they will govern virtually all bankruptcy cases and adversary proceedings, including those filed prior to December 1, 2016, so be ready to apply them right away.

 

Image Courtesy of Flickr by Ken Lund

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The In re Tempnology LLC bankruptcy case in New Hampshire has produced yet another important decision involving trademarks and Section 365(n) of the Bankruptcy Code. This time the decision is from the United States Bankruptcy Appellate Panel for the First Circuit (“BAP”). Although the BAP’s Section 365(n) discussion is interesting, even more significant is its holding on the impact of rejection of a trademark license. The decision is also further evidence of the continuing trend of courts seeking ways to protect trademark licensees in bankruptcy.

Before we get ahead of ourselves, let’s take a quick look back at the Bankruptcy Court’s decision.

The Bankruptcy Court’s Decision. Just about a year ago the New Hampshire Bankruptcy Court issued a decision involving the effects of rejection by the debtor, Tempnology LLC, of a Co-Marketing and Distribution Agreement (“Agreement”). In re Tempnology, LLC, 541 B.R. 1 (Bankr. D.N.H. 2015). In the Agreement, Tempnology had granted Mission Product Holdings, Inc. (“Mission”) (1) a non-exclusive license to certain of Tempnology’s copyrights, patents, and trade secrets, (2) an exclusive right to distribute certain cooling material products that Tempnology manufactured, and (3) an associated trademark license. With one of its first motions in the bankruptcy case, Tempnology rejected the Agreement.

  • The Bankruptcy Court held that the non-exclusive license to Tempnology’s copyright, patent, and trade secret rights was a license of “intellectual property” as defined in Section 101(35A) of the Bankruptcy Code, and that Mission’s rights to continue to use that IP was protected under Section 365(n). However, the exclusive distribution rights were not “intellectual property” under Section 101(35A) and the Bankruptcy Court held Mission’s distribution rights were not protected under Section 365(n).
  • The Bankruptcy Court also held that because trademarks were not included in Section 101(35A)’s definition of intellectual property, Mission’s trademark license rights were not protected by Section 365(n).
  • In considering the impact of rejection, the Bankruptcy Court followed the 1985 decision in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985). The Bankruptcy Court held that due to the rejection of the Agreement, Mission lost both the exclusive distribution rights and the trademark license rights.
  • You can get the details on the Bankruptcy Court’s decision at this prior post, entitled “A Reminder Of The Limits Of Section 365(n)’s Licensee Protection.”

Why No Mention Of The Seventh Circuit’s Sunbeam Decision? In that earlier post, I noted that given Circuit level decisions over the last few years involving trademarks and bankruptcy, it was interesting that the Bankruptcy Court’s decision did not mention the Seventh Circuit’s 2012 decision in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 382 (7th Cir. 2012).

  • In Sunbeam, the Seventh Circuit expressly rejected the Lubrizol decision and its analysis of the effects of rejection (follow the link for a full discussion of the Sunbeam decision). In contrast to Lubrizol, the Sunbeam court held that rejection is a breach by the debtor and does not terminate the agreement or the rights of the non-breaching party.
  • As a result, the Seventh Circuit allowed the non-debtor trademark licensee to continue using the licensed trademarks despite rejection of the trademark license.

At the time I speculated that if the Bankruptcy Court in the Tempnology case had applied the Sunbeam decision, the result might have been different.

The Bankruptcy Appellate Panel Decision. Mission appealed the Bankruptcy Court’s decision to the BAP. On November 18, 2016, the BAP issued its decision, affirming in part and reversing in part the Bankruptcy Court’s decision. Follow this link for a copy of the BAP’s November 18, 2016 decision.

  • The BAP affirmed the Bankruptcy Court’s holding that the exclusive distribution rights in the Agreement were not intellectual property as defined in the Bankruptcy Code and were not protected by Section 365(n).
  • The BAP also affirmed the Bankruptcy Court’s decision that Section 365(n) did not protect Mission’s rights as a trademark licensee, ruling that the Bankruptcy Court had corrected held that Section 101(35A)’s definition of “intellectual property” excludes trademarks.
  • On the trademark point, Mission urged the BAP to follow the equitable approach that Judge Ambro had suggested in his concurring opinion in the Third Circuit’s decision in In re Exide Techs., 607 F.3d 957 (3d Cir. 2010), which would let bankruptcy courts fashion equitable protections for trademark licensees. The BAP declined to follow either that approach or the one taken by the New Jersey Bankruptcy Court in In re Crumbs Bake Shop, 522 B.R. 766 (Bankr. D.N.J. 2014), which had effectively applied Section 365(n) to trademarks.
  • For more on the Crumbs Bake Shop and Exide Techs. decisions, take a look at this earlier post.

The BAP Discusses, And Then Follows, Sunbeam. Had the BAP stopped there, it would have affirmed the Bankruptcy Court’s holding. The BAP, however, did not stop there. Instead, it considered the Sunbeam decision and ultimately followed its analysis on the effect of rejection on a trademark license agreement. In so doing, the BAP became the first appellate court outside the Seventh Circuit to adopt the Sunbeam decision’s rejection analysis.

The BAP turned to the Lubrizol decision first:

We must part company with the bankruptcy court, however, on the effect the Debtor’s rejection of the Agreement had on Mission’s licensee rights in the Debtor’s trademark and logo. The bankruptcy court ruled that, because the Debtor’s trademark and logo were not protected by Mission’s election under § 365(n), Mission did “not retain rights to the Debtor’s trademarks and logos post-rejection.” This conclusion endorses Lubrizol’s approach to the rejection of executory contracts, namely that rejection terminates the contract. Lubrizol, however, is not binding precedent in this circuit and, like the many others who have criticized its reasoning [footnote omitted], we do not believe it articulates correctly the consequences of rejection of an executory contract under § 365(g). We adopt Sunbeam’s interpretation of the effect of rejection of an executory contract under § 365 involving a trademark license.

The BAP went on with its analysis:

Applying Sunbeam’s rationale, we conclude that, while the Debtor’s trademark and logo were not encompassed in the categories of intellectual property entitled to special protections under § 365(n), the Debtor’s rejection of the Agreement did not vaporize Mission’s trademark rights under the Agreement. Whatever post-rejection rights Mission retained in the Debtor’s trademark and logo are governed by the terms of the Agreement and applicable non-bankruptcy law.

Thus, we conclude that the bankruptcy court did not err in ruling that Mission’s § 365(n) election failed to protect its rights under the Agreement as licensee of the Debtor’s trademark and logo, but it erred in ruling that Mission’s rights in the Debtor’s trademark and logo as set forth in the Agreement terminated upon the Debtor’s rejection of the Agreement.

Sunbeam, Now Joined By Tempnology, Raises A Number Of Questions. If followed by other courts, the Sunbeam and Tempnology decisions raise a variety of issues. These include the following:

  • Aside from the right to use the licensed trademarks, does the licensee keep other rights under the trademark license, such as exclusivity if applicable?
  • Does the licensee have rights to use the trademarks for the full term of the license agreement plus any extensions, or some shorter period?
  • If payment of royalties is required under a trademark license, must the trademark licensee continue to pay them post-rejection to use the licensed trademarks, as an IP licensee covered by Section 365(n) is required to do?
  • Can the trademark licensee instead argue that rejection is a material breach by the debtor and excuses the obligation to pay royalties?
  • Under Sunbeam and Tempnology, if rejection does not terminate trademark license rights, is the same true for intellectual property licenses other than trademarks, such as patents and copyrights, covered by Section 365(n)?
  • Is the Section 365(g) analysis of Sunbeam and Tempnology just limited to trademark license rights? Can a non-debtor party to an executory contract argue that other of its contract rights are also preserved, as long as they don’t impose affirmative performance obligations on the debtor? If so, in Tempnology, would that extend to Mission’s exclusive distribution rights?
  • Are licensees of patents, copyrights, or trade secrets, otherwise protected by Section 365(n), required to follow Section 365(n)’s statutory scheme to retain their rights, or can they rely on the analysis in Sunbeam and Tempnology as a complete alternative?
  • How will purchasers of trademarks and other assets react to the potential continued use of trademarks by licensees under rejected trademark licenses?

Conclusion. The BAP’s Tempnology decision marks the first time an appellate court other than the Seventh Circuit has applied the Sunbeam analysis to a trademark license.

  • It remains to be seen if other courts will start to follow suit or, alternatively, if the Lubrizol decision’s approach to the consequences of rejection will continue to hold sway.
  • If many courts followed the Sunbeam/Tempnology approach and rejected Lubrizol, the omission of trademarks from Section 365(n) protection could matter less than in the past. In addition, the license agreement’s provisions governing the licensee’s rights upon the licensor’s breach could become much more significant.

Given the broad implications of the Lubrizol/Sunbeam split on rejection of executory contracts, and especially on trademark licenses, be sure to stay tuned.

 

Image Courtesy of Flickr by discutant

As discussed in an earlier post called “Going Up: Bankruptcy Code Dollar Amounts Will Increase On April 1, 2016,” various dollar amounts in the Bankruptcy Code and related statutory provisions were increased for cases filed on or after today, April 1, 2016. This information sheet has a list of all the dollar amount changes now in effect.

The official bankruptcy forms have also been revised to reflect these new dollar amounts.

Remember, the increased dollar amounts, now reflected on these forms, apply only to cases filed on or after April 1, 2016.