In May, 2019, the Supreme Court resolved a long-standing circuit split on the effect of a debtor’s rejection of a contract under section 365 of the U.S. Bankruptcy Code. Under section 365, a debtor entering bankruptcy may decide to reject any executory contract, that is, a contract where performance is still due on either side. On one side of the split, the Courts treated rejection of a contract in bankruptcy as having the effect of a contract recession, meaning that the entire agreement is terminated by the debtor’s rejection. On the other side, with which the Supreme Court agreed, the Court treated rejection as a breach, meaning that the counterparty’s rights under the contract were left intact post-rejection.
In Mission Product Holdings, Inc. v. Termnology, LLC, the Supreme Court determined that the rejection of a trademark agreement in bankruptcy proceedings has the same consequence as a breach of contract outside of bankruptcy: the licensee retains the right to use the trademark. Mission Products involved a contract between Mission Product Holdings and Termnology, which gave Mission Products a non-exclusive license to use certain Termnology trademarks. Before the agreement expired, Termnology filed a petition for Chapter 11 bankruptcy and asked the bankruptcy court to allow it to “reject” the licensing agreement under section 365. The bankruptcy court granted the request, and Termnology proceeded to seek a declaratory judgment from the court confirming that the rejection of the contract terminated all rights granted to Mission Products to use the trademarks. The issue made it to the Court of Appeals for the First Circuit, which held that the rejection of a contract in bankruptcy proceedings essentially terminates the contract, and along with it Mission Product’s right to use the trademarks.
The Supreme Court disagreed. It reasoned that under general contract law, when a party breaches a contractual agreement it creates a choice for the non-breaching party: to terminate the contract, or to keep up its side of the bargain while suing the breaching party for damages. In either case, the breaching party has no say in whether or not the agreement should be terminated; only the non-breaching party has a right to terminate the contract. In other words, the non-breaching party retains the rights it received under the agreement unless it chooses to terminate them.
This decision solidifies a licensee’s right to use trademarks under a contractual agreement even where the licensor has declared bankruptcy. As such, licensors of trademarks must exercise caution in entering into bankruptcy proceedings. A licensor involved in an ongoing contractual agreement with a licensee to use a trademark may not unilaterally terminate the licensee’s right to use the trademark because of bankruptcy.
*By Attorney Tori Lynne Kluess, with credit to Law Clerk, Laina Stuebner