Presented by John Goodhue
In an opinion by Justice Kagan, an 8-1 Supreme Court held that a debtor-licensor's rejection of a trademark license in bankruptcy, under Section 365 of the Bankruptcy Code, does not terminate the licensee's rights. Rejection operates as a breach of the contract rather than a rescission, so it leaves in place the rights the license had already conveyed, and the licensee may continue to use the trademark on the terms of the agreement. The decision resolved a split over whether the Bankruptcy Code's silence on trademark licenses (unlike its treatment of certain other intellectual property) allowed a debtor to revoke them. Justice Sotomayor concurred; Justice Gorsuch dissented and would have dismissed the writ as improvidently granted.
Mission Product Holdings v. Tempnology, decided May 20th, 2019. By a vote of eight to one, the Supreme Court reversed the First Circuit and held that when a bankrupt trademark licensor rejects a license under Section 365 of the Bankruptcy Code, that rejection is a breach of the contract, not a rescission of it — and so it does not terminate the licensee's right to keep using the mark. Justice Kagan wrote for the Court. Here's the brief.
Tempnology manufactured clothing and accessories designed to stay cool during exercise, sold under the brand name Coolcore. In 2012, it entered a contract with Mission Product Holdings. The agreement gave Mission an exclusive license to distribute certain Coolcore products, and — more important here — a non-exclusive license to use the Coolcore trademarks, worldwide, through July 2016.
In September 2015, Tempnology filed for Chapter 11 bankruptcy. It soon asked the Bankruptcy Court to let it reject the licensing agreement. Section 365 lets a debtor reject an executory contract — one neither side has finished performing — and it provides that rejection constitutes a breach. The parties agreed that rejection let Tempnology stop performing and gave Mission a pre-petition damages claim.
But Tempnology argued for more: that rejection also terminated Mission's right to use the Coolcore marks. The Bankruptcy Court agreed. The Bankruptcy Appellate Panel reversed. The First Circuit then reversed the Panel and reinstated the Bankruptcy Court, holding that rejection stripped the license. The Supreme Court granted cert to resolve a split with the Seventh Circuit.
The question: does a debtor-licensor's rejection of a trademark license terminate the licensee's rights to use the mark?
The framework is Section 365 itself. Subsection (a) gives a debtor the option, subject to court approval, to reject any executory contract. Subsection (g) says what rejection means: it constitutes a breach of the contract, deemed to occur just before the bankruptcy filing. The word breach, the Court stressed, is not a specialized bankruptcy term; it carries its ordinary contract-law meaning. Tempnology's contrary reading drew a negative inference from other provisions — Sections 365(h), (i), and (n) — that expressly preserve certain counterparties' rights after rejection, including licensees of patents and other intellectual property, but not trademarks.
Justice Kagan's opinion rested on the statute's text and a basic principle of bankruptcy.
Start with breach outside bankruptcy. When a licensor breaches, it can stop performing, but it cannot claw back rights it has already granted; the counterparty may keep using what the contract gave it. Because Section 365 makes rejection a breach, the Court reasoned, the same consequence follows inside bankruptcy.
That reading tracks a general bankruptcy rule — the estate cannot hold more than the debtor did outside bankruptcy. Letting rejection rescind a counterparty's rights would let the debtor recapture what it had given up, and would blur the line between rejection and the Code's narrow avoidance powers. The Court also rejected Tempnology's negative inference: the provisions preserving particular rights arose at different times to solve discrete problems, and could not be read to strip everyone else. And it declined to carve out trademarks because of the licensor's quality-control duties; Section 365 does not exempt a debtor from the ordinary burdens of owning property.
Justice Sotomayor concurred in full, emphasizing that a licensee's post-rejection rights depend on what nonbankruptcy law would provide, and that trademark licensees may fare differently from other intellectual-property licensees. Justice Gorsuch dissented, and only on mootness.
Mission Product resolved a split over the effect of rejecting a trademark license, and it did so with a rule that reaches well beyond trademarks. Rejection under Section 365 is a breach, not a rescission: it frees the debtor from future performance and hands the counterparty a pre-petition damages claim, but it leaves intact the rights the contract had already conferred. The decision fills the gap Congress left when Section 365(n) extended protection to patents and copyrights but not to trademarks — confirming that trademark licensees fall under the statute's general rule, not outside it.
Mission Product Holdings v. Tempnology, 587 U.S. 370, decided May 20th, 2019. I'm John Goodhue. Thanks for watching.
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