Trademark licenses are commonly used to exploit and protect trademark rights and to facilitate the promotion, distribution and sale of products and services. In addition to documents that are expressly identified or titled as trademark licenses, many agreements for services, manufacturing, distribution, or sales also may include less noticed trademark license provisions integrated among the other transactional provisions.

In the recent decision in Mission Product Holdings, Inc. v. Tempnology, LLC, the United States Supreme Court addressed the effect of the rejection of a trademark license by a debtor-licensor in bankruptcy.  The Supreme Court’s decision made clear that the rejection of a trademark license by a licensor in bankruptcy is not a termination of the license (in which case the licensee would no longer be able to lawfully use the marks), but is instead a breach of the license by the licensor.  The licensee of a rejected trademark license thus may “continue to do whatever the license authorizes” and continue to use the trademark subject to the obligations and restrictions imposed by the license. Alternatively, the licensee can choose to “call off the deal” and stop using the trademark. In either case, the licensee also maintains a right to sue the debtor-licensor for damages from the breach comprised of the licensor’s rejection of the license.

Impact of the Mission Product Holdings Decision

Licensors – Trademark licensors who enter bankruptcy no longer have the discretion to unilaterally terminate license agreements and licensees’ rights to use the trademark by rejecting licenses.  Instead, a licensor-debtor must weigh the value of the licensed trademark and any royalties or license fees owed under the license against the cost of maintaining the trademark by monitoring and exercising quality control over the licensee’s use of the trademark.  Licensors who reject the license and fail to continue quality control and maintenance of the trademark risk claims from the licensee for damages, as well as themselves suffering losses arising from the diminished reputation and brand, and erosion of the value that the trademarks represent as assets.  Licensors reviewing existing licenses or negotiating new trademark license terms should seek trademark license provisions that more flexibly allow terminations of the license at the licensor’s election, such as on notice or at intervals within the term of a license, as a possible escape from continuing licensing obligations in the event of bankruptcy.

Licensees - While a licensee may choose to continue to use the trademarks after rejection of a trademark license agreement by a licensor in bankruptcy, a licensee must still adhere to the terms of the license, including payment of license fees or royalties and complying with quality controls or other restrictions specified in the license.  Failing to comply with the license terms may risk losing the right to use the trademarks.  Licensees should be aware of their rights in the event of a rejection of the license by the debtor licensor in bankruptcy, as electing to continue use of the mark under the license terms, terminating the license, and possible breach damages may be available.

Conclusion

Bankruptcy courts will continue to examine license agreement provisions to determine the effect of debtor-licensor’s rejection. Trademark licensors and licensees will need to carefully consider the impact of any restructuring or reorganization on their rights and should consult with counsel to review existing trademark license agreements and provisions in light of the Mission Product decision.