INTA Files Amicus Brief in United States Supreme Court Case on Licensee Rights After Licensor Bankruptcy

Published: August 1, 2018

Jenifer deWolf Paine Microsoft Corporation Redmond, Washington, USA

On July 12, 2018, INTA filed an amicus curiae brief with the United States Supreme Court in Mission Product Holdings, Inc. v. Tempnology, LLC n/k/a Old Cold LLC, taking the position that, when a trademark licensor in bankruptcy rejects a trademark license, the rejection should be deemed a breach of the license but should not terminate the licensee’s right to continue use of the mark.

Section 365 of the U.S. Bankruptcy Code permits a debtor to “assume or reject any executory contract” and provides that rejection “constitutes a breach of such contract.” In 1985, the Fourth Circuit held in Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985) that a debtor-licensor’s rejection of a technology license terminated the licensee’s right to use the technology. In response to that decision, Congress enacted Section 365(n) of the Bankruptcy Code, which permits a licensee to retain its rights to “intellectual property” under a rejected license agreement. “Intellectual property” was defined in Section 365(n) to include patents and copyrights, but not trademarks. The legislative history reveals that Congress believed the issue with regard to trademarks required “more extensive study” and thus was being postponed.

After the enactment of Section 365(n), a split developed in the courts as to the effect of rejection on trademark licenses. In 2012, the Seventh Circuit held in Sunbeam Prods, Inc. v. Chicago Mfg. LLC, 686 F.3d 372 (7th Cir. 2012) that rejection of a license by a debtor-licensor does not terminate the licensee’s right to use the mark (it only relieves the licensor of its obligations under the license). INTA filed an amicus brief to urge the U.S. Supreme Court to grant certiorari, arguing that the circuit split needed to be resolved. INTA did not, however, take a position at that time on which approach the Court should adopt. The Supreme Court did not grant certiorari in that case, and the issue has not come before the Court again until now.

In Mission Product, the First Circuit held on January 12, 2018 that the rejection of a license by a debtor-licensor terminates the licensee’s right to use the mark. This decision further exacerbated the split among U.S. courts on the effect of rejection on a trademark license. For that reason, INTA has again advocated for the Court to grant certiorari, and it also is now urging the Court to side with the Seventh Circuit and hold that the rejection of a license does not terminate the licensee’s right to use the mark.

Mission Products
At issue in Mission Product is a clothing license allowing use of the marks DR. COOL and COOLCORE on athletic towels, socks, and headbands, all of which are designed to stay cool during exercise. The licensor filed for bankruptcy and immediately moved to reject the license under the Bankruptcy Code. The bankruptcy court granted the debtor’s motion to reject the license “subject to [the licensee’s] . . . election to preserve its rights under 11 U.S.C. § 365(n).” When the debtor moved for a determination of the licensee’s rights under Section 365(n), the bankruptcy court concluded that Section 365(n) did not apply to trademarks and thus that the licensee did not have the right to continue to use the licensed marks. Ultimately, a divided First Circuit agreed.

The majority reasoned that, to achieve the goal of Section 365 (which is “releas[ing] the debtor’s estate from burdensome obligations that can impede a successful reorganization”), a debtor should not have to be burdened with monitoring use and exercising quality control. The licensee then asked the Supreme Court to review the case.

INTA’s Brief
INTA submitted a brief in support of the petition for certiorari. INTA argued that the Court should adopt a rule that allows licensees to continue to exercise their rights to use a mark under a license post-rejection, noting that this is the most significant unresolved issue in trademark licensing law and that, given that trademarks are the most widely used form of intellectual property, there is a need for clear, consistent, and equitable rules that are the same regardless of the forum.

INTA noted that the legislative history of Section 365(n) called for more study of the trademark issue in order to “allow the development of equitable treatment of this situation by bankruptcy courts”-and that equity requires that a licensee should not live in fear that its rights will be rescinded and reclaimed. INTA also noted that Section 365 allows a debtor to free itself from burdensome contractual obligations so it can focus on a fresh start. In a trademark license, those obligations could include filing and maintaining various registrations, or funding enforcement actions; but exercising quality control is not a contractual obligation but rather one imposed by statute that serves a broader public purpose beyond any particular license.

Ultimately, INTA argued, allowing licensees to continue to use a mark after rejection would benefit trademark licensors by resulting in higher royalty payments, relieve licensees of the risk of suddenly and unexpectedly losing their rights in which they may have invested, and relieve both parties of the need to engage in protracted and lengthy negotiations and contractual attempts at a fix.

INTA’s amicus brief in the Mission case was written by David Bernstein, Jeffrey Cunard, Jeremy Feigelson, Henry Lebowitz, Jasmine Ball, Jared Kagan, and Elie Worenklein (all of Debevoise & Plimpton LLP, USA) and Eleanor Lackman (Cowan, DeBaets, Abrahams & Sheppard LLP, USA).

Although every effort has been made to verify the accuracy of items in the INTA Bulletin, readers are urged to check independently on matters of specific concern or interest. Law & Practice updates are published without comment from INTA except where it has taken an official position.

© 2018 International Trademark Association