What Happens to a Trademark License If a Licensor Files for Bankruptcy?

Retail stores and outlets feature trademark branded merchandise produced under license agreements.  Millions of dollars in manufacturing costs, marketing expenses and distribution chain development are incurred in getting the branded goods from initial concept to the shelf for retail sale.  The current and anticipated wave of fashion industry bankruptcies raises questions about the risk of loss by the licensee on that investment if the brand-owner/licensor files for bankruptcy.

What happens when a trademark licensor files for bankruptcy? Does the licensor’s various license agreements continue as if nothing happened? Are the license agreements automatically terminated as part of the bankruptcy process? Do the licensors have the ability to reject the license agreements? These have been questions causing anxiety to those in licensing industry for years and until recently, the questions were answered differently depending on the court being asked the question.

In May 2019, the U.S. Supreme Court answered some of these questions through its decision in Mission Products Holdings, Inc. v. Tempnology, LLC. The Court held that a licensor’s rejection of a trademark license agreement during bankruptcy proceedings did not “deprive the licensee of its right to use the trademark.”

Tempnology, a licensor of the brand name “Coolcore”, granted Mission Products a non-exclusive license to use the brand name through 2016.

In 2015, Tempnology filed for bankruptcy and used 11 U.S.C. 365(a) of the Bankruptcy Code to reject the license agreement with Mission Products.

Section 365 of the Bankruptcy Code provides that a debtor or trustee may assume or reject any contract that has some performance that remains due on both sides, provided the Bankruptcy Court approves the rejection.[1]

When rejection occurs, the party whose contract has been rejected is given the choice to retain its rights in the intellectual property, provided it continues to perform under the terms of the license agreement. But until Mission Products, this survival right did not definitively and conclusively apply to trademark license agreements because various Federal Circuit Courts of Appeal had given conflicting opinions.

Mission Products was a “game changer”. The Supreme Court held that rejection of a non-exclusive trademark license agreement in bankruptcy operated as a breach, not as a rescission. Accordingly, the injured party retains the rights it has received under the agreement.

Questions remain as to whether Mission Products will be limited to non-exclusive license agreements. But the ruling clearly reduces the considerable uncertainty and risks faced by trademark licensees in the current and volatile economic environment.

[1] Although Court approval is necessary, the decision by a debtor or trustee to do so is given broad deference.

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