United States: Mission Products V. Tempnology: The Supreme Court Speaks

In February, following oral argument before the U.S. Supreme Court in Mission Product Holdings, Inc. v. Tempnology, LLC,[1] we wrote about the hugely important trademark law issue presented by this case, namely: If a bankrupt trademark licensor "rejects" an executory trademark license agreement, does that bankruptcy action terminate the licensee's right to continue using the licensed trademark for the remaining term of the agreement?

On May 20, 2019, the Supreme Court issued its decision. In a resounding 8-1 majority opinion, it declared that rejection of a trademark license under Section 365 of the Bankruptcy Code does not terminate the licensee's right to continue using the licensed mark. The opinion points to Section 365(g) [2], which provides that rejection of an executory contract constitutes a "breach" of that contract by the bankrupt debtor. The Court concludes – with what appears to be unassailable logic – that a breach of a license agreement by the licensor cannot deprive the innocent licensee of its rights under the agreement. As Justice Kagan's energetic opinion summarizes: "A rejection breaches a contract but does not rescind it. And that means all the rights that would ordinarily survive a contract breach ... remain in place."

The reason this seemingly obvious conclusion had generated so much judicial uncertainty is found in a series of additional sub-parts that Congress had appended to Section 365 over a span of 50 years.[3] Each of these provisions addresses the impact of bankruptcy rejection on the non-bankrupt counterparty in certain specific types of agreements – leases, timeshare contracts and intellectual property licenses, among others – and each affirms that the counterparty's rights remain enforceable post-rejection, as Section 365(g) would indicate. The Court stresses that each of these legislative additions to Section 365 was a Congressional rejection of judicial decisions that produced a contrary outcome.

In the case of Section 365(n), the trigger for Congressional response was Lubrizol Enterprises v. Richmond Metal Finishers, in which the Fourth Circuit held that a debtor's rejection of an executory contract worked to revoke its grant of a patent license.[4] As Justice Kagan recounts, "Congress sprang into action" with Section 365(n), overruling Lubrizol and declaring that rejection does not terminate the patent licensee's remaining license rights. And it went further, extending the same mandate for post-rejection survival of licensed intellectual property rights to agreements covering copyrights, trade secrets, plant varieties and mask works.

The only broad category of IP rights omitted from Section 365(n) is trademark licenses. Presumably, Congress had a reason for this exclusion. In the 30 years since Section 365(n) was enacted, many commentators have opined that the rationale lies in the different social and commercial reasons to protect patents and copyrights, as distinguished from trademarks. Patents and copyrights encourage and reward intellectual innovation. Trademarks, in contrast, do not fundamentally reward innovation, but rather serve to assure the public that the products and services marketed under an established brand will provide the benefits and advantages associated with that brand. This requires that a trademark licensor monitor and police the quality, consistency and other material attributes of the goods or services offered by the licensee. Where a bankrupt licensor elects to reject an executory trademark license, allowing the licensee to continue using the mark will require the debtor to either continue policing the mark – which may impose burdens that hinder its financial reorganization – or allow unsupervised use of the mark (known as a "naked license"), which could tarnish or even invalidate the brand.

Tempnology argued strenuously that, by purposefully leaving trademark licenses out of Section 365(n), Congress must have intended that rejection of a trademark license would result in revocation of the licensed rights, arguing further that this different result makes sense in light of the different attributes and licensor burdens of trademark licenses in a bankruptcy situation.

But Justice Kagan, speaking for an eight-person majority,[5] with equal vigor rejected this argument. She reasoned that any negative inference said to follow from the exclusion of trademarks from Section 365(n) could not overcome the direct, overarching mandate of Section 365(g), which states that rejection of an executory contract constitutes the bankrupt debtor's breach of that contract, which cannot be expanded into a rescission or revocation of the counterparty's rights. The opinion stresses that Section 365(n), as well as Sections 365(h) and (i) before it, were created precisely to counteract judicial interpretations that treated rejection as resulting in termination of the non-bankrupt counterparty's executory rights.

The opinion goes on to emphasize that nowhere in Section 365 is there any specific mention of trademark agreements. There is only Section 365(g), stating the rule generally applicable to all types of executory contracts – that is, rejection is a breach, not a rescission. Then there are the other sub-parts noted above, each of which reinforces that the same outcome applies in the context of certain types of agreements, where court decisions had reached a different result.

But, if Tempnology's argument is accepted, that is, that by omitting trademarks from Section 365(n), Congress intended that "rejection" of a trademark license would operate as a complete revocation of the license agreement, it would follow that all contracts except those carved out by Sections 365(h), (i) and (n) would, upon rejection, similarly be revoked. In practical effect, this would functionally delete Section 365(g), which has always been understood as the general rule on the effect of rejection, from the statute. The decision makes clear that such a wholesale reinterpretation of Section 365 cannot be sustained on nothing more than a "negative inference" drawn from what was left out of Section 365(n). As Justice Kagan comments, such an interpretation "would allow the tail to wag the Doberman."

The opinion gives similar short shrift to the argument that the special "quality control obligations" imposed on a trademark licensor require that rejection of such a license must also result in termination of the licensee's continuing right to use the licensed mark, so as not to complicate the bankrupt licensor's reorganization plan. The opinion points out: "The Code of course aims to make reorganization possible. But it does not permit anything and everything that might advance that goal." Rather, the rejection power gives the debtor a powerful tool with which to escape undesirable contractual obligations, but it does not "relieve the debtor of the need ... to make economic decisions about preserving the estate's value – such as whether to invest the resources needed to maintain a trademark."

The opinion does not offer any suggestion about why Congress chose to omit trademarks from Section 365(n), nor does it acknowledge that its decision requires any such explanation. But the fact that trademarks are indeed omitted from Section 365(n) will have potentially profound commercial implications on trademark licenses rejected in bankruptcy going forward.

This is highlighted in the concurring opinion authored by Justice Sotomayor. Justice Sotomayor "join[s] the Court's opinion in full." But her concurring opinion goes on to note that, because Section 365(n) does not cover trademark licenses, trademark licensees whose license is rejected will enjoy a valuable right specifically denied by Section 365(n) to those IP licensees covered by that statute. Specifically, under generally applicable contract law, if a licensor breaches a license agreement, the licensee may offset the resulting damages against royalties otherwise owing to the licensor. Section 365(n) provides that a covered licensee who chooses to continue exercising the licensed rights post-revocation must continue to pay all associated royalties and fees, but may not offset any damages caused by the licensor's breach against those payments. Because trademark licenses are not mentioned in Section 365(n), this prohibition against damage offsets will not affect trademark licensees when their license is rejected.

This becomes economically significant because the "breach of contract" caused by the debtor licensor's rejection of the license is deemed to have occurred immediately prior to the filing of the bankruptcy case. Therefore, the damages suffered by the licensee as a result of the rejection/breach will be treated as an unsecured pre-bankruptcy claim against the debtor. In most bankruptcy reorganizations, the unsecured pre-petition claimants will receive only pennies on the dollar for whatever nominal damages can be proven. For those types of licenses covered by Section 365(n), the licensee's recovery will be limited to that diminished payout, with no right to offset the actual damage amount against royalties otherwise owing.

But trademark licensees will not be precluded from offsetting, under generally applicable non-bankruptcy law, the entire amount of damages caused by the rejection/breach from the royalties accrued by the continued use of the licensed mark. Depending on the economic circumstances of any given situation, this means that a trademark licensee may be able to fully recoup the entire amount of monetary loss caused by the license rejection, in stark contrast to the "pennies on the dollar" recovery of the licensees covered by Section 365(n).

Now that the impact of rejection on trademark licenses is unambiguously resolved, it will be up to trademark practitioners, particularly those representing trademark licensors, to attempt to fashion contractual mechanisms that may preserve some greater measure of licensor control over the licensees' post-rejection activities while surviving scrutiny under bankruptcy as well as general contract law. It will also be interesting to see whether Congress will take any action in light of this ruling, for example, addressing the "royalty offset" disparity that now exists between trademark versus other IP licensees. However that may be, the "most significant open question in trademark law" is now closed.


1 Mission Products Holdings, Inc. v. Tempnology, LLC, case no. 17-1657 before the United States Supreme Court.

2 All statutory references are to the Bankruptcy Code.

3 See Section 365(h), (i) and (n).

4 See 756 F. 2d 1043, 1045-1048 (1985).

5 Justice Gorsuch dissented, but only on the ground that the historical circumstances of the dispute rendered the case moot, and so the Court should have declined to make a substantive ruling on the merits.

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