On Monday, the Supreme Court announced its decision in the case of Mission Product Holdings Inc. v. Tempnology LLC, ruling that the rights of trademark licensees to continue using licensed logos and labels are protected even after the holder of the license goes bankrupt.
The case was brought to the Supreme Court after Tempnology requested that a bankruptcy court void its licensing agreement with Mission in 2015. Tempnology, a company in New Hampshire that manufactured performance textiles designed to cool down wearers, entered into an agreement with Mission in 2012 affording non-exclusive rights to sell Tempnology’s “Coolcore” products in the United States and use its trademark around the world. This agreement was scheduled to end in July 2016, according to court records.
However, in September of 2015, Tempnology filed for bankruptcy before the agreement was fulfilled. In its opinion, the Court found that this situation gave undue preference to the bankrupt party, limiting licensees’ abilities to defend their contracts.
“Such an agreement represents both an asset (the debtor’s right to the counterparty’s future performance) and a liability (the debtor’s own obligations to perform),” Supreme Court Justice, Elene Kagan, wrote in the court’s opinion. “[Article §365 of the Bankruptcy Code] enables the debtor (or its trustee), upon entering bankruptcy, to decide whether the contract is a good deal for the estate going forward. If so, the debtor will want to assume the contract, fulfilling its obligations while benefiting from the counterparty’s performance. But if not, the debtor will want to reject the contract, repudiating any further performance of its duties. The bankruptcy court will generally approve that choice, under the deferential ‘business judgment’ rule.”
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In this case, the judge overseeing Tempnology’s bankruptcy agreed that the brand should not have to honor its contract to Mission despite the fact that the terms of the contract were not completely fulfilled. The bankruptcy court ruled that this put Mission in the same situation as unsecured creditors in bankruptcy proceedings, meaning their claims to Tempnology’s assets were extremely limited as unsecured creditors typically get “pennies on the dollar” from debtors in Chapter 11 proceedings.
A Bankruptcy Appellate Panel reversed that decision and a subsequent First Circuit Court appeal overturned the first appeal, setting up a date with the Supreme Court.
In its decision, the Supreme Court was clear.
“A debtor’s rejection of an executory contract under Section 365 of the Bankruptcy Code has the same effect as a breach of that contract outside bankruptcy,” the ruling read. “Such an act cannot rescind rights that the contract previously granted.”
This ruling gives a greater amount of power to licensees during a time in which bankruptcy in retail is especially common. Essentially, licensees will be able to maintain contracts with bankrupt companies and carry out the terms of those agreements regardless of the ongoing financial health of the licensor.
However, the court allowed that licensees would still be required to prove that the contract “would survive the licensor’s breach under applicable nonbankruptcy law” in order to be granted the ability to preserve said contract by a bankruptcy court.