Can Bankruptcy terminate a licensee’s rights in a trademark license?

By Matthew J. Booth

The Supreme Court has on its docket this term a very important case that affects trademark licensees if the owner (licensor) of the trademark goes into bankruptcy. Here’s the scenario, the owner of the trademark (licensor) or Company A enters into licensing agreement for intellectual property with Company B. The licensing can include different types of intellectual property such as trademarks, trade secrets, patents, and/or copyrights. These types of licenses occur with big and small companies and can be seen everywhere. One example is a national brand doing business in a town where the brand is being operated by a small business that includes the tag “locally owned and operated”.

So, what happens in a typical bankruptcy? When a company enters into bankruptcy, the trustee or debtor (we will just refer to either as the debtor), has the option to reject executory contracts so the other party to the contract is left with a damages claim for the breach of contract, but not the ability to compel further performance. This other party ends up with an unsecured claim and is tossed in with other unsecured creditors and may settle for a reduced amount on the breach of contract claim as part of the bankruptcy.

But what happens with an intellectual property license in bankruptcy? First a little background, in 1985, the Federal Court of Appeals for the 4th Circuit, held that a debtor (and licensor) could use bankruptcy to unilaterally revoke the rights of the licensee of a patent license. See Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985). The revocation also meant that licensee did not even have an unsecured claim in bankruptcy. The revocation basically meant that the license was obliterated and simply disappeared, a very harsh result.

Soon after that case, Congress moved to overrule that result and added into the Bankruptcy Code a new provision that gives the licensee of an intellectual property license the option to either treat the license as terminated and have a claim as an unsecured creditor or retain the intellectual property rights under the original license and continue the license. See 11 USC 365(n). To support this new section, Congress also added new definitions to the Bankruptcy Code and specifically defined “intellectual property” to include trade secrets, patents, and copyrights to mention a few. See 11 USC 101(35A). But Congress did not specifically mention trademarks in this new definition section. Rather, Congress said it needed more time to study trademark licenses. Mind you, this was in 1988 and Congress still has not revisited this issue, leaving trademark licenses unprotected by the same protections given to other forms of intellectual property.

Since 1988, various bankruptcy courts have gone in different directions on whether a trademark license is an intellectual property license as defined in section 365(n) of the Bankruptcy Code. The Third Circuit looked at this issue in 2010, and while it decided that case on different grounds, a concurring opinion disagreed with Lubrizol on trademark licenses. See In re Exide Technologies, 607 F.3d 957, 966–67 (3d Cir. 2010) (Ambro, J., concurring) (concluding that 365(n) neither codifies nor disapproves Lubrizol as applied to trademarks).

In 2012, the Seventh Circuit Court of Appeals looked at Lubrizol and determined that it did not apply to trademark licenses. See Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012). The Fifth Circuit (where I live) like some other circuits, has not yet weighed in on this issue. And finally, the First Circuit last year weighed in and rejected Sunbeam, followed Lubrizol, and found that a trademark license does not survive bankruptcy and can be terminated. See Mission Prod. Holdings, Inc. v. Tempnology, LLC (In re Tempnology, LLC), 879 F.3d 389 (1st Cir., 2018).

Since Congress has never revisited this issue in over 20 years, there is still lingering uncertainty. In the Fourth and First Circuits, licensees are out of luck if the licensor goes into bankruptcy. In the Seventh Circuit, licensees have protection and have a choice of how to proceed. In other circuits, like the Fifth Circuit, who knows what will happen. Hopefully, the Supreme Court will provide guidance on this issue since Congress never got around to it.

The case is Mission Product Holdings, Inc. v. Tempnology, LLC, nka Old Cold LLC, No. 17-1657 (US). Link to the case. Oral arguments on the case were heard on Wednesday, February 20, 2019.