A case from the bankruptcy court in Connecticut may allow the Second Circuit to take sides in a circuit split on the question of whether rejection of an executory contract bars the licensee from continuing to use a trademark license.
However, the Supreme Court may resolve the split before the issue ever reaches the Second Circuit if the justices grant certiorari to review this year’s First Circuit decision in Mission Product Holdings Inc. v. Tempnology LLC (In re Tempnology LLC), 879 F.3d 389 (1st Cir. Jan. 12, 2018). A final appeal in Tempnology would enable the high court to expound on the effects of rejecting executory contracts while either upholding or rejecting the Fourth Circuit’s controversial opinion in Lubrizol Enterprises Inc. v. Richmond Metal Finishers Inc., 756 F.2d 1043 (4th Cir. 1985).
The Connecticut Case
Bankruptcy Judge James J. Tancredi confronted a typical intellectual property dispute with a few twists. Basically, the chapter 7 debtor owned and licensed software and accompanying trademarks. The trustee filed a motion to reject a software and trademark license agreement where the licensee had ambiguous exclusivity rights in the technology.
The trustee argued that the technology would fetch a considerably higher price at a later bankruptcy sale if rejection would preclude the licensee from using the technology and trademarks.
The licensee effectively conceded the trustee’s right to reject the contract but elected under Section 365(n) to continue using the “intellectual property,” as that term is defined in Section 101(35A).
In his May 17 opinion, Judge Tancredi aligned himself with the Seventh Circuit in the circuit split by holding that rejection did not “abrogate” the licensee’s right to use the trademarks or to enforce its exclusivity rights.
The Circuit Split
Judge Tancredi traced the tortured history in case law dealing with the rejection of executory contracts licensing intellectual property.
In Lubrizol, the Fourth Circuit held in 1985 that rejecting an executory contract for intellectual property barred the non-bankrupt from continuing to use patents, trademarks and copyrights. Congress responded three years later by adding Section 365(n), which, together with the definition of “intellectual property” in Section 101(35A), provides that the non-debtor can elect to continue using patents, copyrights and trade secrets despite rejection of a license.
The amendment omitted reference to trademarks. The Senate Report said that the amendment did not mention trademarks because the issue “could not be addressed without more extensive study.” In the meantime, Congress said it would “allow the development of equitable treatment of this situation by bankruptcy courts.”
Later, courts went in two directions. One camp takes a negative inference from the omission of trademarks from Section 365(n) and holds that rejection terminates the right to use a trademark, even though the licensee could elect to continue using patents covered by the same agreement.
In Sunbeam Products Inc. v. Chicago American Manufacturing LLC, 686 F.3d 372 (7th Cir. 2012), the Seventh Circuit split with the Fourth in 2012 when Judge Frank Easterbrook held that rejection “constitutes a breach” of contract under Section 365(g). Outside of bankruptcy, he said, a licensor’s breach would not preclude the licensee from continuing to use a trademark. He held that “nothing about this process [of rejection] implies that any other rights of the other contracting party have been vaporized.” Holding that the right to use the trademark was not terminated by rejection, he noted how Lubrizol has been “uniformly criticized” by scholars and commentators.
In his concurrence in In re Exide Technologies, 607 F.3d 957, 964 (3d Cir. 2010), Third Circuit Judge Thomas L. Ambro reached the same result as the Seventh Circuit on much the same reasoning.
Sunbeam and Exide did not turn the tide, because the First Circuit resurrected Lubrizol early this year in Tempnology, when the majority on a panel from the Boston-based appeals court held that rejection of a trademark license agreement precludes the licensee from continuing to use the mark.
In Tempnology, the losing side sought and obtained an extension of time to file a petition for certiorari in the Supreme Court. The deadline to file the petition is June 11. Evidently serious about going up, the petitioner has retained Danielle Spinelli, a former Supreme Court clerk who argued on the winning side in two recent bankruptcy cases: Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017), and Clark v. Rameker, 134 S. Ct. 2242 (2014).
Judge Tancredi Sides with the Seventh and Third Circuits
Judge Tancredi said that Tempnology “is plainly contrary to Congress’ explicit efforts to rebalance affected rights on intellectual property and leave Section 365(g) to answer otherwise unresolved trademark issues.” Judge Tancredi said he would align himself with the Seventh Circuit and the “plain reading of Section 365(g).” Quoting a bankruptcy judge in New York, he said that rejection “‘does not make the contract disappear.’”
Under Connecticut law, Judge Tancredi said that rejection of the license would not be a material breach because taking the election under Section 365(n) preserved the licensee’s intellectual property and exclusivity. Therefore, he said, “the core of the bargain and substantial purpose of the License Agreement has been preserved.”
Judge Tancredi held that the licensee’s election under Section 365(n) preserved its exclusive rights to use the technology. He also held that “all royalty and payment provisions . . . remain in full force and effect.”
Given the stark disagreement among the circuits on a controlling issue of law, the trustee in Judge Tancredi’s case might request a direct appeal to the Second Circuit. However, the Supreme Court may resolve the split before the Second Circuit takes sides.
To read ABI’s discussion about Tempnology, click here.
A case from the bankruptcy court in Connecticut may allow the Second Circuit to take sides in a circuit split on the question of whether rejection of an executory contract bars the licensee from continuing to use a trademark license.