New Supreme Court Case Redefines Trademark Licenses During Bankruptcy

If asked to make a list of the “property” or assets that they own, the average American would include a wide range of tangible items, i.e. land, houses, cars, computers, etc. An American business would possibly expand the definition of property further to include items such as: customer lists, product designs, suppliers etc. The premise that such items can be included in the definition of “property” or “business assets” is generally accepted and acknowledged in the minds of most citizens and is reflected in the laws of the United States. Americans inherently believe these things are property.

People in the business of buying and selling companies have established methods they use to value a company or business.  However, some types of property make this process difficult, i.e. intangible things like ideas, knowledge, works of art, and skills. The value of this “intellectual property” is a concept rife with nebulous definitions and can be as changeable as the patterns of human thought. It is no wonder that legal decisions associated with intellectual property can seem confusing to the uninitiated.  

The Supreme Court of the United States (SCOTUS) issued such a decision on May 20, 2019 in Mission Product Holdings Inc. v. Tempnology, LLC, No. 17-1657.  This decision changes the way a trademark license is viewed in the event of the bankruptcy of the trademark owner.

The Court explained:

“Section 365 of the Bankruptcy Code enables a debtor to “reject any executory contract”—meaning a contract that neither party has finished performing. 11 U. S. C. §365(a). The section further provides that a debtor’s rejection of a contract under that authority “constitutes a breach of such contract.” §365(g).

Today we consider the meaning of those provisions in the context of a trademark licensing agreement. The question is whether the debtor-licensor’s rejection of that contract deprives the licensee of its rights to use the trademark. We hold it does not. A rejection breaches a contract but does not rescind it. And that means all the rights that would ordinarily survive a contract breach, including those conveyed here, remain in place.”

Despite the media hype, the specifics of most decisions by the SCOTUS, are only interesting to the average person in the light of how it might affect them. Every small business owner dreams of their brand growing; perhaps, even to the point that others would like to license it. When that happens, a business owner’s position changes from making money based on the number of hours worked (which are limited) to making money based on the reputation of a brand (which is limitless). Conversely every small business owner has nightmares about having to declare bankruptcy. Unfortunately, bankruptcy is an all too common reality when trying to establish a business in any market. This Supreme Court ruling essentially tells those business owners who are licensing a trademark to others, that declaring bankruptcy does not automatically cancel that license.

It seems simple enough, but essentially it changes how owning a trademark is viewed as a business asset. A trademark license, that is not automatically considered fully cancelled with a bankruptcy, can leave the owner with limited choices. A trademark is much less valuable to creditors if it is entangled in licensing contracts. Essentially if the owner can’t or won’t spend the necessary money to maintain and monitor the trademark effectively, the licensee has free reign to use the trademark within the bounds of the original contract.   

When asked about the long-term effects of this SCOTUS decision, Trademark Attorney Steve Bean of Legends Law Group, PLLC explained that “In light of this decision of the Supreme Court a Licensor (or Trademark owner) may want to put express provisions that require termination of a license agreement in the event that the licensor becomes bankrupt. However, this will become an additional point of negotiation in license agreements.”

Owning a small business requires understanding and knowledge of just about everything.  Entrepreneurs face an uphill battle, because no one can have experience with everything that a business will face. Intellectual property is something that the average American does not really understand, yet it is so important. Experienced legal counsel has always been valuable, but it is often overlooked as an optional cost when a business is starting out. This new SCOTUS decision will perhaps highlight the need for a good relationship with a trusted intellectual property attorney. If a small business owner dreams of being paid for their thought, vision, and ideas, the last thing they want is for that same intellectual property to become a liability.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.