The Big Question. What is the effect of rejection of a trademark license by a debtor-licensor? Over the past few years, this blog has followed the Tempnology case out of New Hampshire raising just that issue. The case has gone from the bankruptcy court, to the Bankruptcy Appellate Panel, and then to the First Circuit. Last August, I wrote about how the case could be headed to the Supreme Court. In late October, the Supreme Court granted review and has set oral argument for February 20, 2019.

Here’s the question on which the Supreme Court granted certiorari:

Whether, under §365 of the Bankruptcy Code, a debtor-licensor’s “rejection” of a license agreement—which “constitutes a breach of such contract,” 11 U.S.C. §365(g)—terminates rights of the licensee that would survive the licensor’s breach under applicable nonbankruptcy law.

A Supreme Court Preview Article. In anticipation of next week’s oral argument, I wrote an article on the case and it’s just been published by the American Bar Association’s Supreme Court Preview publication, which as its name implies previews each pending case coming up on the Supreme Court’s calendar.

  • The new article discusses the key facts, issues, and arguments presented by the parties and amici to the Supreme Court, along with background on the legal context and potential significance of the case.
  • For a detailed look at the case and these issues, you can access the full article using this link.

The Circuit Split. The case seems likely to resolve the split between the First and Fourth Circuits on the one hand, and the Seventh Circuit on the other hand, on the impact of rejection of a trademark licensee. Let’s review the history:

The Supreme Court Briefs. In addition to briefs from debtor-licensor Tempnology and licensee Mission Products, the case has attracted six amicus briefs, including from the United States. Four amici support the licensee and two support neither party. However, all six call for reversal of the First Circuit’s position that rejection of a trademark license terminates the licensee’s rights under the license. For your further reading pleasure, each of the briefs from the parties and the amici are at the links below:

Is Rejection Just A Breach Or Something More? Sifting through all the arguments, the key issue is what effect rejection of an executory contract under Section 365 has on the counterparty’s rights. Does rejection function merely as a breach that frees the estate from future affirmative performance obligations? Or, does it render the contract unenforceable by the counterparty—other than the right to file a pre-petition rejection damages claim under Section 502(g)—thereby terminating all other rights and remedies under the rejected contract absent a statutory exception like Section 365(n)? If the former, the Supreme Court will likely reverse and endorse the Sunbeam approach or something similar. If the latter, it will likely affirm and adopt the Tempnology/Lubrizol approach.

Oral Argument Is February 20th. At the February 20th oral argument, the two parties, and the United States, have been allocated time to argue. Stay tuned for what could be a very interesting oral argument—and of course, ultimately the Supreme Court’s decision.