When your licensor is in financial difficulty

“As more and more companies with intellectual property licenses (and in particular trademarks) are forced to move to Chapter 11 due to the ongoing pandemic, we expect to see more Chapter 11 debtors seeking to renegotiate trademark licensing agreements or sell rights to such agreements, rather than rejecting them outright.

Your business and its business have been built around the strength of a trademark license from a third-party licensor. You have invested a lot in the brand.

Now, however, your trademark licensor is in financial trouble. Bankruptcy is not beyond the realm of possibility. Perhaps the licensor has asked to renegotiate the terms of the trademark license or has threatened to terminate the license once a Chapter 11 bankruptcy filing is filed. What are the respective rights of the licensor of the trademark in difficulty and of your company, as owner of the trademark, in this situation? Does your business risk losing everything it has invested in relying on the license?

the mission product Decision

Fortunately, the Supreme Court decision in Mission Product Holdings Inc.. v. Tempnology, LLC made it more difficult for licensors to terminate a Chapter 11 trademark license. The Supreme Court ruled in mission product that if you hold a trademark license from a Chapter 11 debtor-licensor under a contractual license agreement, you may continue to use that license, subject to the terms of the license agreement, even if the debtor -grantor seeks to dismiss the underlying agreement in bankruptcy. 139 S.Ct. 1652 (2019).

The United States Bankruptcy Code permits a corporation in Chapter 11 (that is to saythe “debtor”) to “assume” or “reject” contracts or agreements (referred to as “enforceable contracts”), including license agreements, in bankruptcy. See 11 USC § 365.

When a debtor decides to “assume” a license agreement, the debtor determines that the agreement (including the license thereunder) is beneficial to the debtor and, therefore, agrees to continue to perform This agreement. Under Section 365(b) of the Bankruptcy Code, in order to presume a license agreement, the debtor is required to remedy previous breaches under the agreement and also to provide “adequate assurance” that it will be able to comply with the terms of the agreement for the remainder of the term of the license agreement. After obligor’s assumption, the licensor and licensee remain contractually bound by the license (and related agreement).

Alternatively, a debtor can “reject” the license agreement. Under the Bankruptcy Code, denial of a license is treated as a substantive offense (but not termination) of the license agreement. Following the rejection of the license, neither party is obligatory to continue to operate under the terms of the license agreement, except as described below.

The Supreme Court explained in Mission Product that because rejection of a contract in bankruptcy “constitutes a breach”, just as outside of bankruptcy, breach of a license agreement by a licensor does not terminate a licensee’s right to use licensed intellectual property, the same applies in the event of bankruptcy. Mission products, 139 S.Ct. to 1662-63. Therefore, notwithstanding the rejection of a license agreement, “the licensee may continue to do whatever the license authorizes”. Identifier. at 1663. The Court also noted that a Chapter 11 debtor “cannot own anything more than the debtor himself outside of the bankruptcy”; therefore, if the debtor outside the bankruptcy had no right to revoke the license of the non-debtor contractual counterparty (absent the licensee’s defaults under the license), nor the filing of balance sheet nor article 365 of the Bankruptcy Code extend to these rights. Identifier.

The non-debtor party has a option treat rejection of the license agreement as termination. If the Non-Debtor Licensee chooses to treat the License as terminated, then it will be excused from continuing to perform under the License.

Before mission product cases, the law was unclear as to whether a debtor-licensor could reject a trademark license agreement and thus seek a more lucrative licensee partner or sell its trademark license to a higher bidder. Some courts had previously treated the “dismissal” of an enforceable contract as akin to Termination of this Agreement and the Counterparty’s rights (including trademark rights) under it. However, the Supreme Court of mission product clarified that the rejection of an enforceable contract is akin to breaking such a contract outside of bankruptcy.

The post office-Mission Countryside

What are the implications of the debtor licensor’s rejection of the trademark license agreement aftermission product? As noted, the mission product The Court concluded that the rejection of such a license is only considered an infringement but does not terminate the rights of the licensee in the underlying mark. As another court explained, “nothing about it [contract rejection] process implies that all other rights of the other contracting party have been evaporated. ” See Sunbeam Products, Inc. v. American Manufacture of Chicago, LLC686 F.3rd 372 (7and Cir. 2012). In other words, a debtor’s refusal of a trademark license agreement is a contractual breach of the license, but it is not a termination of the license. A licensee’s rights to debtor’s mark after rejection are governed by the terms of the agreement and by bankruptcy law. Rejection “only releases the estate from the obligation to perform and has absolutely no effect on the durability of the contract”.

When a debtor licensor rejects a trademark license agreement, the licensee may seek damages. However, this claim is deemed to be a pre-bankruptcy general unsecured claim (even if the rejection occurs after bankruptcy is filed). Unfortunately, general unsecured claims in bankruptcy cases are usually only worth a fraction of the amount of the claim.

In the event of refusal of a contract, the debtor generally ceases to perform his obligations under the license contract. Thus, even if the licensee is authorized to continue to use the mark, the debtor is released from all other obligations arising from the license agreement, such as the obligation to provide technical and other support. Licensor may also be left without legal recourse to require Licensor to fulfill such support obligations.

If failure to continue to support the Trademark License under a Rejected Agreement constitutes a material breach of the License Agreement, Licensee has the option to cease performance under the License Agreement. and/or retain continued use of the mark under the license. (because the license existed immediately before the violation) and fend for itself.

The Supreme Court’s decision in mission product increases a trademark licensee’s bargaining power, since a debtor-licensor is unable to view the rejection of a license agreement as a revocation of the underlying license, even in Chapter 11. However , the ability of the licensee to continue to use the mark without the debtor’s neglect of quality control may result in a decrease in the value of the mark to the licensor. Accordingly, insolvent licensors may be better served by negotiating either an outright sale of the mark to the licensee or a mutual termination of the license. As more companies with IP (and especially trademark) licenses are forced to move to Chapter 11 due to the ongoing pandemic, we expect to see more Chapter 11 debtors seek to renegotiate trademark license agreements or sell rights related to such agreements. , rather than rejecting the agreements outright, since rejection will not eviscerate a previously granted trademark license (as some courts have already ruled). Rejection may only relieve a debtor of onerous obligations related to an underlying trademark license agreement, but it does not generate necessary cash for a debtor.

Key tips for licensees

What should a trademark licensee do to best protect themselves? To begin with, a licensee must monitor the financial health of its brand licensor. During the initial negotiation of the license, it is necessary to anticipate the consequences of a refusal by the licensor and to negotiate specific conditions in order to mitigate the consequences of a refusal as much as possible. Issues to be addressed include quality control, product approval, promotion and the right to compensation for damages. The parties can also negotiate liquidated damages clauses.

As noted, in the event of bankruptcy proceedings initiated by the licensor, the debtor’s assets are often sold to third parties. Licensees should monitor any sales process and communicate with potential buyers of the Trademarks and associated Trademark License Agreements (any prudent buyer performing due diligence will certainly want to speak with Trademark Holders). Whether or not there is a sale or the debtor attempts to reorganize, the trademark owner should also communicate directly with the debtor regarding any mutually beneficial changes to the license agreement. Close monitoring of the bankruptcy case, including any Chapter 11 sale process, is essential to ensure that the rights of the licensee are not restricted or inappropriately affected by the bankruptcy process. , including any order made by the bankruptcy court that may ultimately bind the Licensee. due to the Holder’s failure to object to certain court-awarded remedies. Finally, licensees may also consider purchasing the trademark (and all related rights under the trademark license agreement) in the event of the licensor’s insolvency or bankruptcy.

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Sarah J. Greer