Bankruptcy does not void a trademark license. MISSION v. TEMPNOLOGY

Bankruptcy does not void a trademark license. MISSION v. TEMPNOLOGY

A trademark is something which signals to consumers the identity of a producer of a product.  Traditionally a trademark if thought of a symbol, word or short phrase. However, anything that serves the purpose of identifying the identity of a product producer can be eligible for trademark protection.  In the United States the first person to use a trademark is considered the senior user of a trademark and subsequent users of a trademark are considered junior users.  A senior trademark user is given priority over junior users.  A trademark can be registered with the United States Patent and Trademark Office to strengthen the rights associated with the trademark, however registration is not a prerequisite to begin using a trademark to brand products and registration does not negate the priority of a senior trademark user.

Trademarks are valuable pieces of intellectual property.  Companies expend significant sums to promote their trademarks to the public.  The association a consumer makes between a trademark and a high quality product is an indicator of the value of a trademark.  Frequently owners of trademarks will license a trademark to other companies.  The motivation to license a trademark can vary greatly.  Sometimes a manufacturer will license their trademark to other manufacturers that produce products outside the trademark owner’s core business, or a sports team will license their trademark to clothing manufacturers.

A trademark license is governed by both trademark law and contract law.  Contract law governs the general terms of how the contract is interpreted, and trademark law imposes additional requirements.  Trademark law requires a trademark owner to enforce quality control over licensed product.  If a trademark owner fails to demand and enforce quality control over licences products, the trademark owner risks loosing the trademark.

Bankruptcy is a third branch of law that can become important in a trademark license agreement.  Bankruptcy allows a company to shed its obligations and reorganize its operations.  Generally under bankruptcy law contracts are voided so that a company can continue unencumbered by past mistakes. The question then becomes, what happens to a trademark license when the licencor declares bankruptcy?  On one hand it would seem unfair to require a bankrupt company to continue to monitor the quality of a third party’s products.  On the other hand, if would seem unfair to revoke a license if a trademark licensee continues to make royalty payments.

The United States Supreme Court answered this question in MISSION PRODUCT HOLDINGS, INC. v. TEMPNOLOGY, LLC, NKA OLD COLD LLC,  17–1657 (U.S. 2019). The plaintiff in this case licensed certain trademarks from the defendant in connection with the distribution of certain clothing and accessories. The defendant filed for Chapter 11 bankruptcy and sought to reject its agreement with the plaintiff. Section 365 of the Bankruptcy Code enables a debtor to “reject any executory contract”—meaning a contract that neither party has finished performing. 11 U. S. C. §365(a). It further provides that rejection “constitutes a breach of such contract.” §365(g). The Bankruptcy Court approved the defendant’s rejection and further held that the rejection terminated the Plaintiff’s rights to use the Defendant’s trademarks. The Bankruptcy Appellate Panel reversed, relying on Section 365(g)’s statement that rejection “constitutes a breach” to hold that rejection does not terminate rights that would survive a breach of contract outside bankruptcy. The First Circuit rejected the Panel’s judgment and reinstated the Bankruptcy Court’s decision.  The plaintiff then appealed the First Circuits decision to the United States Supreme Court.

The United States Supreme Court sided with the Plaintiffs.  The court held that a license allows a licensee to continue doing whatever is authorized in a license.  The bankruptcy code does not allow a debtor to roll back a transfer of interests whether the property transferred is tangible, like a photocopier, or intangible, like a trademark.

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