Last week, the United States Supreme Court issued an opinion in Mission Product Holdings, Inc. v. Tempnology, LLC, No. 17-1657 (May 20, 2019). Tempnology sold clothing and accessories under the brand name “Coolcore.” Tempnology granted Mission a non-exclusive license to use the Coolcore trademarks worldwide. Before the expiration of the license agreement, Tempnology filed for Chapter 11 bankruptcy, and rejected the agreement as permitted by 11 U.S.C. § 365(a). The parties agreed under § 365(g) the rejection allowed Tempnology to stop performing its duties under the agreement, and allowed Mission to bring a claim against Tempnology’s estate as an unsecured creditor. Tempnology, however, also sought a declaratory judgment that its rejection of the agreement terminated Mission’s rights to continue using the trademarks, which Mission opposed. The bankruptcy court granted Tempnology’s requested declaratory relief.
The Bankruptcy Appellate Panel reversed. Relying on Seventh Circuit precedent, the BAP explained that outside bankruptcy “the breach of an agreement does not eliminate rights the contract had already conferred on the non-breaching party. So neither could a rejection of an agreement in bankruptcy have that effect.” The First Circuit reversed the BAP decision and reinstated the bankruptcy court’s decision. The First Circuit reasoned in part that, because a trademark licensor must monitor a licensee’s use of the mark to preserve its validity, permitting Mission to continue using the mark improperly imposed a post-rejection duty on Tempnology.
The Supreme Court granted certiorari and reversed the First Circuit decision, holding “[r]ejection of a contract—any contract—in bankruptcy operates not as a rescission but as a breach.” The Court explained that the absence of special rules for trademark licenses in § 365 means they should be treated as any other executory contract, the breach of which does not extinguish the rights granted the licensee. In response to Tempnology’s stated concerns about having to choose between continuing to monitor the licensee’s use or risking loss of the trademark rights altogether, the Court explained: “Section 365 provides a debtor like Tempnology with a powerful tool: Through rejection, the debtor can escape all of its future contract obligations, without having to pay much of anything in return. But . . . Section 365 does not grant the debtor an exemption from all the burdens that generally applicable law—whether involving contracts or trademarks—imposes on property owners.”