Trademark License Survives Bankruptcy, High Court Rules

WASHINGTON (CN) - A company’s bankruptcy does not allow it to rescind a trademark licensing agreement, the Supreme Court ruled 8-1 Monday.

The case stems from the 2012 agreement between Tempnology LLC and Mission Product Holdings Inc. over the exclusive rights for U.S. distribution of Tempnology’s apparel and accessory products — Branded Coolcore and Dr. Cool, which were designed to remain at a low temperature when used during exercise.

As part of such distribution, Mission Product Holdings also received a nonexclusive license to use Tempnology’s trademarks, but Tempnology invoked Section 365 of the Bankruptcy Code to reject the distribution agreement after seeking to reorganize under Chapter 11 in 2015.

The Supreme Court sided Monday with Mission Product Holdings that Tempnology’s rejection of the agreement did not afftect its licensing rights with regard to the trademarks.

What makes this case unusual, Justice Elena Kagan noted in the majority opinion, is Tempnology’s invocation of Section 365 of the Bankruptcy Code. While the statute sets out rules for various types of common contracts, it makes no mention of what happens to a trademark licensing agreement when a company in bankruptcy rejects the deal.

Creating a split with the Seventh Circuit, the First Circuit had sided with Tempnology in finding that the decision to invoke Section 365 meant Mission could no longer use the Coolcore trademark under the agreement.

But the Supreme Court ruled today that the Seventh Circuit had the right reading of the law.

Just as a company that leases a copy machine to a law firm cannot get back the copier by refusing to meet its promise in the lease to service the machine, Tempnology does not get to decide what happens to the trademark it granted Mission just because it breached the agreement.  

"The debtor can stop performing its remaining obligations under the agreement," Kagan wrote. "But the debtor cannot rescind the license already conveyed. So the licensee can continue to do whatever the license authorizes."

Kagan emphasized that such a ruling prevents the estate of a company that enters bankruptcy from having more than the company did before it declared.

All but Justice Neil Gorsuch joined Kagan’s 17-page opinion.

In a 2-page dissent, Gorsuch wrote the court should not have considered the case at all because the licensing agreement at issue expired long ago, and because Mission might not have a case for damages.

Though Kagan said in the majority opinion that Mission is entitled to seek to recover money it lost from not being able to use the trademark, Gorsuch was skeptical, saying such claims seem to rest on Tempnology’s request for the bankruptcy court to invalidate the agreement.  

If Mission cannot bring its damages claim, then the Supreme Court should not have ruled on the case, Gorsuch wrote.  

"If the legal questions here are of sufficient importance, a live case presenting them will come along soon enough," Gorsuch wrote. "There is no need to press the bounds of our constitutional authority to reach them today."  

Wilmer Hale attorney Danielle Spinelli argued the case for Mission Product Holdings and did not immediately return a request for comment on the decision. The company itself also did not respond to a request for comment.

While Tempnology did not return a request for comment, the company's attorney Douglas Hallward-Driemeier at Ropes & Gray said Monday the decision did not answer some key questions, such as whether a trademark agreement can survive bankruptcy outside of the bounds of bankruptcy laws at issue in the case.

"More broadly, the decision will enhance the negotiating leverage of trademark licensees and make it more difficult for trademark licensors to reorganize without assuming the debtors' trademark licenses," Hallward-Driemeir said in a statement.

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