To some, the U.S. Supreme Court’s most-watched trademark case takes a well-worn path: Company A owns a diverse portfolio of patents, copyrights, trade secrets, and trademarks, which it licenses out for royalties. Company B is one such licensee, and has built its entire enterprise on the manufacture and sale of products featuring the licensed IP.
But what happens if Company A goes belly-up and files for bankruptcy?
Bankruptcy law is designed in part to relieve debtors of their contractual obligations that may interfere with a restructuring—allowing Company A to “reject” its executory contracts. But if the company’s IP license agreement is “rejected,” should Company B have to go down with the ship just because its business centers wholly on licensed IP rights?
For licenses involving patents, copyrights, and trade secrets, Congress provided an answer back in 1987: Under Section 365(n) of the Bankruptcy Code, a licensor’s rejection of IP licenses in bankruptcy does not unwind those agreements or revoke the licensee’s rights. A licensor’s rejection may constitute a breach of the contract with its licensee, or may motivate the parties to renegotiate their agreement, but rejection itself does not yank the right to use the licensed IP away from the licensee.
For example, a manufacturer with licenses to various pharmaceutical patents need not cease manufacturing the patented pharmaceuticals, just because its licensor went bankrupt. The idea is that the licensee should not lose its business because the licensor’s business failed.
However, Congress, in specifying the forms of licensed IP exempted in this carve-out, expressly left trademarks off the list. So, what happens to the bankrupt licensor’s trademarks?
Trademark owners and licensees nationwide finally may receive an answer in Mission Product Holdings Inc. v. Tempnology LLC.
Lubrizol and Sunbeam: The Origin of the Split
Mission Product Holdings is set to resolve a split in authority between the Fourth Circuit patent case Lubrizol Enters. Inc. v. Richmond Metal Finishers Inc. and the Seventh Circuit’s Sunbeam Products Inc. v. Chicago American Mfg. LLC.
The so-called “Lubrizol approach” instructs that trademark licenses “rejected” in bankruptcy are treated as terminated, and that the licensee must discontinue all use of the licensed trademarks, leaving the non-bankrupt party with only a money damages remedy against the bankrupt party.
The “Sunbeam approach” holds the opposite, such that debtors may not rescind their trademark licenses through “rejection.”
This split has left trademark licensees in limbo when their licensors go bankrupt.
Sunbeam May Be the Favorite, But Congress Likely to Have Last Word
Many amicus curiae briefs have been filed by various expert organizations, including the International Trademark Association (INTA), the New York Intellectual Property Law Association (NYIPLA), the American Intellectual Property Law Association (AIPLA), the Intellectual Property Owners Association (IPOA), collections of bankruptcy law professors, and the U.S. government.
Most have argued vehemently in support of the licensee petitioner, urging the Supreme Court to make Sunbeam the law of the land.
Although the Sunbeam approach has drawn the bulk of amicus support, the court’s analysis of this issue will not be one-sided. After all, the objective of Chapter 11 is to rehabilitate debtors, not protect trademark licensees. It expressly permits debtors to assume the contracts that are beneficial to them and reject those that may hinder their recovery.
For many bankrupt licensors, licensees’ retention of trademark rights may be an obstacle to their reorganization, especially if they have significant portfolios with a slew of licensees, each with their own commercial interests.
Lubrizol supporters argue that the Bankruptcy Code should favor the debtor’s choice. If a debtor decides that rescinding its trademark licenses would best aid its recovery, it should be able to do so through rejection under Section 365, freeing up third-party claims to its IP rights as it gets back on its feet.
However, despite arguments to the contrary, the Supreme Court will likely side with the petitioner and hold that rejection of trademark license agreements in bankruptcy constitutes a simple breach, rather than rescission, of those agreements.
As AIPLA put it: “The simple answer to the question presented is ‘no’: rejection of a trademark license agreement does not terminate rights of the licensee that would survive the licensor’s breach under applicable non-bankruptcy law.”
The licensee-friendly Sunbeam approach appears to comport more closely with Congress’ intent in amending Section 365, as it would unify the treatment of all licensed IP under the statute.
Regardless, Congress will likely have the last word on this issue. Because trademarks were excluded from the list of “intellectual property” protected under Section 365 in the statute, but discussed in the Senate committee report and earmarked for further analysis, (See S.Rep. No. 100–505, 100th Cong., 2d Sess. 5 (1988), 1988 U.S.C.C.A.N. 3200).
Congress may amend the statute to include trademarks, especially if the Supreme Court adopts Lubrizol as the national standard. If the court approves Sunbeam, Congress may seek to codify the result or provide additional clarity on the issue.
The court heard oral argument on Feb. 20, but did not give a clear indication one way or the other where the majority will fall. Given the gargantuan commercial impact of the decision, trademark and bankruptcy practitioners, and their clients, alike, anxiously await the court’s decision.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Katy M. Basile is an Intellectual Property partner based in Reed Smith’s Silicon Valley office, who focuses on all aspects of trademark law, from trademark and brand creation to litigation. Katy serves as primary outside counsel for several world famous brands, advising on trademark clearance, prosecution and related transactions domestically and worldwide.
Andrew M. Levad is an associate with Reed Smith based in San Francisco, and focuses on trade secrets litigation, unfair competition, complex commercial disputes, employee mobility conflicts, and trademark enforcement.