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.