Back to the Future: Contracts 101 and Mission Product Holdings v. Tempnology

In Mission Product Holding, Inc. v.  Tempnology, LLC, 587 US. ­­­___ (2019) [hereinafter ‘Mission Product’ and ‘Tempnology’] the U.S. Supreme Court held that trademark licenses are governed by the same contract principles within a bankruptcy estate as outside the estate. Bankruptcy debtor Tempnology had earlier asserted that an executory contract,[1]  such as a license, may be rejected by the bankruptcy debtor, and therefore the licensee exclusively possesses a damages remedy. Tempnology conceded that there is a statutory exemption for intellectual property licenses by which the licensee also retains its license rights. 11 U.S.C. 365(n). However, 11 U.S.C. 101(35A) of the Bankruptcy Code designates subject matter which qualifies as intellectual property, but this provision does not include trademarks or a residual clause. According to Tempnology, a licensee of intellectual property exclusively within this designation retains its rights if the debtor rejects the executory license. However, because this list does not include trademarks, a trademark licensee may not continue using a debtor’s trademark under a rejected executory license. Consequently, the question before the Court was whether a debtor/licensor’s rejection of an executory trademark license terminates the licensee’s rights.

The license between the two companies provided that Mission Products use Tempnology’s trademark upon its apparel products. The bankruptcy court selected Tempnology’s analysis and held that Mission products could not use the trademark. The Bankruptcy Appellate Panel reversed and held that Tempnology could use the trademark, because (i) rejection of an executory contract under section 365(g) comprises a breach, and (ii) under basic contract law the non-breaching party retains its contract rights. However, the United States Court of Appeals for the First Circuit (‘First Circuit’] reversed this decision, because (i) 11 U.S.C. 101(35A) exclusively defines intellectual property in bankruptcy proceedings, but (ii) this provision does not designate trademarks. Consequently, Mission Products as a trademark licensee exclusively possessed a breach of contract remedy for damages, but without the right to use Tempnology’s trademark.

The Supreme Court reversed and remanded the First Circuit’s decision. In most relevant part, the Court stated that (i) section 365(g) specifically defines rejection of any executory contract in bankruptcy as a breach, and (ii) breach is defined under the law of contracts because there is no definition for breach which is specific to the Bankruptcy Code. As a result, and absent any state law or contract term to the contrary, a non-breaching possesses both (i) a remedy of damages as well as (ii) retention of its rights under the breached contract. Moreover, according to the Court this is the correct result because the bankruptcy estate cannot possess more property rights than it would possess outside bankruptcy. Furthermore, if Mission Products did not retain its contractual rights upon rejection, then the result under basic contract law would be rescission and not a breach. However, since section 365(g) explicitly states that a rejection comprises a breach, and not a rescission, then retention of the rights to use the mark is the only correct result. The Court concluded by stating that (i) the intellectual property designation of section 101(35A), (ii) the specific performance exceptions for intellectual property contracts under 365(n), and (iii) potential burdens of the debtor for supervising the licensee’s trademark use do not supersede or modify the result under sections 365(a) and 365(g).

©2019 Adrienne B. Naumann, Esq.  Ms. Naumann does not endorse or sponsor the advertisements at adriennebnaumann.wordpress.com.

[1] That is, a contract that neither party has finished performing. See 11 U.S.C. 365(a).

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