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Debtor’s Rejection of Distribution Agreement Does Not Eliminate Licensee's Trademark Rights: 1st. Cir. Bankr.
Practical Law Legal Update w-004-8446 (Approx. 4 pages)
Debtor’s Rejection of Distribution Agreement Does Not Eliminate Licensee's Trademark Rights: 1st. Cir. Bankr.
by Practical Law Intellectual Property & Technology
| Published on 05 Dec 2016 • USA (National/Federal) |
In In re Tempnology LLC, the US Bankruptcy Appellate Panel of the First Circuit held, among other things, that while the debtor's trademark and logo were not entitled to special protection under section 365(n) of the Bankruptcy Code, the debtor's rejection of a co-marketing and distribution agreement did not eliminate the licensee's trademark rights under the agreement, but that the agreement and non-bankruptcy law determine the licensee's rights in the debtor’s trademark and logo.
On November 18, 2016, in In re Tempnology LLC, the US Bankruptcy Appellate Panel of the First Circuit reversed in part the US Bankruptcy Court for the District of New Hampshire's ruling that a distributor's rights in the debtor's trademark and logo terminated on the debtor's rejection of the parties' co-marketing and distribution agreement ( (B.A.P. 1st Cir. Nov. 18, 2016)).
The appellate panel held that while debtor Tempnology LLC's trademark and logo were not entitled to special protection under section 365(n) of the Bankruptcy Code, the rejection did not eliminate the distributor's (Mission Product Holdings, Inc.'s) trademark rights under the agreement. Instead, the agreement and non-bankruptcy law determine Mission's rights in Tempnology’s trademark and logo. The appellate panel further affirmed in part all other aspects of the bankruptcy court's order.
Previously, in November 2015, the district bankruptcy court also held, among other things, that:
- Mission's exclusive product distribution rights were not protected by its section 365(n) election.
- Tempnology's section 365(n) motion did not require Tempnology to commence an adversary proceeding.
In its decision, the appellate panel expressly rejected Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985) and followed Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372, 377 (7th Cir. 2012). In Sunbeam, the US Court of Appeals for the Seventh Circuit held that the debtor's rejection of a trademark license, which was part of a supply agreement concerning the manufacture and sale of electric fans by a third party, did not automatically terminate the licensee's right to use the debtor's trademarks. Specifically, the Seventh Circuit concluded that it was more appropriate to focus on section 365(g), which sets out the consequences of a rejection under section 365(a), and held that:
- The rejection of an executory contract is a breach of the agreement, rather than an automatic termination of trademark rights.
- By classifying the rejection as a breach, the non-rejecting party's rights remain in place and the rejection has no effect on the agreement's continued existence.
Applying Sunbeam's rationale, the appellate panel held that while the section 365(n) definition of intellectual property excludes special protection for trademarks, and Mission's rights in the debtor's trademark and logo were not protected by its section 365(n) election, Tempnology's rejection of the agreement did not eliminate Mission's trademark rights under the agreement. Rather, the agreement and non-bankruptcy law determine Mission's rights in Tempnology's trademark and logo.