Case No. 17-1657, 1st Cir.
Preview by Christopher Lin
In November 2012, Tempnology, a company that developed and owned the intellectual property rights in sports attire and accessories that were designed to remain at a low temperature during exercise, entered into a licensing agreement with Mission Product Holdings (“MPH”). The agreement granted MPH a nonexclusive intellectual property license, a nonexclusive trademark license (issued separately from the IP license), and a limited exclusive distribution rights license.
In September 2015, Tempnology filed for bankruptcy due to operation losses and sought to reject its agreement with MPH under 11 U.S.C. § 365(a) (2012), which allows the debtor-in-possession to “reject any executory contract” so long as the court approves. The bankruptcy court approved the rejection but allowed MPH to retain the intellectual property rights pursuant to 11 U.S.C. § 365(n). The court determined the scope of the retainable rights to include the intellectual property license, but not the trademark license or the distribution rights license, and held that Tempnology’s rejection of the agreement terminated the latter two licenses. On appeal, the First Circuit affirmed the bankruptcy court’s disposition.
In granting MPH’s petition and setting off to resolve a circuit split, the Supreme Court limited the issue to one question: whether a debtor-licensor’s rejection of a license agreement under the Bankruptcy Code terminates the licensee’s rights that would have otherwise survived the rejection under applicable nonbankruptcy law.
MPH argues that the rejection of an agreement under the Bankruptcy Code merely constitutes a breach of contract on the debtor-licensor’s part. According to MPH, such a rejection does not rescind an agreement or revoke a counterparty’s right, nor does it take back interests (such as an IP license) that the debtor-licensor transferred to the counterparty prior to bankruptcy, because the estate should not enjoy a greater interest in the assets than the debtor-licensor would have outside of bankruptcy. MPH further contends that the policy of the Bankruptcy Code does not support an interpretation allowing for the termination of third party rights in the debtor’s estate assets upon bankruptcy. According to MPH, such an interpretation will result in the termination of all the counterparty’s rights in the debtor’s assets, which is contrary to bankruptcy principles.
In response, Tempnology argues that when a debtor rejects an agreement under the Bankruptcy Code, the counterparty’s sole remedy is a prepetition claim for damages, with certain exceptions that do not apply to the instant case. Tempnology contends that upon rejection of the agreement, the Bankruptcy Code reduced MPH’s rights to a claim for damages, and that adding any more remedies would make the enumerated exceptions meaningless. Tempnology further responds to MPH’s policy argument and asserts that MPH’s rule will frustrate the Bankruptcy Code’s policy of equality in asset distribution by enhancing the interests of some counterparties to rejected agreements above other creditors. Finally, Tempnology claims that a trademark license does not create a property interest in the trademark, but merely a right to use it, which is unenforceable after rejection.