Taking a Second Look at Trademark License Agreements in Light of Mission Product Holdings Inc. v. Tempnology, LLC – Part II

Back in February of this year, the U.S. Supreme Court heard the oral argument for Mission Product Holdings Inc. v. Tempnology, LLC, to determine “[w]hether, under Section 365 of the Bankruptcy Code, a debtor-licensor’s ‘rejection’ of a license agreement – which ‘constitutes a breach of such contract,’ 11 U.S.C. § 365(g) – terminates rights of the licensee that would survive the licensor’s breach under applicable non-bankruptcy law.” We visited this case in our March article. On May 20, 2019, the Supreme Court ruled in favor of Mission Holdings, the licensee, reversing the ruling of the First Circuit and holding that a “debtor-licensor’s rejection of a contract neither party has finished performing does not prevent the licensee from using the trademark.”

In the majority opinion, Justice Kagan wrote that while Section 365(a) of the Bankruptcy allows a debtor to reject any executory contract, the debtor’s rejection of the contract constitutes a breach under Section 365(g). Further, under applicable non-bankruptcy law, a breach would not result in revocation of a trademark license. Thus, it follows that a licensee can continue using a licensed trademark.

Justice Sotomayor, in her concurring opinion, pointed out that individual licenses may be subject to review and trademark licensees do not have continued license rights in every case. With this in mind, parties should consider including a right for a party to terminate due to the other party’s bankruptcy, insolvency, or financial distress. A sample provision is shown below:

Either party may terminate this Agreement if a party: becomes insolvent or is unable to pay, or fails to pay, its debts; files or has filed against it, a petition for bankruptcy; makes or seeks to make a general assignment for the benefit of its creditors; or applies for or has appointed a receiver, trustee, custodian, or similar agent appointed by order of any court of competent jurisdiction to take charge of or sell any material portion of its property or business.

Other termination triggers can include the termination of another agreement between the parties or a party’s undergoing a change of control (via an assignment, delegation, or transfer).

Fortunately, mutual rights to terminate for bankruptcy and insolvency of the other party are generally accepted. Additionally, because licensees can now potentially retain license rights under Mission Product Holdings, parties should consider terminating all licenses granted by either party to the other upon termination, as shown below:

Upon any expiration or termination of this Agreement, except as expressly otherwise provided in this Agreement, all rights, licenses, consents, and authorizations granted by either party to the other hereunder will immediately terminate.

In many cases, it may be appropriate or even optimal to include a schedule in a license agreement that lists all of the licensed trademarks. Licensors can seek further assurances by taking possession and control over existing marketing materials and/or remaining inventory. The below example is drafted in favor of a licensor.

Termination of License. Upon termination of this Agreement, the license to use all trademarks will immediately terminate, and Licensee will immediately discontinue use of any and all trademarks and any other trademarks which Licensor deems to be confusingly similar thereto and will promptly destroy, or at Licensor’s option, forward to Licensor all advertising and promotional materials, displays, order forms, signage, and all other materials that contain any of Licensor’s trademarks.

In response, licensees may consider separating out any license payments for the trademark from those related to other intellectual property (e.g., patents, copyrights) being licensed. This allows licensees to avoid having to pay for a rejected trademark license. Overall, it is advisable for both parties to carefully review and negotiate the Effect of Termination provisions to mitigate potentially adverse consequence for either party.