Source: https://newsletter.bpla.org/spring2017-trademarks-and-bankruptcy
Timestamp: 2019-04-24 22:10:52+00:00

Document:
The BAP found Sunbeam Products’s reasoning persuasive and adopted it, concluding that while trademarks are 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.”30 Thus, the BAP determined that Mission retained whatever rights to the debtor’s trademark as it was otherwise entitled to under applicable non-bankruptcy law following a breach of the parties’ agreement. Conclusion As Tempnology demonstrates, there is no shortage of legal arguments on the effect of rejection of a trademark license in light of the fact that the Bankruptcy Code’s definition of “intellectual property” does not include trademarks. Even so, it is important to recognize that the BAP’s decision has the added benefit of placing the parties to licensing agreements in control of their rights following a breach by a debtor-licensor, though the BAP may not have the last word on this issue due to an appeal of its ruling pending before the First Circuit. In the meantime, in order to benefit from the BAP decision, trademark licensors and licensees must negotiate and agree, at the outset of a licensing transaction, upon clearly-defined rights following a breach of the license agreement by a licensor.
	559 B.R. 809 (1st Cir. BAP 2016), appeal pending (1st Cir. Case No. 16-9016). 	The Bankruptcy Code does not define the term “executory contract,” but it is widely regarded as “a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.” Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L. R. 439, 460 (1973). 	11 U.S.C. § 365(g)(1). However, § 365(g) provides different timing rules for those contracts assumed during the course of a case and subsequently rejected. E.g., 11 U.S.C. § 365(g)(2). 	For a more complete description of the relevant rules, which differ from one another in certain respects, see 11 U.S.C. § 365(h) (real property lease), (i) (real property purchaser), (n) (intellectual property license), (p) (personal property lease). 	While license agreements often constitute executory contracts under the Countryman definition of an “executory contract” discussed above in note 2, it is not always the case. However, in order to focus on the implications of rejection, this article only addresses those license agreements that are executory. 	11 U.S.C. § 365(n)(1)(A). Lessees and purchasers of a debtor’s real estate have similar rights. 11 U.S.C. § 365(h), (i). 	11 U.S.C. § 365(n)(1)(B) (parenthetical in statutory text). The licensee can also continue to use the debtor’s intellectual property for any time period during which the contract can be extended at the licensee’s election. Id. 	11 U.S.C. § 365(n)(2). 	11 U.S.C. § 101(35A). 	Mission Product Holdings, 559 B.R. at 813. 	Id. 	Id. 	Id. at 814. 	Id. 	Id. 	Id. Mission also contended that an adversary proceeding was required because a determination of its rights following a § 365(n) election was a determination of its property rights in the debtor’s intellectual property. Id. The bankruptcy court disagreed, and the BAP affirmed this ruling. 	Id. (parenthetical in original). 	Id. 	Id. 	Id. at 825. 	Id. at 819. 	Id. at 813. 	Id. at 820. 	Id. at 819. 	Id. at 820 (quoting In re Crumbs Bake Shop, Inc., 522 B.R. at 772). 	Id. at 820. 	Id. (quoting Sunbeam Products, 686 F.3d at 375). 	Id. (quoting Sunbeam Products, 686 F.3d at 376 (edit supplied by the BAP)). 	Id. (quoting Sunbeam Products, 686 F.3d at 377 (internal citations omitted; emphasis added). 	Id. at 822-23.
In Mission Product Holdings, Inc., v. Tempnology LLC (In re Tempnology LLC)1, the Bankruptcy Appellate Panel for the First Circuit recently held that a debtor-licensor’s rejection under § 365 of the Bankruptcy Code of a trademark license agreement did not “vaporize” the rights of the non-debtor licensee. As a result, if a licensee’s non-bankruptcy rights include the ability to continue to use a trademark despite the licensor’s breach, then rejection by a debtor-licensor will not automatically terminate those rights.
The BAP’s decision is important because it adopted the reasoning of Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012), which, broadly speaking, held that rejection is a breach of contract but does not terminate a trademark license or strip the non-debtor licensee of its post-breach rights under applicable non-bankruptcy law. This should provide solace for trademark licensees grappling with inconsistent judicial views of their post-rejection rights due the Bankruptcy Code’s omission of trademarks from the type of intellectual property licenses protected under § 365(n).
Even though a further appeal is pending, Tempnology is an important decision not only for bankruptcy lawyers but also for intellectual property and transactional lawyers. The decision highlights the need, at the outset of a licensing transaction, for parties to negotiate and clearly memorialize their rights and obligations in the event of a breach by the other party. Clear drafting is always important, but it takes on added significance when bankruptcy law leaves parties to their non-bankruptcy rights. Bankruptcy Code § 365’s Basics Before turning to the facts of the case, it is helpful to review a few provisions of § 365 of the Bankruptcy Code in order to understand the issues that were before the BAP.
Broadly speaking, § 365 governs the rights and obligations of debtors and executory contract counter-parties.2 For example, § 365(a) authorizes a trustee or debtor-in-possession (DIP) to assume or reject any executory contract or unexpired lease of the debtor, and § 365(g) details the effect of rejection in most instances. In particular, § 365(g) provides that “rejection . . . constitutes a breach of such contract or lease” as of the date that is “immediately before the date of the filing of the petition[.]”3 In other words, once a contract is rejected, it is as though the debtor has breached the contract and cannot be compelled to perform.
In so ruling, the bankruptcy court reasoned that (A) the licensee’s distribution rights were unrelated to the intellectual property license itself and, therefore, unprotected under § 365(n); and that (B) § 365(n) did not protect the licensee’s trademark rights because Congress excluded trademarks from the definition of “intellectual property” in § 101(35A) the Bankruptcy Code.18 The bankruptcy court rejected the reasoning of cases like In re Crumbs Bake Shop, Inc., 522 B.R. 766 (Bankr. D.N.J. 2014), which hold that it is “improper to draw a negative inference” from the omission of trademarks from § 101(35A) and that “bankruptcy courts must exercise their equitable powers on a case-by-case basis to determine whether trademark licensees may retain their rights under § 365(n).” 19 Mission appealed from the bankruptcy court’s order.
Reprinted with permission from the ABI Journal, Vol. XXXVI, No. 4, April 2017.

References: § 365
 § 365
 § 365
 § 365
 § 365
 § 365
 § 365
 § 365
 § 365
 § 101
 § 365
 v. 
 § 365
 v. 
 § 365
 § 365
 § 365
 § 365
 § 365
 § 365
 § 365
 § 365
 § 365
 § 101
 § 101
 § 365