BREAKING: Rejection under section 365 of the Bankruptcy Code does not rescind trademark license agreement

Last November, we reported on the long-standing circuit split between the First and Seventh Circuits regarding the effect of rejection of a trademark license agreement under section 365 of the Bankruptcy Code.

This morning, in Mission Product Holdings, Inc. v. Tempnology, LLC,  2019 WL 2166392, the Supreme Court affirmed the Seventh Circuit’s reasoning and held 8-1 that a debtor-licensor’s rejection of a non-exclusive trademark license agreement under section 365 of the Bankruptcy Code does not prohibit its licensee from continuing to use that trademark.  In so doing, the Court flatly rejected arguments that rejection functions as a quasi-rescission:

Today, we hold that both Section 365’s text and fundamental principles of bankruptcy law command the first, rejection as- breach approach. We reject the competing claim that by specifically enabling the counterparties in some contracts to retain rights after rejection, Congress showed that it wanted the counterparties in all other contracts to lose their rights. And we reject an argument for the rescission approach turning on the distinctive features of trademark licenses. Rejection of a contract—any contract—in bankruptcy operates not as a rescission but as a breach.

Id. at *5.

But while the Court provided helpful guidance on the legal effect of a rejection under section 365, Justice Sotomayor emphasized in her concurrence that the “baseline inquiry remains whether the licensee’s rights would survive a breach under applicable nonbankruptcy law.”  Id. at *9.  Thus, according to Justice Sotomayor, it is conceivable that “special terms” in a licensing agreement or provisions of state law could affect a licensee’s right in an individual case.  Id.

There is little question that debtors (and their licensing counterparties) will test the bounds of those “special terms” in the coming years.  But, at least for now, 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.”  Id. at *8.

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

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