Richard Levy, Jr., co-chair of Pryor Cashman’s Bankruptcy, Reorganization + Creditors’ Rights Group, and bankruptcy associate Andrew Richmond have co-authored an amicus brief in conjunction with the New York Intellectual Property Law Association (NYIPLA) urging the U.S. Supreme Court to rule that the Bankruptcy Code does not permit bankruptcy trademark licensors to terminate existing trademark licensing agreements, as doing so would amount to more than simply a breach of the contract. NYIPLA’s Board of Directors, of which Pryor Cashman intellectual property partner Dyan Finguerra-DuCharme is a member, authorized the preparation and submission of the brief.

Background

When a company files for bankruptcy, it has a right to keep (known as “assuming”) or escape the obligation to perform (known as “rejecting”) certain contracts. Companies will often reject contracts in order to maximize returns to the bankruptcy estate by shedding obligations that would otherwise burden the estate, and thereby reclaim assets and rights that can be sold or relicensed.

Over the years, a significant question has arisen over what happens when a licensor rejects a license pertaining to intellectual property. Historically, rejection was viewed only as a breach of contract, but in recent years courts have differed over the treatment of various forms of intellectual property.

The law concerning the rejection of trademark rights in this context is split, with some courts holding that licensors can terminate licenses and recover the licensed rights for sale or relicensing, while other courts find they cannot do so. Recently, after two U.S. Circuit Courts in Illinois and Massachusetts handed down conflicting decisions, the Supreme Court agreed to review the issue in order to settle the law.

The case now before the Supreme Court, Mission Product Holdings, Inc. v. Tempnology, LLC, was brought by a licensee (Mission Products) whose right to use certain trademarks owned by the licensor (Tempnology) was rejected by Tempnology during its Chapter 11 bankruptcy proceeding.

Writing in support of Mission Products, Pryor Cashman and NYIPLA (along with other amici) argued that the licensee should be allowed to retain its trademark rights for the duration of the license.

Who Stands to be Affected Should the Supreme Court Rule Against the Licensee?

While the creditors of a bankrupt company stand to benefit if the Supreme Court decides that a bankruptcy licensor can strip a licensee of its right to use a trademark, licensees would be significantly injured by losing these rights. Licensees of marks are engaged in business, exploiting the marks in the sale of goods and services so as to generate revenues which, in turn, are used to pay trade obligations, repay financing debts, pay taxes and generate returns to business owners and investors. The expansion of bankruptcy rejection to permit the stripping of licensees’ trademark rights could lead to increased distress and failures among licensing businesses, and disruptions in both the commercial channels in which licensed products are sold and distributed, and the financial channels through which those businesses are financed.

Additionally, the broader commercial community - including trademark owners, brands, marketers, and consumers - will be impacted by the Court’s decision. Trademark and intellectual property licensing is a major element of modern commerce, touching nearly every business and consumer every day. Contracts and licenses are intended to provide structure and certainty in commercial and licensing transactions. If the Supreme Court rules against Mission Products, bankruptcy may become a strategic device for companies to escape licenses in order to resell or relicense rights regardless of the impact on the licensees and their own commercial relationships.

“You risk a tremendous amount of uncertainty if the Court were to find that rejection in bankruptcy is tantamount to termination,” Levy said. “It would mean that a licensee could lose the agreed-upon, licensed trademark rights literally anytime a licensor declares bankruptcy, which would, in turn, greatly undermine the integrity of contracts.”

The case will be heard by the Supreme Court early in 2019, and a decision is expected to be issued before the Court adjourns in June.

The full text of the amicus brief can be found here.