On February 20, 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.”

Tempnology develops, manufactures, and sells cooling fabrics materials to which they own intellectual property. In 2012, Tempnology and Mission Product Holdings entered into an agreement granting Mission Product Holdings distribution rights to some of Tempnology’s products and intellectual property licenses, including a license to use Tempnology’s trademarks to sell and promote those products.

In 2015, Tempnology filed for bankruptcy under Chapter 11 of the Bankruptcy Code and moved to reject its agreement with Mission Product Holdings under Section 365(a) of the Bankruptcy Code, which states, “… the trustee, subject to the court’s approval, may assume or reject any executory contract or unexpired lease of the debtor.” Mission Product Holdings opposed this motion and asserted that it was entitled to keep its intellectual property licenses and distribution rights under Section 365(n).

The bankruptcy court found that Tempnology’s rejection of the agreement left Mission Product Holdings with only a claim for damages for breach of contract, and no claim that Tempnology was under an obligation to further perform the license agreement, and therefore Mission Product Holdings would have to relinquish its distribution rights and trademark license under Section 365(n).

Mission Product Holdings appealed to the Bankruptcy Appellate Panel for the First Circuit, which held that the Bankruptcy Code does not terminate Mission Product Holding’s trademark license.

However, on appeal, the First Circuit affirmed the earlier bankruptcy’s court decision, finding that Mission Product Holding’s trademark license was not preserved under Section 365(n) because trademark owners have the obligation to police their trademark, and allowing Mission Product Holdings to continue using Tempnology’s trademarks would put a burden on Tempnology to continue maintaining the trademark in order to avoid naked licensing or lose its trademark rights.

Even though the decision is still pending, there are key learnings for trademark owners, licensors and licensees. Particularly, in order to avoid uncertainty for both trademark licensors and licensees, parties should discuss and include terms outlining whether the trademark license will survive a licensor’s potential bankruptcy and whether other rights accruing to the parties would also survive a licensor’s potential bankruptcy.

In discussing these terms, licensees should consider whether the loss of rights to use a licensor’s trademark could lead to a potential loss to their business. Conversely, licensors should consider the potential liability and cost to manage and police their trademarks and whether they will be able to revamp their brand or rebrand in the event that they are unable to reject trademark licenses under bankruptcy law.