Source: https://bankruptcy.cooley.com/
Timestamp: 2019-04-21 00:30:17+00:00

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The total debt amount in the definition of small business debtor in Section 101(51D) will rise to $2,725,625.
Other adjustments will affect consumers more than business debtors. For example, the debt limit for an individual to qualify for a Chapter 13 bankruptcy case will rise to $1,257,850 of secured debt, and certain exemption amounts will also increase.
Although the changes aren’t that large, be sure to keep them in mind when assessing cases filed after April 1, 2019. Official bankruptcy forms will likely be updated as April 1st draws near.
The Big Question. What is the effect of rejection of a trademark license by a debtor-licensor? Over the past few years, this blog has followed the Tempnology case out of New Hampshire raising just that issue. The case has gone from the bankruptcy court, to the Bankruptcy Appellate Panel, and then to the First Circuit. Last August, I wrote about how the case could be headed to the Supreme Court. In late October, the Supreme Court granted review and has set oral argument for February 20, 2019.
A Supreme Court Preview Article. In anticipation of next week’s oral argument, I wrote an article on the case and it’s just been published by the American Bar Association’s Supreme Court Preview publication, which as its name implies previews each pending case coming up on the Supreme Court’s calendar.
The new article discusses the key facts, issues, and arguments presented by the parties and amici to the Supreme Court, along with background on the legal context and potential significance of the case.
For a detailed look at the case and these issues, you can access the full article using this link.
The bankruptcy court in Tempnology followed the Lubrizol decision and held that Tempnology’s rejection terminated the rights of the licensee, Mission Products Holdings, to use the trademarks.
On appeal, the First Circuit Bankruptcy Appellate Panel reversed, following Sunbeam and not Lubrizol.
Then, on further appeal, the First Circuit Court of Appeals went the other way, unequivocally following Lubrizol and not Sunbeam.
Amicus Brief of the New York Intellectual Property Law Association.
Is Rejection Just A Breach Or Something More? Sifting through all the arguments, the key issue is what effect rejection of an executory contract under Section 365 has on the counterparty’s rights. Does rejection function merely as a breach that frees the estate from future affirmative performance obligations? Or, does it render the contract unenforceable by the counterparty—other than the right to file a pre-petition rejection damages claim under Section 502(g)—thereby terminating all other rights and remedies under the rejected contract absent a statutory exception like Section 365(n)? If the former, the Supreme Court will likely reverse and endorse the Sunbeam approach or something similar. If the latter, it will likely affirm and adopt the Tempnology/Lubrizol approach.
Oral Argument Is February 20th. At the February 20th oral argument, the two parties, and the United States, have been allocated time to argue. Stay tuned for what could be a very interesting oral argument—and of course, ultimately the Supreme Court’s decision.
The In re Tempnology LLC bankruptcy case in New Hampshire has produced yet another important decision involving trademarks and Section 365(n) of the Bankruptcy Code. This time the decision is from the United States Bankruptcy Appellate Panel for the First Circuit (“BAP”). Although the BAP’s Section 365(n) discussion is interesting, even more significant is its holding on the impact of rejection of a trademark license. The decision is also further evidence of the continuing trend of courts seeking ways to protect trademark licensees in bankruptcy.
Before we get ahead of ourselves, let’s take a quick look back at the Bankruptcy Court’s decision.
The Bankruptcy Court’s Decision. Just about a year ago the New Hampshire Bankruptcy Court issued a decision involving the effects of rejection by the debtor, Tempnology LLC, of a Co-Marketing and Distribution Agreement (“Agreement”). In re Tempnology, LLC, 541 B.R. 1 (Bankr. D.N.H. 2015). In the Agreement, Tempnology had granted Mission Product Holdings, Inc. (“Mission”) (1) a non-exclusive license to certain of Tempnology’s copyrights, patents, and trade secrets, (2) an exclusive right to distribute certain cooling material products that Tempnology manufactured, and (3) an associated trademark license. With one of its first motions in the bankruptcy case, Tempnology rejected the Agreement.
The Bankruptcy Court held that the non-exclusive license to Tempnology’s copyright, patent, and trade secret rights was a license of “intellectual property” as defined in Section 101(35A) of the Bankruptcy Code, and that Mission’s rights to continue to use that IP was protected under Section 365(n). However, the exclusive distribution rights were not “intellectual property” under Section 101(35A) and the Bankruptcy Court held Mission’s distribution rights were not protected under Section 365(n).
In considering the impact of rejection, the Bankruptcy Court followed the 1985 decision in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985). The Bankruptcy Court held that due to the rejection of the Agreement, Mission lost both the exclusive distribution rights and the trademark license rights.
Why No Mention Of The Seventh Circuit’s Sunbeam Decision? In that earlier post, I noted that given Circuit level decisions over the last few years involving trademarks and bankruptcy, it was interesting that the Bankruptcy Court’s decision did not mention the Seventh Circuit’s 2012 decision in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 382 (7th Cir. 2012).
In Sunbeam, the Seventh Circuit expressly rejected the Lubrizol decision and its analysis of the effects of rejection (follow the link for a full discussion of the Sunbeam decision). In contrast to Lubrizol, the Sunbeam court held that rejection is a breach by the debtor and does not terminate the agreement or the rights of the non-breaching party.
As a result, the Seventh Circuit allowed the non-debtor trademark licensee to continue using the licensed trademarks despite rejection of the trademark license.
At the time I speculated that if the Bankruptcy Court in the Tempnology case had applied the Sunbeam decision, the result might have been different.
The Bankruptcy Appellate Panel Decision. Mission appealed the Bankruptcy Court’s decision to the BAP. On November 18, 2016, the BAP issued its decision, affirming in part and reversing in part the Bankruptcy Court’s decision. Follow this link for a copy of the BAP’s November 18, 2016 decision.
The BAP also affirmed the Bankruptcy Court’s decision that Section 365(n) did not protect Mission’s rights as a trademark licensee, ruling that the Bankruptcy Court had corrected held that Section 101(35A)’s definition of “intellectual property” excludes trademarks.
On the trademark point, Mission urged the BAP to follow the equitable approach that Judge Ambro had suggested in his concurring opinion in the Third Circuit’s decision in In re Exide Techs., 607 F.3d 957 (3d Cir. 2010), which would let bankruptcy courts fashion equitable protections for trademark licensees. The BAP declined to follow either that approach or the one taken by the New Jersey Bankruptcy Court in In re Crumbs Bake Shop, 522 B.R. 766 (Bankr. D.N.J. 2014), which had effectively applied Section 365(n) to trademarks.
For more on the Crumbs Bake Shop and Exide Techs. decisions, take a look at this earlier post.
The BAP Discusses, And Then Follows, Sunbeam. Had the BAP stopped there, it would have affirmed the Bankruptcy Court’s holding. The BAP, however, did not stop there. Instead, it considered the Sunbeam decision and ultimately followed its analysis on the effect of rejection on a trademark license agreement. In so doing, the BAP became the first appellate court outside the Seventh Circuit to adopt the Sunbeam decision’s rejection analysis.
We must part company with the bankruptcy court, however, on the effect the Debtor’s rejection of the Agreement had on Mission’s licensee rights in the Debtor’s trademark and logo. The bankruptcy court ruled that, because the Debtor’s trademark and logo were not protected by Mission’s election under § 365(n), Mission did “not retain rights to the Debtor’s trademarks and logos post-rejection.” This conclusion endorses Lubrizol’s approach to the rejection of executory contracts, namely that rejection terminates the contract. Lubrizol, however, is not binding precedent in this circuit and, like the many others who have criticized its reasoning [footnote omitted], we do not believe it articulates correctly the consequences of rejection of an executory contract under § 365(g). We adopt Sunbeam’s interpretation of the effect of rejection of an executory contract under § 365 involving a trademark license.
Applying Sunbeam’s rationale, we conclude that, while the Debtor’s trademark and logo were not encompassed in the categories of intellectual property entitled to special protections under § 365(n), the Debtor’s rejection of the Agreement did not vaporize Mission’s trademark rights under the Agreement. Whatever post-rejection rights Mission retained in the Debtor’s trademark and logo are governed by the terms of the Agreement and applicable non-bankruptcy law.
Thus, we conclude that the bankruptcy court did not err in ruling that Mission’s § 365(n) election failed to protect its rights under the Agreement as licensee of the Debtor’s trademark and logo, but it erred in ruling that Mission’s rights in the Debtor’s trademark and logo as set forth in the Agreement terminated upon the Debtor’s rejection of the Agreement.
Aside from the right to use the licensed trademarks, does the licensee keep other rights under the trademark license, such as exclusivity if applicable?
Does the licensee have rights to use the trademarks for the full term of the license agreement plus any extensions, or some shorter period?
If payment of royalties is required under a trademark license, must the trademark licensee continue to pay them post-rejection to use the licensed trademarks, as an IP licensee covered by Section 365(n) is required to do?
Can the trademark licensee instead argue that rejection is a material breach by the debtor and excuses the obligation to pay royalties?
Under Sunbeam and Tempnology, if rejection does not terminate trademark license rights, is the same true for intellectual property licenses other than trademarks, such as patents and copyrights, covered by Section 365(n)?
Is the Section 365(g) analysis of Sunbeam and Tempnology just limited to trademark license rights? Can a non-debtor party to an executory contract argue that other of its contract rights are also preserved, as long as they don’t impose affirmative performance obligations on the debtor? If so, in Tempnology, would that extend to Mission’s exclusive distribution rights?
Are licensees of patents, copyrights, or trade secrets, otherwise protected by Section 365(n), required to follow Section 365(n)’s statutory scheme to retain their rights, or can they rely on the analysis in Sunbeam and Tempnology as a complete alternative?
How will purchasers of trademarks and other assets react to the potential continued use of trademarks by licensees under rejected trademark licenses?
Conclusion. The BAP’s Tempnology decision marks the first time an appellate court other than the Seventh Circuit has applied the Sunbeam analysis to a trademark license.
It remains to be seen if other courts will start to follow suit or, alternatively, if the Lubrizol decision’s approach to the consequences of rejection will continue to hold sway.
If many courts followed the Sunbeam/Tempnology approach and rejected Lubrizol, the omission of trademarks from Section 365(n) protection could matter less than in the past. In addition, the license agreement’s provisions governing the licensee’s rights upon the licensor’s breach could become much more significant.
Given the broad implications of the Lubrizol/Sunbeam split on rejection of executory contracts, and especially on trademark licenses, be sure to stay tuned.

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