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Rejection Hurts: Trademark Licenses and the Bankruptcy Code

Posted by on Monday, April 20, 2020 in Notes, Volume 73, Volume 73, Number 3.

Amanda E. James | 73 Vand. L. Rev. 889 |

Section 365 of the Bankruptcy Code empowers debtors to reject burdensome executory contracts. From 1988 until May 2019, the effect of such a rejection on trademark licenses was unclear. The Supreme Court’s recent decision in Mission Product Holdings, Inc. v. Tempnology, LLC settled the matter definitively: all rejections under § 365(g) operate exactly as a breach would outside the bankruptcy context. As such, if the trademark license would allow the licensee to continue using the mark after a breach, the licensee may continue to use the mark after a rejection. While this decision comports with the language of the Code and gives effect to the parties’ contracted terms, it may functionally deprive debtors of the ability to reject trademark licenses. The problem lies in trademark law’s quality control requirements, which obligate licensors to exert control over the trademark’s quality. If a debtor-licensor rejects a trademark license and then fails to exert this control—an obligation it should theoretically be relieved of by the rejection—it could face claims of naked licensing and abandonment. Because a successful abandonment claim would render the trademark much less valuable, or even worthless, bankruptcy courts may refuse to approve such a rejection on the grounds that it does not satisfy the business judgment test. As a result, debtor-licensors may be faced with an unsavory decision: pursue a rejection that does not function to relieve the estate of all its obligations, or assume the license. This Note proposes that an equitable solution is only possible with congressional intervention. Specifically, § 365 should be amended to allow licensees to retain (1) an adjusted prepetition claim to damages for breach of contract and (2) the rights and obligations, as set out in the contract’s breach provisions, to products already produced or possessed by the licensee and controlled for quality by the licensor at the time rejection is approved. The enactment of this brightline, middle-ground solution would adequately balance party interests, give effect to the parties’ negotiated breach terms, and create a more predictable structure for trademark license rejections.

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Amanda E. James