What Happens if Your Trademark Licensor Files for Bankruptcy?
In the consumer brands industry, licensing makes the world go round. Licensing is critical in the consumer brand industry because many businesses make a large portion of their revenue from licensing their trademarked brands to others to use on their consumer products. However, what happens to a brand licensee if the trademark licensor that owns the brand files for bankruptcy? The 2019 opinion in Mission Products Holdings v. Tempnology issued by the United States Supreme Court addressed this issue.
As discussed in detail below, in Mission Products Holdings the Supreme Court held that a debtor-licensor’s rejection of a trademark license agreement under § 365 of the Bankruptcy Code does not terminate the creditor-licensee’s right to continue to use the trademark if those rights would otherwise have survived the debtor-licensor’s breach pursuant to non-bankruptcy law.
In 2017, a clothing company called Tempnology filed for chapter 11 bankruptcy and sought to reject several of its trademark license agreements. One of Tempnology’s licensees, Mission Products Holdings, accepted the debtor-licensor’s rejection of the license agreement but nonetheless argued that it had the right to continue using its licensed trademark.
The Supreme Court agreed with Mission Products Holdings, deciding that under § 365(g) of the Bankruptcy Code, the chapter 11 rejection of the trademark license was a breach of the license by Tempnology and that the rejection did not terminate Mission Products Holdings’ right to use the licensed trademarks moving forward. The Supreme Court noted that this ruling is consistent with the underlying policies of the Bankruptcy Code that are to provide debtors with a fresh start, while also preserving the rights of creditors. Additionally, this holding is consistent with § 365(n) of the Bankruptcy Code that after the rejection of the underlying agreement by a debtor-licensor permits a licensee to continue the use a license of a trade secret; invention, process, design, or plant protected under title 35; patent application; plant variety; work of authorship protected under title 17; and mask work protected under chapter 9 of title 17.
The ruling in Mission Products Holdings v. Tempnology has significantly impacted those in the licensing industry. Licensors now often include a provision in their license agreement templates stating that upon insolvency of any parties, the license can be automatically terminated at the option of the licensor.
Now more than ever, licensors must scrutinize the post-rejection fights they are likely to face stemming from their respective license agreements upon filing for chapter 11 bankruptcy. Bankruptcy may become cost prohibitive if a licensor determines that its licensees facing rejection are willing to fight for the continuation of their respective licenses. Nevertheless, bankruptcy still provides licensors the ability to evade liens, automatically stay all existing litigation, and permits the assumption/rejection of their contractual agreements. Therefore, bankruptcy remains a useful option for certain licensors.
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