In this tumultuous retail climate, a string of recent conflicting court decisions remind retailers that the potential impact of a licensor bankruptcy on a trademark licensee’s rights may vary dramatically depending on the location of the licensor’s bankruptcy proceedings. In some jurisdictions a licensee may be entitled to continue to use a trademark despite its licensor’s rejection of the related license, while in other courts the licensee under a rejected trademark license is left with only a claim for damages against the licensor’s bankruptcy estate and no right to use the mark.

Basics of Rejection and IP Licensee’s Rights in Bankruptcy

Section 365 of the U.S. Bankruptcy Code, 11 U.S.C. §§ 101 et seq., permits a debtor in possession or bankruptcy trustee to free itself from certain burdensome contracts, through a process called rejection. Contracts subject to rejection may include intellectual property license agreements and integrated contracts containing IP licenses.

Upon a licensor’s rejection of a license of “intellectual property” under, and as defined in, the Bankruptcy Code, the licensee has the option of (A) considering the license terminated and submitting a claim for monetary damages, or (B) retaining its intellectual property rights under the license. However, trademarks are not included among the intangible property types (such as copyrights and patents) listed in the Bankruptcy Code definition of “intellectual property” in 11 U.S.C 101(35A). Rather, when enacting the relevant statutory provisions and definitions, Congress postponed action on trademark licenses “to allow the development of equitable treatment of this situation by bankruptcy courts.” S. Rep. No. 100-505, at 5.

The Trouble with Trademarks

Congress’s deference to the courts has resulted in a split among the various courts that have considered whether a trademark licensee can continue to use a trademark after rejection of the license by its licensor in bankruptcy. For example, in January 2018, the First Circuit Court of Appeals, which sits in Boston, held in Mission Product Holdings, Inc. v. Tempnology LLC, Case No. 16-9016 (1st Cir. January 12, 2018) that bankruptcy protections provided to licensees of “intellectual property” (as defined under the bankruptcy code), such as patents and copyrights, do not extend to trademark licensees. Accordingly, Mission Product, the licensee of Tempnology’s trademarks, could not continue to use the trademarks following rejection of the agreement containing the license.

Only a few months later, in May 2018, the U.S. Bankruptcy Court for the District of Connecticut came to a virtually opposite result in In re SIMA International, Inc., Case No. 17-21761 (Bankr. D. Conn. May 17, 2018), finding that the contractual rights of the trademark licensee remain following rejection of the license.

Know Your Rights

The Tempnology and SIMA decisions are only the most recent in a line of other judicial opinions grappling with this issue and coming to conflicting conclusions. See, e.g., Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012). Given the increasing focus on (and collateralization of) the value of retail brand assets, the prevailing uncertainty of the law in this area is unsettling for the retail industry and other market segments that rely heavily on trademark licenses.

A petition to the U.S. Supreme Court has been filed in the Tempnology case, which may result in the Supreme Court resolving the split of judicial authority. In the meantime, retailers dealing with any particular distressed licensor (as well as any licensors considering a bankruptcy filing) should seek the advice of intellectual property and bankruptcy counsel to understand their rights with respect to trademarks subject (or potentially subject) to a bankruptcy case.