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By Daniel Gill
Non-debtor trademark licensees aren’t entitled to keep using those trademarks when a licensor Chapter 11 debtor chooses to “reject” the contract, the U.S. Court of Appeals for the First Circuit ruled in a split decision.
The Jan. 12 opinion split with the Seventh Circuit, which has held that trademark rights don’t “vaporize” when the contract is rejected.
Tempnology LLC had a contract with Mission Product Holdings Inc., providing Mission with non-exclusive licenses to certain intellectual property rights and exclusive distribution rights to some specific products.
Tempnology filed for Chapter 11 reorganization Sept. 1, 2015, and moved to “reject” many of its executory contracts, including the agreement with Mission.
An executory contract is one for which both parties still have outstanding obligations.
Debtors may reject such contracts in order to escape overly burdensome contracts. The contracts are treated as if they were breached, and the non-debtor party would have a claim against the bankruptcy estate for damages.
But for contracts licensing certain intellectual property rights, non-debtor licensees can elect to continue to use the licenses in accordance with non-bankruptcy law.
Tempnology sought a declaration that Mission’s right to use the trademark and the exclusive distribution agreement were terminated.
The First Circuit held that they were. It expressly rejected a decision by the Seventh Circuit, which held that trademark rights could survive rejection of the contract.
The Bankruptcy Code’s definition of intellectual property doesn’t include trademarks, the court held. Congress intended to exclude trademarks from Bankruptcy Code Section 365(n) because trademark licensors have a continuing obligation to monitor the exercise of their trademarks.
Judge Juan R. Torruella dissented, arguing the legislative history indicated that Congress had intended the bankruptcy courts to come up with an equitable solution to such problems.
Judge William J. Kayatta Jr. wrote for the majority, and was joined by Judge Sandra L. Lynch.
Robert J. Keach, Portland, Maine, represented Tempnology. Lee A. Harrington, Boston, represented Mission.
The case is Mission Prod. Holdings, Inc. v. Tempnology, LLC (In re Tempnology, LLC) , 2018 BL 11707, 1st Cir., No. 16-9016, 1/12/18 .
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