United States: Supreme Court: Licensees Retain Trademark Rights After Rejection Under Section 365 Of The Bankruptcy Code

On May 20, 2019, the U.S. Supreme Court issued its decision in Mission Product Holdings, Inc. v. Tempnology, LLC, resolving what was substantively one of the more significant circuit court splits existing under the Bankruptcy Code. The Court's decision hands a clear victory to trademark licensees, and provides some certainty regarding the continued viability of a licensee's trademark rights following the bankruptcy filing of a counterparty licensor.


The issue before the Court in its simplest terms was whether a bankruptcy debtor/licensor's rejection of a trademark licensing agreement under Section 365 of the Bankruptcy Code terminates the licensee's trademark rights. Mission Product Holdings, the trademark licensee, contended that a debtor trademark owner's rejection of a licensing agreement under Section 365 should leave in place the rights a licensee would otherwise have upon a breach outside of bankruptcy. The debtor, Tempnology, argued that its rejection should terminate the licensee's right to continue using the trademarks in question.

In the licensing agreement at issue, Tempnology gave Mission Product Holdings, among other things, a non-exclusive license to use Tempnology's "Coolcore" trademarks and logo on athletic apparel sold in Mexico. After filing for Chapter 11 bankruptcy protection, Tempnology rejected the licensing agreement and asserted that its rejection terminated Mission Product's right to use its trademark. Both the bankruptcy court and the U.S. Court of Appeals for the First Circuit agreed with the debtor and held that Mission Product Holdings' rights to continue using the debtor's trademark terminated as a result of the rejection.

One of a debtor's most powerful tools in bankruptcy is the ability to decide whether to assume or reject its executory contracts – contracts in which some form of performance remains due from both sides. The courts give great deference to a debtor's decision to reject a contract under the "business judgment" rule and debtors wield the rejection power to shed onerous or unfavorable contracts. Section 365(g) of the Bankruptcy Code provides that "the rejection of an executory contract [ ] constitutes a breach of such contract" occurring immediately before the filing of the bankruptcy. One result of rejection, therefore, is that the non-debtor counterparty receives an unsecured claim against the bankruptcy estate for rejection damages. Pursuant to the Bankruptcy Code's rules for distributions, this means that a counterparty whose contract is rejected rarely will be fully compensated for the losses it suffers as a result.

Lower Court Split

Leading up to the Court's decision in Mission Product Holdings, the lower courts had reached conflicting determinations as to whether a debtor's rejection under Section 365 terminates a licensee's right to continue using a trademark. This divergence among the courts had its genesis in a 1985 decision by the Fourth Circuit holding that a debtor's rejection of a licensing agreement terminated the counterparty's patent rights. Lubrizol Enterprises v. Richmond Metal Finishers, 756 F.2d 1043 (4th Cir. 1985). In response, Congress added Section 365(n) to the Bankruptcy Code which expressly gives a licensee of "intellectual property" the option either to treat rejection as a termination of the licensing agreement or to retain its rights as they existed prior to the bankruptcy.

Unfortunately, although the Bankruptcy Code's definition of "intellectual property" includes such things as trade secrets, patents, and copyrights, the definition does not explicitly list trademarks. 11 U.S.C. § 101(35)(A). Partially as a result of this omission, some courts concluded that for trademarks a rejection terminates the licensee's rights, unlike the forms of intellectual property explicitly listed in the definition. See, e.g., In re Global Holdings, Inc., 290 B.R. 507, 513 (Bankr. Del. 2003) ("[S]ince the Bankruptcy Code does not include trademarks in its protected class of intellectual property . . . the Franchisees' right to use the trademark stops on rejection."). Other courts, most notably the Seventh Circuit, came to the opposite conclusion. In a well-reasoned decision by Judge Easterbrook in Sunbeam Products, Inc. v. Chicago Am. Mfg., LLC, 686 F.3d 372, 376-77 (7th Cir. 2012), the Seventh Circuit held that rejection does not terminate a licensee's trademark rights because under Section 365(g), rejection constitutes a breach and under non-bankruptcy law a breach does not ordinarily terminate the licensee's trademark rights. The U.S. Supreme Court granted cert in Mission Product Holdings in order "to resolve the division between the First and Seventh Circuits."

Justice Kagan's Majority Opinion

Justice Kagan – writing for an 8-1 majority of the court – concluded that because "breach" is not a defined or specialized bankruptcy term, the term "means in the Code what it means in contract law outside bankruptcy." As explained by Justice Kagan, under non-bankruptcy contract law, a party's breach of an executory contract ordinarily gives the counterparty the right either to treat the contract as terminated or to continue performing its obligations and enforcing its rights under the contract. Therefore, a trademark licensee whose licensing agreement has been rejected, likewise has the same choice, including the right to continue using the marks in question.

The Court also observed the general bankruptcy axiom that "[t]he [bankruptcy] estate cannot possess anything more than the debtor itself did outside bankruptcy." Accordingly, because rejection under Section 365 is the equivalent of a non-bankruptcy breach and outside of bankruptcy a licensor does not have the power to unilaterally rescind a licensee's trademark rights, Section 365 preserves the licensee's rights and ensures that a debtor does not receive a greater interest in the trademarks than it would otherwise have outside of bankruptcy.

In addition, the Court noted the Bankruptcy Code's "stringent limits" on a debtor's power to pursue avoidance actions. Unlike Section 365's rejection power "which may be exercised for any plausible economic reason," a debtor's avoidance powers are narrowly circumscribed by the Bankruptcy Code. Therefore, a reading of Section 365 that permits a debtor to use the broad power of rejection to effect an avoidance of a licensee's trademark rights would improperly undermine the otherwise limited scope of a debtor's avoidance powers.

The Court rejected Tempnology's primary argument that certain subsections of Section 365 expressly preserve a counterparty's contractual rights upon rejection, but not for the termination of a licensee's trademark rights. The Court rejected this "negative inference" argument, observing that the legislative history of these subsections shows they were added to Section 365 in piecemeal fashion over a span of 50 years, "as often as not, correcting a judicial ruling of just the kind Tempnology urges." The Court concluded, therefore, that Congress, by its enactment of each of these provisions, has demonstrated its disapproval of the view that rejection terminates contractual rights.

Finally, Tempnology had argued that permitting a licensee to continue using trademarks after rejection would require licensors in bankruptcy to expend scarce resources to monitor trademarks to protect their integrity or forgo the value that such marks could otherwise realize for the bankruptcy estate. The Court, however, noted that this argument directly conflicted with Tempnology's primary argument – that rejection results in a counterparty's loss of contractual rights unless Congress has enacted some provision specifically protecting the rights in question. Accordingly, the Court refused to rest its interpretation of Section 365 on special considerations of trademark law where its decision would have an impact on a variety of other kinds of executory contracts. Further, as the Court observed, debtors frequently must make difficult economic choices on how to expend limited resources in order to preserve something of value for the bankruptcy estate, and Section 365 is not intended to relieve them of that burden.

Impact of the Decision

The Court's decision is a major victory for trademark licensees. Due to the conflicting decisions by the lower courts on this issue, trademark licensees previously faced significant uncertainty whenever a trademark owner filed for bankruptcy protection. It is not difficult to imagine the significant financial havoc that might result from a licensor's ability to unilaterally terminate a licensee's trademark rights. Under the interpretation of Section 365 reached by the First Circuit and urged by Tempnology, entire business plans, marketing strategies and product lines could be unilaterally unraveled by a debtor's decision to reject unfavorable trademark agreements. Further, because the bankruptcy courts, applying the business judgment rule, afford great deference to a debtor's decision to reject executory contracts, trademark licensees would have little leeway in protecting their rights even where the result might be highly inequitable or even prove ruinous to their business.

At the same time that the Court's decision provides a level of predictability for trademark licensees, it also gives licensees a choice. The Court's decision makes clear that licensees whose agreements are rejected may choose to treat the contract as terminated, provided they could otherwise do so upon a breach. In this way, a licensee unhappy with the terms of its agreement or afraid of the consequences of the licensor's bankruptcy can take advantage of a debtor's rejection by electing to simply treat the agreement as terminated.

Despite the importance and clarity of the Court's decision, certain ramifications remain unclear. As highlighted by the concurring opinion of Justice Sotomayor, "the baseline inquiry remains whether the licensee's rights would survive a breach under applicable nonbankruptcy law" including applicable state law and the contractual terms in a given case. To some extent, bankruptcy courts will now necessarily have to wade in and grapple with interpreting trademark licenses where questions arise regarding the scope of a licensee's rights and obligations under non-bankruptcy law. And licensors will not be left without some element of control in certain situations. For example, where a trademark license agreement's quality control provisions require a licensee to incorporate a part or ingredient supplied by the licensor into its final product, the licensee may still be unable to continue using the marks in question where rejection relieves the debtor of its obligation to supply the component part or ingredient. After all, whatever rights the licensee retains after rejection, it's also clear that rejection relieves the licensor of its obligations. Further, although so-called ipso facto clauses – provisions which alter contractual rights upon the filing of a bankruptcy – are generally unenforceable in bankruptcy, in the future creatively drafted quality control provisions might be incorporated into licensing agreements to create some form of escape hatch and shift an element of control back to debtor licensors.

The Court's decision will also certainly have ramifications for other forms of contracts as well. Although the exact implications will emerge on a case-by-case basis, it is not difficult to imagine counterparties, such as individuals whose employment contracts are rejected, utilizing the Court's decision to more forcefully seek enforcement of contractual rights that they previously may have perceived as fatally undermined by rejection.

In short, this important Supreme Court decision serves to both settle some crucial questions at the intersection of intellectual property law and bankruptcy law, as well as provide some leverage to trademark licensees and other contract parties who find themselves facing potential rejection of their contracts by counterparty debtors under the Bankruptcy Code.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions