Mission Product Holdings Inc. v. Tempnology, LLC

EFFECT OF REJECTION ON CONTRACTUAL RIGHTS

Mission points out that, under the plain text of Section 365(g) of the Code, rejection of an executory contract constitutes a breach of that contract. While acknowledging that such rejection releases the bankruptcy estate from future performance, Mission argues that rejection does not eliminate every contractual obligation or the non-breaching party’s contractual rights. Because Section 365(g) treats the contractual breach as occurring prior to the petition for bankruptcy, Mission claims that a breach arising from rejection is no different than a contractual breach outside of the bankruptcy context. Mission therefore concludes that rejection does not alter the parties’ “non-bankruptcy rights.” Mission accordingly argues that, because a licensor’s breach in a non-bankruptcy setting does not eliminate a licensee’s entitlement to use licensed intellectual property, Mission’s right to use Tempnology’s intellectual property here is not affected by Tempnology’s rejection of the parties’ license agreement.

Mission furthermore posits that rejection is not equivalent to the power of avoidance, which, according to Mission, is the only means by which a bankruptcy estate can completely unwind a contract. Mission states that avoidance is available in only limited circumstances under the Code, such as with fraudulent conveyances under Section 548 and preferences under Section 547(b). Mission argues that a rejection under Section 365(g) is not an avoidance because the plain text of Section 365 speaks only to future performance and is silent on asset ownership. It would go against “basic principles of statutory construction,” claims Mission, to view Section 365 as containing an “implied avoiding power.”

In response, Tempnology argues that rejection of an executory contract renders the entire contract unenforceable, leaving the counterparty with only a pre-bankruptcy petition claim for damages. Tempnology states that a rejection is not piecemeal—no contractual provisions survive rejection. It is improper to equate rejection with the general concept of contractual breach outside the bankruptcy setting, Tempnology claims, because rejection is a power unique to bankruptcy that is only available to a bankrupt party. Tempnology therefore concludes that rejection does change the other party’s “non-bankruptcy” rights by converting them into a claim for monetary damages. This claim for monetary damages, Tempnology contends, is the only right available to the counterparty unless there is an express statutory exception. Tempnology argues that Section 101(5) of the Code defines “claim” so broadly that it covers “any conceivable” contractual damages, even damages that are “unmatured” or difficult to quantify. This broad definition, Tempnology maintains, indicates that monetary damages are the sole remedy for rejection.

Tempnology also contends that Mission mischaracterizes rejection as avoidance. Unlike avoidance, which, according to Tempnology, completely eliminates all contractual rights, rejection simply converts those rights into a claim for damages. In other words, Tempnology explains, avoidance “unwinds” a contract by restoring the parties to the status quo that existed prior to the contract. Because rejection leaves the counterparty with a claim for damages, Tempnology asserts, rejection cannot undo a contract in the way that avoidance does. Furthermore, Tempnology continues, avoidance and rejection have different purposes: avoidance enables a bankruptcy estate to recuperate certain transfers while rejection allows an estate to relieve the debtor from detrimental obligations.

A STATUTORY EXCEPTION FOR TRADEMARK LICENSES?

Mission claims that the Code’s Section 365(n) safe harbor, which specifically protects a licensee’s rights to use intellectual property post-rejection, can include licenses to use trademarks. Although Mission concedes that “intellectual property,” as defined in Section 101(35A), does not expressly mention trademarks, Mission contends that this omission does not mean that trademark licensees find no protection under Section 365(n). According to Mission, the legislative history behind Section 365(n) merely indicates that Congress was unsure of whether to include trademark licenses within the Section 365(n) safe harbor. The purpose of a safe harbor provision, Mission continues, is to address a specific ambiguity in the law; a safe harbor is not meant to “rewrite the entire statute.” Mission thus argues that it would be inappropriate to draw the “negative inference” that a trademark licensee’s rights terminate with rejection. If this were the case, Mission claims, then a trademark licensor’s rejection of a license agreement would be tantamount to avoidance. Endowing rejection with this avoidance power, Mission states, is simply too far a leap.

Tempnology counters that a contractual right survives rejection only if there is an express statutory exception to the general rule of Sections 365(a) and 365(g) that rejection terminates all contractual rights. While acknowledging that Congress has created more statutory exceptions over time, Tempnology argues that these exceptions have always been narrowly tailored. Moreover, Tempnology states that Congress has enacted these exceptions by creating new subsections to Section 365—not by altering the general rule. Tempnology asserts that this method of legislative action reinforces the general rule that rejection renders a contract unenforceable. Furthermore, Tempnology argues that the Section 365(n) exception for intellectual property is not applicable to trademark licenses. According to Tempnology, the legislative history indicates that that Congress intentionally excluded trademark licenses from protection under Section 365(n). Tempnology thus concludes that there is no exception for trademark licenses. Moreover, Tempnology contends, it is not the Court’s place to recognize new exceptions absent congressional approval. Doing so, Tempnology states, would upset the “carefully balanced” scheme of Section 365.

TRADEMARK LICENSOR OBLIGATIONS

Mission argues that a trademark licensor’s obligation to protect its trademarks is independent of any contractual obligations arising from a trademark licensing agreement. Rather, Mission contends that a licensor’s obligation to protect its trademarks, such as by monitoring the quality of goods that a licensee sells using the trademark arises from trademark law. Mission accordingly claims that a licensor owes no quality control “performance obligation” to any licensee, unless a licensing agreement itself makes such an obligation contractual. Mission therefore concludes that a bankrupt licensor’s rejection of a trademark licensing agreement does not actually change the licensor’s obligations to protect its trademarks. If that is the case, Mission continues, then it should not matter whether a licensee’s trademark rights survive rejection: regardless, the licensor still has the obligation to “preserve the value of its mark.” Mission points out that a licensor undertakes this obligation for its own benefit, and that this obligation is not made compulsory were a licensee’s rights survive rejection. In any event, Mission claims, a licensor’s quality control monitoring obligation does not represent a significant hardship; trademark licensees are equally incentivized to protect the value of licensed trademarks.

In response, Tempnology claims that allowing a trademark licensee’s rights to survive rejection undermines the purposes of the Code. Tempnology asserts that the “basic purpose” of reorganizing under Chapter 11 is to rehabilitate the distressed company, and that terminating burdensome contracts facilitates this rehabilitation. If a trademark licensee’s rights survive rejection, Tempnology continues, then the licensor would have greater difficulty repositioning itself in the marketplace. Furthermore, Tempnology states that a bankruptcy estate cannot simply reject any contract automatically; a bankruptcy court must approve the rejection. Tempnology argues that this backstop prevents rejections that would cause “undue hardship” to counterparties. In any case, Tempnology contends, the Lanham Act, codified at 15 U.S.C. §§ 1051 et seq., makes it impossible to carve out property interests from trademarks. Tempnology claims that this principle of “unified ownership” means that a trademark can only have one owner. Furthermore, Tempnology argues that its licensing agreement with Mission explicitly stated that the license did not constitute a transfer of a property interest. Tempnology also posits that a trademark owner may license a mark only if the licensor maintains quality control over goods sold using the licensed trademark. Absent this quality control obligation, Tempnology maintains, there is no license.