Mission Accomplished … First Circuit Bankruptcy Appellate Panel Acknowledges Post-Rejection Rights of Licensee of Trademarks

Client Advisory
January 18, 2017

The Bankruptcy Appellate Panel (“BAP”) for the First Circuit recently upheld a licensee’s rights to use a debtor’s trademarks and logo after a rejection by the debtor of the underlying licensing and distribution agreement. Mission Product Holdings, Inc., v. Tempnology LLC (In re Tempnology LLC) 2016 WL 6832837 (Bankr. 1st Cir. 11/18/16). Despite the omission of trademarks in the definition of intellectual property protected by Section 365(n) of the Bankruptcy Code, the BAP determined that the rights of the licensee do not vaporize upon rejection, but rather may be enforced in accordance with the terms of the underlying agreement between the licensee and the Debtor.

The case involved a motion by Tempnology LLC (the “Debtor”), to reject a co-marketing and distribution agreement with Mission Product Holdings, Inc. (“Mission”). The agreement included (i) an exclusive right to distribute the Debtor’s products; (ii) a non-exclusive, perpetual license to exploit the Debtor’s intellectual property; and (iii) a limited license during the term of the contract to exploit the Debtor’s brand and logo. After filing its chapter 11 petition, the Debtor moved to reject the marketing and distribution agreement, intending to sell all of its assets free and clear of the interests of Mission.

Mission filed objections to both the rejection motion and the motion to sell free and clear, and asserted continuing rights under the agreement by virtue of Section 365(n) of the Bankruptcy Code. That section permits a licensee of intellectual property, at its option, to either treat a rejected agreement as terminated or continue to use the intellectual property throughout the term of the agreement. The bankruptcy court[1] held first, that Mission had no continuing exclusive distribution right, noting that nothing under Section 365(n) protects a distribution agreement post-rejection. Next, the court held that Mission’s non-exclusive license of the Debtor’s copyright, patent and trade secret rights fell within the Bankruptcy Code’s definition of intellectual property and therefore Section 365(n) permitted Mission’s continued right to use that property post-rejection. Finally, the bankruptcy court held that Section 365(n) did not protect Mission’s continued use of the Debtor’s trademark rights, because trademarks are not included within the definition of intellectual property in Section 101(35A) of the Bankruptcy Code.

On appeal, the BAP agreed with the bankruptcy court in part, but not entirely. The BAP agreed that the protections of Section 365(n) were inapplicable to Mission’s distribution rights; it also agreed that Section 365(n) was clearly intended to protect Mission’s post-rejection continued use of the Debtor’s intellectual property (as that term is expressly defined in the Bankruptcy Code) under its non-exclusive license with the Debtor. More importantly, however, was the BAP’s final holding. Although the BAP agreed that trademarks fell outside the parameters of Section 365(n)’s protections, it did not conclude that Mission had lost all of its rights to continued use of the Debtor’s trademarks. Instead, the BAP looked to the Seventh Circuit’s decision in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 382 (7th Cir. 2012). In Sunbeam, the Seventh Circuit had failed to follow earlier cases that suggested one of two outcomes for trademark licensees. Under the first line of cases, trademarks could potentially fall within the protections of Section 365(n) under equitable principles, as suggested by Judge Ambro’s concurring opinion in the Third Circuit’s decision in In re Exide Techs., 607 F.3d 657 (3d Cir. 2010)[2]; under the second line of cases, the failure to include trademarks within the definition of intellectual property was fatal to the licensee’s continued use[3].

Although the Sunbeam court agreed that a trademark license was not protected under a Section 365(n) election (by virtue of trademarks not being included in the definition of intellectual property), it looked Section to 365(g) to determine the effect of such a rejection. In so doing, the Seventh Circuit held that a rejection of such an agreement constituted a breach by the debtor, but not a termination of the agreement or the rights of the licensee.

The First Circuit BAP agreed with Sunbeam. It held that while trademarks and logos did not fall within the categories of intellectual property protected by Section 365(n), the rejection would not “vaporize” the licensee’s rights under the agreement. Instead, rejection would constitute a breach by the Debtor of the agreement, and any post-rejection rights Mission retained in the trademarks and logos would be governed by the terms of the agreement and non-bankruptcy law.

The Mission decision is a very important one for licensees in the First Circuit and may signal a growing trend to protect their trademark rights. To the extent a debtor-licensor seeks to evade its trademark and other intellectual property licenses through rejection (or by seeking to sell its assets free and clear of all interests) the licensee should not only assert its Section 365(n) rights to protect defined intellectual property, but it should also look to its underlying agreements to assess and assert its continuing rights in such trademarks under non-bankruptcy law.

[1] In re Tempnology LLC, 541 B.R. 1 (Bankr. D.N.H. 2015).

[2] In re Exide Techs., the court determined that a trademark license could not be rejected because it was no longer part of an executory contract. Judge Ambro issued a concurring opinion, suggested that equitable principles could mitigate in favor of a licensee retaining its rights to trademarks and that one should not draw a negative inference from their omission from the definition of intellectual property.

[3] Lubrizol Enterprises, Inc. v. Richard Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985).

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