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Supreme Court Rules Rejection of Trademark License Does Not Rescind Rights of Licensee
In Mission Product Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652 (2019), the Supreme Court undertakes to resolve a circuit split between the First and Seventh Circuits over the effect of rejection in bankruptcy of a trademark license under section 365 of the Bankruptcy Code. The question is whether a debtor's rejection of its agreement granting a license "terminates rights of the licensee that would survive the licensor's breach under applicable nonbankruptcy law." (Pet. for Cert. i.) Those rights include the right to continue to use the trademarks for the term of the rejected agreement.
Refusing to treat a trademark license agreement any differently from any other executory contract, the Court applies general executory contract principles to resolve the question. It broadly concludes "rejection breaches a contract but does not rescind it. And that means all the rights that would ordinarily survive a contract breach, including those conveyed here, remain in place." Id. at 1657. Accordingly, the Court holds rejection does not rescind rights the contract previously granted and so cannot revoke the trademark license granted the nondebtor licensee. Id. at 1666.
In reaching this decision, the Court not only resolves the circuit split and an important trademark license issue, but also provides definitive guidance on the effect of rejection. Although rejection is a simple concept, its effect, especially in contracts where the debtor granted valuable property rights, has confused bankruptcy litigants and courts for the last 40 years, ever since the Code was first enacted in 1978. But the Court has now made clear that rejection is a breach, and only a breach. Rejection does not rescind the contract. The counterparty's rights are not terminated by rejection and are governed by how nonbankruptcy law treats breached contracts, subject to any claims of the counterparty under the contract being treated only as general unsecured claims in the debtor's bankruptcy.
Background to Circuit Split
The First and Seventh Circuits split over whether rejection of a trademark license terminates the licensee's rights to use the trademarks after rejection. Section 365(a) of the Bankruptcy Code allows a debtor to "assume or reject any executory contract," subject to court approval. Section 365(g) addresses the effect of rejection. It provides only that rejection of an executory contract "constitutes a breach of such contract." And it further deems that breach to occur "immediately before the filing of the [bankruptcy] petition," which means any rejection damages claim is treated as a prepetition claim.
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