On May 20, 2019, in Mission Product Holdings, Inc. v. Tempnology, LLC, 587 U.S. ___ (2019), the Supreme Court resolved an area of ongoing concern for parties to trademark licenses. The court addressed a circuit split on whether a trademark licensee may continue to use a trademark for the term of the license, after the license has been rejected in bankruptcy.  In Mission, the debtor-licensor rejected a trademark license agreement and sought to terminate the licensee’s right to use the debtor’s trademark. This decision has important ramifications to parties to trademark licenses.

Bankruptcy Code section 365(a) provides a debtor (i.e., the bankrupt party) the right to reject executory contracts – i.e., contracts where both parties have performance obligations remaining. Pursuant to Bankruptcy Code section 365(g), such rejection amounts to a breach of the contract. To avoid the claim from being viewed as occurring after the bankruptcy filing, section 365(g) provides the breach is deemed to occur immediately before the filing of the debtor’s bankruptcy petition.

The Supreme Court was asked to determine the effect of a rejection of an executory trademark license by the debtor, the estate of the trademark licensor, pursuant to Bankruptcy Code section 365. The rejection may give rise to a damage claim, but did it otherwise leave the counterparty, the trademark licensee, the right to use the trademark it had received under the contract, or did it terminate the entire agreement along with the right to use the trademark?

The Supreme Court held a debtor-licensor’s rejection of a trademark licensing agreement in bankruptcy does not terminate the rights of the non-debtor licensee that would survive the licensor’s breach under applicable non-bankruptcy law—including the continued use of the trademark.  The rationale is that the rejection of an executory contract is a court-authorized breach, which may give rise to a damage claim against the debtor, but does not put the parties back in the positions they had before entering into the contract, which rescission would do. Notably, the debtor’s rejection does allow the debtor-licensor to stop providing any services the licensee may have required such as quality control or maintaining a certain image of the trademark.

Section 365(n) of the Bankruptcy Code allows a licensee of patents or copyrights whose license is rejected to either treat the license as terminated and assert a claim for damages, or retain its intellectual property rights under the license.  Section 365(n) refers to the Bankruptcy Code definition of “Intellectual Property” which includes patents and copyrights but does not include trademarks. The legislative history of section 365(n) suggests that Congress intentionally excluded trademarks from the definition because of the special concerns relating to trademark licensing, and expressly left that issue to the courts to decide. See S. Rep. No. 100-505, at 5, 7 (1998) (since issues relating to trademark licensing could not be addressed without more extensive study, it was determined to postpone congressional action in this area and to allow the development of equitable treatment of this situation by bankruptcy courts).

In reaching its conclusion, the majority opinion focused on the general rules of rejection in Bankruptcy Code sections 365(a) and (g), and on the effect rejection has on all executory contracts—not just trademark licenses. That the specific provisions in section 365(n) do not include trademarks does not change the general rule that rejection of an executory contract does not rescind the rights the contract previously granted. Justice Sotomayor’s concurrence highlighted the decision did not mean every trademark licensee would have rights to continue using licensed marks post-rejection. The inquiry remains whether the licensee’s rights to use the trademark for the duration of the license would survive a breach under applicable nonbankruptcy law, taking into account all applicable special terms of licensing agreements or state law.

Naturally, intellectual property licensing is a key part of many commercial arrangements. This decision sheds light on an aspect of that practice which, when disputed, was subject to different analyses depending on the jurisdiction of the dispute. When negotiating intellectual property licenses, parties should keep this decision, the entire set of jurisprudence around section 365(n), and applicable state law regarding breach of contract in mind in order to ensure the desired outcome in the event of a bankruptcy of the licensor in the future.

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Photo of Steve Ma Steve Ma

Steve Ma is a special bankruptcy counsel in the Business Solutions, Governance, Restructuring & Bankruptcy Group. Steve’s practice focuses on the representation of debtors, creditors, statutory and ad hoc committees, and equity holders in chapter 11 cases and out-of-court restructurings.

Steve is a…

Steve Ma is a special bankruptcy counsel in the Business Solutions, Governance, Restructuring & Bankruptcy Group. Steve’s practice focuses on the representation of debtors, creditors, statutory and ad hoc committees, and equity holders in chapter 11 cases and out-of-court restructurings.

Steve is a core member of the team representing the Financial Oversight and Management Board for Puerto Rico in its restructuring of Puerto Rico’s outstanding debt load of more than $70 billion. He played a key role in the successful restructuring of the Commonwealth of Puerto Rico, the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, the Puerto Rico Public Buildings Authority, the Puerto Rico Highways and Transportation Authority, and the Puerto Rico Sales Tax Financing Corporation (COFINA).

Steve has been recognized by Best Lawyers in America in its “Ones to Watch” list since 2021. He served on the Editorial Advisory Board for Turnaround Management Association’s Journal of Corporate Renewal from 2021-2023.

Steve earned a B.A. in philosophy, cum laude, from Columbia University, and a J.D. from Cornell Law School. During law school, Steve served as Notes Editor on the Cornell Law Review.

Photo of Vincent Indelicato Vincent Indelicato

Vincent Indelicato is co-head of the Business Solutions, Governance, Restructuring & Bankruptcy Group and a member of the Private Credit Restructuring Group.

Vincent’s practice focuses on corporate restructurings, with an emphasis on the representation of direct lenders, ad hoc groups, bondholders and creditors’…

Vincent Indelicato is co-head of the Business Solutions, Governance, Restructuring & Bankruptcy Group and a member of the Private Credit Restructuring Group.

Vincent’s practice focuses on corporate restructurings, with an emphasis on the representation of direct lenders, ad hoc groups, bondholders and creditors’ committees both out of court and in chapter 11. He is frequently consulted by leading distressed hedge funds, BDCs, private credit lenders, private equity investors and creditors on complex domestic and international insolvency and restructuring issues, including intercreditor and interlender matters, across a variety of industries. Vincent was also part of the Firm’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team helping to shape the guidance and next steps for clients impacted by the pandemic.

Vincent has been recognized by the American Bankruptcy Institute for his “formidable courtroom presence with natural dealmaker instincts” as a recipient of the 40 Under 40 Award, and an Outstanding Young Restructuring Lawyer by Turnaround and WorkoutsChambers USAAmerica’s Leading Lawyers for Business describes Vincent as “incredibly thoughtful” and “a smart practitioner,” who “lobbies hard for his clients” and “is aggressive in his approach, but practical when it comes to dealmaking.” The Chief Executive Officer of a client recently told Bloomberg Law that “his mind is automatically strategic. And in tough situations, he never goes on defense. He has the ability to manage multiple personalities and temperaments to get them focused on the end game.” Reorg, one of the most widely-followed publications in the distressed investing community, also selected Vincent as the inaugural guest of its Professional Spotlight podcast, and he has been identified as a “leading lawyer” in The Legal 500 and named by Best Lawyers in America.

Over the last decade, Vincent has played a lead role in some of the most significant corporate reorganization cases in the United States. These include his representation of the Statutory Committee of Unsecured Claimholders in the chapter 11 cases of Caesars Entertainment Operating Company Inc., which filed for bankruptcy with more than $18 billion of funded debt; the Los Angeles Dodgers in their $2 billion acquisition by Magic Johnson and Guggenheim Partners; Brookfield Asset Management in the $2.5 billion debt restructuring of Kerzner International’s Atlantis Bahamas Resort; and J.P. Morgan and other substantial creditors in the chapter 11 cases of MF Global, a financial services company with $41 billion in assets.

Vincent has been widely recognized in the restructuring community as a thought leader. He writes frequently on restructuring topics, and his writing has been featured in, among other publications, The Wall Street Journal Bankruptcy ProThe American Bankruptcy Institute JournalLaw360 and The Bond Buyer. He has also assisted Martin Bienenstock as an Adjunct Professor of Corporate Reorganization at both Harvard Law School and Michigan Law School.

He serves as a member of the American Bankruptcy Institute’s Views from the Bench Advisory Board, the Co-Chair of the Federal Bar Counsel Bankruptcy Litigation Committee, a Term Member of the Council on Foreign Relations, and a member of The Economic Club of New York. Vincent was selected to participate in the National Conference of Bankruptcy Judges NextGen Program, and also serves as a Member of the Harry S. Truman Scholarship Leadership Council.

A Harry S. Truman Scholar, Vincent graduated from University of Michigan Law School as commencement speaker. Prior to law school, he served as the Special Assistant to United States Senator Charles E. Schumer and worked as a personal aide to John C. Whitehead, former chairman and senior partner of Goldman Sachs. He also led a team of entrepreneurs to bring the world’s first hybrid taxicab to New York City.

Vincent graduated with an English degree from Haverford College, where he served as president of the student body and was one of 16 college students from the United States to be selected as a Goldman Sachs Global Leader. He was a visiting student of English at Pembroke College, Oxford University. A native New Yorker, Vincent attended Regis High School, a tuition free private high school for young men who demonstrate superior intellectual and leadership potential.