United States: First Circuit Holds Rejection Of Trademark License Leaves Licensee With Only A Claim For Pre-Petition Damages – No Right To Continued Use Of Trademarks; Court Upholds Termination Of Exclusive Distribution Rights

The Bottom Line

The First Circuit in Mission Product Holdings, Inc. v. Tempnology, LLC (In re Tempnology, LLC), 879 F.3d 389 (1st Cir. 2018), recently held that the Debtor's rejection of a trademark license left the licensee with only a pre-petition damages claim in lieu of any obligation by the Debtor to further perform under the trademark license or the grant of exclusive distribution rights.  The case is notable because (i) it excludes distribution rights from the protections of Section 365(n) of the Bankruptcy Code and (ii) it declines to follow certain cases (including in the First Circuit) that included trademark rights as protected intellectual property rights post-rejection.

What Happened?

The Debtor made specialized products (including towels, socks, headbands, and other accessories) designed to remain at low temperatures even when used during exercise, which it marketed under the "Coolcore" and "Dr. Cool" brands.  A significant intellectual property portfolio supported the Debtor's products.  This portfolio consisted of two issued patents, four pending patents, research studies, and a multitude of registered and pending trademarks.  On November 21, 2012, Mission Product Holdings, Inc. ("Mission") and the Debtor executed a Co-Marketing and Distribution Agreement (the "Agreement"), which granted three categories of rights: (i) the Debtor granted Mission distribution rights to certain of its manufactured products within the United States – some of the covered categories of goods were exclusive distribution and others were nonexclusive; (ii) the Debtor granted Mission a nonexclusive irrevocable license to the Debtor's intellectual property which expressly excluded any rights to the Debtor's trademarks; and (iii) finally, with respect to trademarks, the Debtor granted Mission a "nonexclusive, non-transferable, limited license" for the term of the Agreement "to use [Debtor's] trademark and logo (as well as any other Marks licensed hereunder) for the limited purpose of performing its obligations hereunder, exercising its rights and promoting the purposes of this Agreement."  879 F.3d at 392–93.

The Debtor-licensor sought to reject seventeen contracts pursuant to Section 365(a) of the Bankruptcy Code, including the Agreement with Mission, the licensee.  The licensee objected to the rejection, arguing that Section 365(n) allowed it to retain both its trademark license and its exclusive distribution rights.

By way of background, Section 365(n) of the Bankruptcy Code limits a debtor's ability to terminate intellectual property licenses and deprives the non-debtor licensee of certain ongoing benefits of the use of the licensed intellectual property.  Specifically, Section 365(n) provides that, despite contract rejection, a licensee may elect to "retain its rights (including a right to enforce any exclusivity provision of such contract . . . ) under such contract and under any agreement supplementary to such contract, to such intellectual property (including any embodiment of such intellectual property to the extent protected by applicable nonbankruptcy law)."  11 U.S.C. § 365(n)(1)(B) (emphasis added).

In the case at issue, the bankruptcy court granted the Debtor's motion to reject, subject to the licensee's election to preserve its rights under Section 365(n).  The Debtor subsequently moved for a determination of the applicability and scope of the licensee's continued usage rights under Section 365(n).  The bankruptcy court found that Section 365(n) only protects "intellectual property" rights and that the licensee's exclusive distribution rights could not be characterized as such.  In addition, trademarks are not included in the list of protected intellectual properties set forth in Section 101(35A) and thus, the court found they are not subject to the exceptions for the effect of rejection under Section 365(n).  The licensee appealed to the Bankruptcy Appellate Panel for the First Circuit (the "BAP").  The BAP affirmed with respect to the exclusive distribution rights but reversed the bankruptcy court's ruling as to the continued use of the trademark license.  The BAP followed the Seventh Circuit's ruling in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 272 (7th Cir. 2012), holding that because Section 365(g) deems the effect of rejection to be a breach of contract, and a licensor's breach of a trademark agreement outside of bankruptcy does not necessarily terminate the licensee's rights, then rejection under Section 365(g) similarly does not necessarily eliminate the right to ongoing use of the trademarks.  The Debtor appealed.

Looking first to the statutory language, the First Circuit found that the reference to "any exclusivity provision of such contract" in Section 365(n)(1)(B) is limited to exclusivity provisions related to intellectual property and does not extend to exclusive distribution rights.  "The Agreement and record are clear that Debtor can use its intellectual property to make and sell products other than those for which the Agreement grants Mission exclusive distribution rights. The only thing that is exclusive is the right to sell certain products, not the right to practice, for example, the patent that is used to make those products. An exclusive right to sell a product is not equivalent to an exclusive right to exploit the product's underlying intellectual property."  879 F.3d at 398.  The Court found that its interpretation was supported by legislative history, noting that Section 365(n) was enacted to ensure that the rights of an intellectual property licensee to use the licensed property cannot be unilaterally cut off.  Therefore, there was no post-rejection right to continue any exclusive distribution.

Turning next to whether the licensee retained the right to use the trademark license post-rejection, the First Circuit initially observed that trademark licenses are not included in the definition of  "intellectual property" set forth in Section 101(35A) of the Bankruptcy Code and, thus, would seem ineligible for protection under Section 365(n).  See 11 U.S.C. § 101(35A).  However, again looking to legislative history, the Court noted that Congress "'postpone[d]' action on trademark licenses to allow the development of equitable treatment of this situation by bankruptcy courts."  879 F.3d at 401.  The only circuit to squarely address this issue is the Seventh Circuit in Sunbeam and there, the Seventh Circuit did not rely on equitable considerations but looked to the meaning of rejection.  The Seventh Circuit found that "while rejection converts a debtor's duty to perform into liability for pre-petition damages, it leaves in place the counterparty's right to continue using a trademark licensed to it under the rejected agreement."  Id. at 402.  The First Circuit disagreed with this approach, finding that the result—allowing a licensee to retain use of a debtor's trademarks thereby forcing the debtor to choose between performing executory obligations arising from continuance of the license or risking the permanent loss of its trademarks—would be inconsistent with Section 365(a), which would otherwise allow a debtor to free itself of burdensome obligations.  Accordingly, the First Circuit held that the licensee's right to use the trademark did not survive rejection of the agreement. 

In a dissent, Judge Torruella disagreed "with the majority's bright-line rule" that Section 365(n) leaves a licensee without any post-rejection rights to use a debtor's trademark and logo.  Instead, Judge Torruella advocated the approach used in Sunbeam and stated that the effect of rejection on a trademark license should be guided by the terms of the agreement and non-bankruptcy law to determine the appropriate equitable remedy.

Why This Case Is Interesting

The Seventh Circuit's approach in Sunbeam, which permitted a trademark licensee to retain rights post-rejection, has been an exception to both the plain reading of the Bankruptcy Code and the majority of cases interpreting the issue.  The First Circuit's decision furthers a divide among circuit courts on whether to grant protection to trademarks despite the language of the Bankruptcy Code.  For certain distressed businesses, including retailers with popular private label products, trademarks can be a valuable right. The ability of the debtor versus the non-debtor licensee to control the use of that trademark can affect the overall restructuring.  This latest decision adds to the uncertainty (depending upon where a case is filed) on the treatment of this potentially valuable property right.

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.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Masuda, Funai, Eifert & Mitchell, Ltd.
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Masuda, Funai, Eifert & Mitchell, Ltd.
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must 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.

Disclaimer

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.

General

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