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Under § 365 of the Bankruptcy Code, a debtor-licensor's "rejection" of a contract operated as a breach of the contract and not as a rescission, the Supreme Court held May 20, 2019. Mission Product Holdings Inc. v. Tempnology, LLC, US, No. 17-1657, 5/22/2019.

Overruling the First Circuit's decision, the Court concluded that a debtor-licensor's rejection of a trademark license agreement did not deprive the licensee of its rights to use the trademark, as all the rights that ordinarily survive a contract breach remained in place.

Background

Tempnology made specialized products designed to remain at low temperatures during exercise, which it marketed under the "Coolcore" and "Dr. Cool" brands. Mission Products entered into a contract which gave it a license to use Tempnology's trademarks when distributing certain clothing and accessories until July 1, 2016. 

Tempnology filed for Chapter 11 Bankruptcy in 2015, and moved to reject the contract with Mission Products pursuant to 11 USC § 365(a). Section § 365 permits a debtor, with the court's approval, to reject any executory contract that is not beneficial to the company.

The Bankruptcy Court approved Tempnology's rejection and held that the rejection did not preserve the trademark license. The Bankruptcy Appellate Panel reversed, following the Seventh Circuit's ruling in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012), and held that because the rejection constituted a breach under § 365 it could not extinguish rights that would have survived a breach of contract outside of bankruptcy.

 The First Circuit rejected the Panel's judgment and reinstated the Bankruptcy Court's decision.

Analysis

 The First Circuit decision was reversed in an 8-1 vote (Justice Gorsuch filed a dissenting opinion). Writing for the majority, Justice Kagan pointed out that Section 365's text, along with the fundamental principles of bankruptcy law, require that rejection of a contract in bankruptcy operates not as a rescission but as a breach. The Court emphasized that the "rejection-as-breach" rule ensures that a debtor in bankruptcy cannot recapture interests it had relinquished.

 Likewise, the Court was not persuaded by Tempnology's principal counterargument, which rested on a negative inference drawn from provisions of Section 365 which identified categories of contracts under which a counterparty could retain specified rights after rejection. Tempnology argued that these provisions indicated that the ordinary consequence of rejection must be something other than a breach. But, the Court argued, Congress did not intend for these provisions to alter the basic conclusion that a rejection operates as a breach of contract.

Concurrence

 Justice Sotomayor, in her concurring opinion, joined the Court's opinion in full, but wrote separately to highlight "two potentially significant features" of the majority's holding.

 First, she highlighted that the decision does not mean that "every trademark licensee has the unfettered right to continue using licensed marks postrejection." Citing AIPLA's amicus brief, Sotomayor agreed with AIPLA's contention that whether a trademark licensee retains rights to use a licensed mark following a debtor-licensor's rejection must be determined under applicable non-bankruptcy law, and that the result will likely turn on the language of the contract or on state law.

 Second, Sotomayor noted that "the Court's holding confirms that trademark licensees' postrejection rights and remedies are more expansive in some respects than those possessed by licensees of other types of intellectual property."

Dissent

 Justice Gorsuch, in his dissenting opinion, argued that the original case had become moot, and therefore the Court should have declined to proceed on the merits.

Read the opinion.

Read AIPLA's amicus brief.