By Dorothy Wu Chiang. A member of our Patent Practice Group
By filing for chapter 11 bankruptcy, a financially distressed company may take advantage of special ways to turn itself around and reorganize instead of liquidating its assets and going out of business. The chapter 11 debtor may, for example, petition a bankruptcy court for relief from those contracts that it deems undesirable (known as “rejecting” a contract).
In theory, freeing a company from unwanted commitments allows the debtor to devote its time to more profitable pursuits that will enable it to regroup quickly. However, bankruptcy law does not completely shortchange the debtor’s business partners; they may still sue for breach of contract and recover monetary damages, although recovery is often limited to a small residue of assets.
However, when a debtor seeks to reject a license of “intellectual property,” as that term is defined in the bankruptcy code[i], the licensee may opt to retain the granted rights.
Trademarks are absent from the bankruptcy code’s definition of intellectual property. The legislative history of the statute is unclear as to whether Congress intended to leave trademark licenses vulnerable to rejection. As a result, the effect of a chapter 11 debtor’s attempt to reject a trademark license remains uncertain, with different courts reaching different conclusions.
The First Circuit Court of Appeals recently held that chapter 11 debtors may reject trademark licenses. In re Tempnology concerns an insolvent company that made products (e.g., towels, socks, headbands) that remained at low temperatures when used during exercise. Tempnology had granted Mission Products, a marketing and distribution company, exclusive marketing and distribution rights to a group of its products and an accompanying license to use Tempnology’s trademark and logo.
The trademark agreement, in typical fashion, explicitly forbade Mission Products from using Tempnology’s trademarks inaccurately or disparagingly, and Tempnology retained the right to review and approve all of Mission Products’ use of its trademarks.
When Tempnology’s business faltered, the company filed for chapter 11 protection in bankruptcy court in Massachusetts. Attributing its dim financial outlook to Mission Products’ poor marketing efforts, Tempnology asked for court permission to reject its agreements with Mission Products.
Mission Products responded that the bankruptcy code protected both its distribution agreement and its trademark license as intellectual property licenses, leaving both in force. The bankruptcy court dismissed this characterization, concluding the distribution rights were not protectable as intellectual property rights; and that because the bankruptcy code’s definition of “intellectual property” does not include trademarks, the Tempnology trademark license was not shielded from rejection.
[i] The term “intellectual property” means—
(A) trade secret;
(B) invention, process, design, or plant ..,
(C) patent application;
(D) plant variety;
(E) work of authorship …; or
(F) mask work …
to the extent protected by applicable nonbankruptcy law.
to the extent protected by applicable nonbankruptcy law.
11 USC § 35A
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