Does the rejection of a trademark license mean that the licensee must stop using the trademark?
The circuits are split, but the Supreme Court is being given an opportunity to resolve the question and decide whether the Fourth Circuit was right or wrong in 1985 when it handed down one of most controversial bankruptcy decision of all time, Lubrizol Enterprises Inc. v. Richmond Metal Finishers Inc., 756 F.2d 1043 (4th Cir. 1985).
The licensee of a rejected trademark license filed a petition for certiorari in the Supreme Court from the First Circuit’s opinion in January in Mission Product Holdings Inc. v. Tempnology LLC (In re Tempnology LLC), 879 F.3d 389 (1st Cir. Jan. 12, 2018). The petition is likely to be considered by the justices at their so-called long conference in late September. We may know as early as September 27 whether the high court will hear the case in the term to begin in October. If certiorari is granted, oral argument could take place in December 2018.
The Circuit Split
In Lubrizol, the Fourth Circuit held in 1985 that rejecting an executory contract for intellectual property bars the non-bankrupt from continuing to use patents, trademarks and copyrights. Congress responded three years later by adding Section 365(n) and the definition of “intellectual property” in Section 101(35A). Together, they provide 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.”
As a result of the omission of trademarks from the definition of “intellectual property,” the lower courts were split when it comes to deciding whether rejection of a trademark license precludes the licensee from continuing to use the mark. Some courts interpreted Sections 365(n) and 101(35A) as implying a legislative adoption of Lubrizol when it comes to trademarks. Other lower courts disagreed.
The Seventh Circuit was the first court of appeals to weigh in when it handed down Sunbeam Products Inc. v. Chicago American Manufacturing LLC, 686 F.3d 372 (7th Cir. 2012). The Chicago-based court disagreed with Lubrizol and 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, Circuit Judge Frank Easterbrook noted how Lubrizol has been “uniformly criticized” by scholars and commentators.
The split crystalized at the circuit level when the First Circuit handed down Tempnology in January. The majority in the 2/1 decision sided with Lubrizol and criticized Sunbeam for “largely [resting] on the unstated premise that it is possible to free a debtor from any continuing performance obligations under a trademark license even while preserving the licensee’s right to use the trademark.” The majority favored “the categorical approach of leaving trademark licenses unprotected from court-approved rejection, unless and until Congress should decide otherwise.”
The licensee filed a petition for certiorari on June 11. Counsel for the petitioner-licensee includes 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).
The Tempnology ‘Cert’ Petition
The licensee in Tempnology tells the justices in the certiorari petition that the First Circuit worsened an existing circuit split on an “openly acknowledged, and longstanding division of authority among the courts of appeals.” The petitioner says that the split “is entrenched and will not resolve itself without this Court’s intervention.”
Arguing that the First Circuit was wrong, the petitioner adopts the approach in Sunbeam by contending that rejection of an “executory contract is merely a breach,” as provided in Section 365(g). The Boston-based appeals court, it says, confused the power of rejection with the avoidance power.
In addition to Sunbeam, the petitioner finds support at the circuit level in the concurring opinion by Third Circuit Judge Thomas L. Ambro in In re Exide Technologies, 607 F.3d 957, 964 (3d Cir. 2010). Judge Ambro advocated the same result as the Seventh Circuit on much the same reasoning.
The Tempnology petition seeks high court review of a second question: Can the exclusive right to sell a product be terminated by rejection of an executory contract? In other words, is “exclusivity” an intellectual property right that is treated the same for rejection purposes as a trademark and other intellectual property?
Although the petitioner cites scholars in support of its argument that the First Circuit was wrong, there may be no circuit split. Absent a circuit split on exclusivity, the Supreme Court might grant certiorari but limit review to the Lubrizol issue.