Long-standing trademark question before high court

By Kris Olson
BridgeTower Media Newswires
BOSTON, MA — The International Trademark Association has called it “the most significant unresolved legal issue in trademark licensing.”

But just how the U.S. Supreme Court might resolve that issue was not immediately apparent after the Feb. 20 oral arguments in Mission Product Holdings, Inc. v. Tempnology, LLC, intellectual property and bankruptcy attorneys say.

The issue — what becomes of a licensee’s right to use a trademark when the licensor rejects the license as part of the bankruptcy process — is not a new one.

The hope is that the Supreme Court will now use Tempnology, which arises out of the 1st U.S. Circuit Court of Appeals, to resolve a split among the federal circuits and lower courts, though there is some fear that the justices may seize on an argument made by the debtor-licensor that the case is moot.

If the justices do tackle the substantive issue at the heart of Tempnology, they should in the process provide the definitive interpretation of Congress’ response to the 1985 4th Circuit decision Lubrizol Enterprises v. Richmond Metal Finishers.

Lubrizol held that a patent license was an executory contract that could be rejected — and, in effect, rescinded — under 11 U.S.C. §365.

Congress responded to Lubrizol by enacting 11 U.S.C. §365(n), which allowed licensees of “intellectual property” to retain their licensing rights post-rejection. However, Congress also simultaneously amended the definition of “intellectual property,” excluding trademark, seemingly purposefully.

Despite Congress’ apparent mandate, the 7th Circuit in 2012 found a way to hold that a licensee’s right to use a debtor’s trademark continues post-rejection in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC.

While rejection constitutes a breach of contract that “frees the estate from the obligation to perform ...  nothing about this process implies that any rights of the other contracting party have been vaporized,” the 7th Circuit wrote in Sunbeam.

The 1st Circuit, however, did not buy that rationale and circled back to Lubrizol to justify its decision.

The licensee’s rights were not “vaporized” but converted into a pre-petition claim for damages, the court said.

Moreover, trademark rights are a “poor candidate” for “dispensation” from the “full effects of section 365(a) rejection,” given that trademark owners have an ongoing obligation to “monitor and exercise control over the quality of the goods sold to the public under cover of the trademark,” the 1st Circuit decided.

“Trademarks, unlike patents, are public-facing messages to consumers about the relationship between the goods and the trademark owner,” Judge William J. Kayatta Jr. wrote for the 1st Circuit panel. “They signal uniform quality and also protect a business from competitors who attempt to profit from its developed goodwill.”

Still, even within the 1st Circuit’s decision in Tempnology, Judge Juan R. Torruella wrote separately, endorsing the Sunbeam approach.

The U.S. Supreme Court now must decide whether to resolve the split, and if so how.

Outcome hard to predict

Douglas Hallward-Driemeier of Ropes & Gray in Washington, D.C., who argued the case on behalf of licensor Tempnology, was circumspect about offering any sort of prediction with the decision pending.

“This case presents a significant, unresolved legal issue at the intersection of trademark law and bankruptcy,” he said in an emailed statement. “Established principles of bankruptcy law confirm a debtor’s ability to shed burdensome contracts and litigious business relationships in a reorganization. Trademark law provides for unitary ownership of trademarks by
licensors and licensor control of the branding and rebranding of trademarks.”

The 1st Circuit had recognized those principles, he added.

Other attorneys said it is hard to get a read on which way the court might be leaning — or whether it might use the escape hatch of the mootness argument.
Lawyers generally were sympathetic to a licensee who invests heavily in building a business around a license, only to have those efforts undone by a licensor’s bankruptcy. But the language of §365(n) also presents a significant — perhaps insurmountable — hurdle, they said.

A decision in the licensor’s favor “may not be right in a moral or economic sense, but it is what the statute says,” Providence bankruptcy attorney Richard J. Land said. “The way to fix the problem is to amend §365(n), not to judicially rewrite the definition of intellectual property.”

Boston trademark and copyright attorney John L. Strand said he could also understand the 1st Circuit’s concern about “ghost licenses.”

“If licensees continue to use the mark, the licensor is stuck,” Strand said. “If they don’t make the effort and use resources to police and patrol that use, there’s a risk the mark could no longer be theirs.”

Though Waltham lawyer Stanley F. Chalvire agreed that the Supreme Court may urge Congress to make a legislative fix, he said Mission Product’s argument that rejection of contract should not give the estate any more rights than it would have if it did not declare bankruptcy seemed to have struck a chord with several of the justices.

John G. Loughnane and Patrick J. Concannon, colleagues at Nutter in Boston, agreed that the intersection of the two challenging areas of law have created a thicket for the Supreme Court to fight through.

They noted that it may prove persuasive that, to the extent amici like the International Trademark Association took a position in the case, it sided with the licensee.

But that “leaves us in an awkward position, with trademark usage going on unsupervised,” Concannon said. Such unsupervised use is “difficult to reconcile with the bankruptcy interest to preserve the value of an asset.”

Though filing bankruptcy gives a debtor a right to avoid further obligations under a contract through the power of rejection, “filing bankruptcy does not typically allow the debtor to take back property that had been previously conveyed,” Loughnane said.

One could argue that the court would not have taken the case without an interest in issuing a substantive decision, but Loughnane said rendering a ruling on the basis of mootness is a distinct possibility.

“It may be now that they have heard more and read more, they punt on [the basis of] mootness,” he said.

If the Supreme Court does not extend §365(n) to provide a safety net, Concannon said the best advice for trademark licensees is to diversify exposure to possible rescission of a trademark license by having “backup plans and backup brands.” Conducting detailed, intensive due diligence on a trademark licensor to assess the risk of bankruptcy is also important, he added.

But Loughnane said that licensors and licensees need not frantically rewrite trademark agreements to gird against the Supreme Court’s decision at this point.

“No matter the result, the court should provide guidance for people going forward,” he said.

Special fabrics

Debtor Tempnology held issued and pending patents on chemical-free cooling fabrics it had developed. It produced clothing and accessories such as towels, socks and headbands that were designed to remain cool when used during exercise, which it marketed using the “COOLCORE” and “DR. COOL” trademarks.

On Nov. 21, 2012, Tempnology granted Mission Product Holdings a non-exclusive, worldwide, perpetual license to use all of Tempnology’s products, inventions, technology and designs and all of Tempnology’s IP rights, excluding trademarks. It also granted Mission a non-exclusive, nearly worldwide license to use Tempnology’s trademarks on the Tempnology products Mission sold for the term of the agreement.

The agreement further carved out a territory for Mission — primarily in the United States — in which Mission had the exclusive right to sell certain products practicing Tempnology’s patents and bearing its trademarks, including towels, wraps and hoodies.

Either party could terminate the agreement without cause, triggering a two-year wind-down period.

In June 2014, Mission exercised its right to terminate the agreement without cause, triggering the two-year wind-down period. The next month, Tempnology purported to terminate the agreement for cause, seeking to end the agreement immediately, because seven months earlier Mission had hired Tempnology’s former president, a rationale an arbitrator would ultimately reject as improper. According to the arbitrator, the agreement remained in effect through the end of the wind-down period —on July 1, 2016.

On Sept. 1, 2015, Tempnology filed a Chapter 11 petition and the next day moved to reject the agreement under §365(a), claiming that it was hindering its “ability to derive revenue by other marketing and distribution opportunities.”

Mission objected to the rejection motion and elected to retain its rights to intellectual property protected by §365(n). When the Bankruptcy Court granted Tempnology’s rejection motion, it did so subject to Mission’s election to preserve its rights under §365(n).

In response to a subsequent motion by Tempnology, the Bankruptcy Court held that, under §365(n), Mission retained its non-exclusive, worldwide license to use Tempnology’s patents post-rejection but that rejection of the agreement terminated Mission’s non-exclusive trademark license and exclusivity rights.

Mission appealed the Bankruptcy Court’s order to the Bankruptcy Appellate Panel for the 1st Circuit, which agreed that Mission did not retain its exclusivity rights post-rejection but held that rejection did not eliminate Mission’s non-exclusive trademark rights, adopting the reasoning of the 7th Circuit’s decision in Sunbeam.

A divided 1st Circuit disagreed with the BAP in part and reinstated the Bankruptcy Court’s decision, embracing Lubrizol instead.

Moot or not?

Tempnology’s mootness argument begins with the Supreme Court’s decision to decline to review whether Mission’s exclusive product distribution rights under the agreement qualified for protection under §365(n) as a patent license.

As a result, all that remains of the case is the issue of the enforceability of an expired, non-exclusive trademark license against a bankruptcy estate, Tempnology argues. Tempnology points out that Mission made no infringing sales between the rejection of the license and its expiration, a decision made in the absence of any “post-rejection interference by the estate.”

Mission had alleged several million dollars in damages from the loss of its exclusive distribution rights but never asserted a damages claim for post-rejection deprivation of its non-exclusive trademark license, Tempnology’s brief notes.

Mission argues that it “would have” attempted to market products under its trademark license but for the lower court’s orders. Tempnology counters that Mission was never enjoined from selling trademarked goods.

“Petitioner’s decision to abide by the bankruptcy court’s order affords no basis for a damages claim against the estate,” Tempnology’s brief states.

Mission says it was under no obligation to “risk contempt of court or else forfeit any damages.”

At oral argument, Justices Sonia Sotomayor and Neil M. Gorsuch pressed Hallward-Driemeier; Mission’s attorney, Danielle Spinelli; and even Assistant Solicitor General Zachary D. Tripp on the mootness issue.

Tripp, who argued in support of Misson’s position and the adoption of the Sunbeam standard, urged the court to reach the merits.

“The 1st Circuit has a damaging precedent on the books that we think really just undermines the stability and value of trademark licenses across the board,” he said.