A Victory for Trademark Licensees in Bankruptcy—Supreme Court’s Ruling in Mission Product Holdings, Inc. v. Tempnology, LLC
In what some are calling a landmark opinion, the United States Supreme Court held that a bankrupt licensor cannot terminate the rights of its licensees to utilize its trademark. Mission Prod. Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652 (2019).
When an individual or an entity files for bankruptcy, there are particular Bankruptcy Code provisions governing the individual’s or entity’s “executory contracts.” See 11 U.S.C. § 365. An “executory contract” is generally defined as a contract under which the bankrupt debtor and the other party to the contract still have obligations to be performed under the contract and either party’s failure to complete their performance would constitute a material breach of the contract excusing the other party’s performance. One common example of an “executory contract” is a supply agreement – the supplier agrees to provide the purchaser a certain number of products for a set period of time, and the purchaser agrees to pay the supplier a certain price for the product during such period of time. If either the supplier stops supplying or the purchaser stops making payments, that party would be in breach of the terms of the agreement, thereby excusing the other party’s obligation of future performance.
Executory contracts are both an asset and a liability for a bankrupt debtor. On the one hand, the executory contract gives the debtor the right to receive the other party’s future performance. On the other hand, the executory contract imposes an obligation on the debtor to perform in the future.
Bankrupt debtors can either assume or reject an executory contract. If the debtor assumes the executory contract, the parties’ rights and obligations will continue pursuant to the contract and are essentially not impacted by the bankruptcy case. If the debtor rejects the executory contract, it is treated as the debtor’s breach of the contract, and the non-debtor party is entitled to a claim for damages.
In Mission Product Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652 (2019), a trademark licensor, Tempnology, filed for bankruptcy protection. Prior to the bankruptcy, Tempnology granted Mission Products a non-exclusive license to utilize its trademarked logos and labels COOLCORE. The trademark license was an executory contract, because both parties had outstanding performance obligations. In its bankruptcy, Tempnology rejected its trademark license with Mission Products. The bankruptcy court ruled the effect of the rejection was termination of the license, which meant Mission Products could no longer produce COOLCORE branded products. On appeal, the United States Supreme Court found that rejection of the license constituted a breach of the license agreement, but not a termination. As a result, Mission Products was allowed to continue using the trademark and producing COOLCORE branded products through the term of the license.
This ruling has been touted as a victory for trademark licensees who will be allowed to continue utilizing a trademark license even if the trademark licensor files bankruptcy.
Note, this ruling is applicable only to bankruptcies of trademark licensors, not trademark licensees. A trademark licensee that rejects a trademark license would not be able to continue utilizing the trademark.