United States: First Circuit Bankruptcy Appellate Panel Latest To Warm Up To Protections For Trademark Licensees In Bankruptcy

In its recent decision in Tempnology LLC, n/k/a Old Cold, LLC v. Mission Product Holdings, Inc. (In re Tempnology LLC), No. 15-065 (B.A.P. 1st Cir. Nov. 18, 2016), the U.S. Bankruptcy Appellate Panel for the First Circuit ("the BAP") rejected the Fourth Circuit's holding in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985), and held that rejection of an intellectual property license does not terminate a licensee's right to use trademarks.

Section 365(n) and Trademarks

In 1985, the Fourth Circuit held in Lubrizol that rejection of an intellectual property license under Bankruptcy Code section 365(a) deprives a licensee of all of its rights to use such licensed intellectual property. Congress enacted section 365(n) in response to Lubrizol, which provides licensees with the ability to elect to retain their licensed rights to "intellectual property" in the face of rejection. However, the definition of "intellectual property" set forth in section 101(35A) does not include trademarks. Thus, by negative inference of such omission, a majority of courts have held that section 365(n) does not extend to trademark rights.

The Tempnology Case

Prior to selling all of its assets in 2015, Tempnology was an athletic textiles company that developed a chemical-free cooling fabric used to produce "Coolcore" performance apparel and accessories. In 2012, Tempnology entered into a distribution agreement with Mission, which granted Mission exclusive and non-exclusive distribution rights with respect to certain of Tempnology's products, as well as a limited license to use the Coolcore trademark and logo.

Shortly after commencing its chapter 11 case, Tempnology filed a motion seeking to reject certain executory contracts, including the agreement with Mission, together with a motion seeking approval to sell substantially all of its assets. Mission objected to both the rejection and sale motions and made a section 365(n) election to retain its rights under the distribution agreement. Tempnology then sought clarification from the bankruptcy court that Mission's section 365(n) election did not extend to Mission's exclusive distribution or trademark rights.

The U.S. Bankruptcy Court for the District of New Hampshire agreed that Mission's exclusive distribution and trademark rights were not protected by section 365(n). The bankruptcy court reasoned that the exclusive distribution rights granted Mission no more than the right to sell certain of Tempnology's products and did not constitute a license of intellectual property, thus falling outside the scope of section 365(n). With respect to the trademark rights, the bankruptcy court followed Lubrizol and the majority view that the absence of "trademarks" from the definition of "intellectual property" found in section 101(35A) renders trademark rights outside the protections afforded by section 365(n).

On appeal, the BAP affirmed the bankruptcy court's holding with respect to the exclusive product distribution rights, but rejected its analysis and application of Lubrizol to Mission's trademark rights. The BAP elected instead to follow the Seventh Circuit's decision in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 382 (7th Cir. 2012), which held that the effect of rejection of a trademark license is governed by section 365(g), rather than section 365(n).

Applying the Seventh Circuit's analysis in Sunbeam, the BAP reasoned that though Mission's trademark rights were not entitled to the protections afforded by section 365(n), rejection of the agreement did not "vaporize" those rights. Instead, the BAP held that Mission's post-rejection rights in the trademark are governed by section 365(g), which provides that rejection constitutes a breach—not termination—and, therefore, the bankruptcy court had erred in ruling that Mission's trademark rights had terminated upon Tempnology's rejection of the agreement.

Also worth noting in the Tempnology decision is the BAP's rejection of a separate line of cases extending the protections of section 365(n) to trademark licensees on equitable grounds. See In re Exide Technologies, 607 F.3d 957 (3d Cir. 2010); In re Crumbs Bake Shop, Inc., 522 B.R. 766 (Bankr. D.N.J. 2014).

Mission has appealed the BAP's decision to the U.S. Court of Appeals for the First Circuit (Case No. 16-9016).

If you have any questions about this Alert, please contact Paul D. Moore, Keri L. Wintle, any of the attorneys in the Business Reorganization and Financial Restructuring Practice Group, any of the attorneys in the Trademarks and Copyrights Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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