Bankruptcy Appellate Panel Rules on Trademark Rights of Licensee

December 1, 2016

The bankruptcy appellate panel for the First Circuit (BAP) recently ruled on the rights of a licensee of trademarks when the licensor files for bankruptcy and the licensor rejects the contract during the bankruptcy case.

Tempnology, the debtor in bankruptcy, had a prepetition agreement with Mission Product Holdings (MPH) giving MPH certain exclusive distribution rights to Tempnology’s product, the right to sell the product worldwide, and a limited license to use Tempnology’s trademarks and logo.  After filing for bankruptcy, Tempnology rejected the contract with MPH in connection with the sale of substantially all of its assets to a third party.  A dispute then arose as to the effect that contract rejection had on MPH’s continuing rights under the contract.

In 1988, Section 365(n) was added to the Bankruptcy Code to provide non-debtor/licensees with certain protections in the event that a debtor/licensor filed for bankruptcy and then rejected a contract involving intellectual property.  That provision allowed the licensee to retain its intellectual property rights, despite contract rejection, so long as the licensee continued to perform and make required payments under the contract.  The Bankruptcy Code definition of intellectual property did not include “trademarks” which has led to conflicting Court rulings on whether the licensee protections found in Section 365(n) extend to trademarks.

The BAP held in the Tempnology case that licensee protections did not extent to trademarks under Section 365(n), since trademarks were not specifically listed among the bundle of licensee rights to be protected.  The BAP disagreed, however, with the Bankruptcy Court on the effect of Tempnology’s rejection of the contract.  Rejection resulted in a breach of the contract, not a termination.  The rights of MPH on contract breach did not “vaporize”.   MPH retained any post-breach rights it had under the agreement and under non-bankruptcy law, which might allow for the retention of rights otherwise not protected by Section 365(n).

The BAP decision provides important guidance in the First Circuit on the effect of Section 365(n) when a debtor/licensor rejects a contract involving intellectual property.    The ultimate effect of contract rejection beyond the contours of Section 365(n), however, will require further development of the law in this area.

The case is Mission Product Holdings, Inc. v. Tempnology, LLC, BAP No. NH 15-065 (1st Cir. B.A.P. November 18, 2016).