Last month, the U.S. Supreme Court answered a question that trademark licensees have been trying to determine for more than 30 years – what happens if your licensor declares bankruptcy? The answer, as it turns out, is that a bankruptcy filing does not automatically result in termination of the trademark license.

The issue in Mission Product Holdings, Inc. v. Tempnology, LLC was whether a trademark licensee could take advantage of rights that were granted to intellectual property licensees under Section 365 of the Bankruptcy Code. Previously, trademarks were not included in defined categories of “IP” that received bankruptcy protection. Lower courts had been split on whether a trademark licensee could continue to use the trademark regardless of a licensor’s bankruptcy filing

Under the Bankruptcy Code, if the debtor (the licensor) rejects an IP license, the licensee has the following options: it can (a) elect to treat the license as terminated, and file a proof of claim for damages, or (b) it can retain its rights to use the IP under the license for the term of the license, as well as any renewal terms that might be permitted.

The First Circuit initially found against the trademark licensee in Mission Product Holdings, stating that the licensor should be released from any continuing obligations that would interfere with its reorganization, and that it should be up to Congress to expand Section 365 of the Bankruptcy Code to include trademarks. But in an 8-1 decision, the Supreme Court reversed the First Circuit’s ruling, finding that a debtor licensor’s rejection of a trademark license constitutes a breach of the license rather than a termination, and does not revoke the licensee’s rights under the trademark license.

In fact, the Supreme Court’s ruling in Mission Product Holdings actually suggests that trademark licensees may have greater rights than licensees of other types of intellectual property. Although a copyright or patent licensee must still pay royalties if the licensee chooses to retain its license rights, under Mission Product Holdings, the licensee of a trademark may actually be able to set off – or deduct – post-bankruptcy petition royalties against any damages because Section 365 does not expressly prohibit it.

Though Congress could tailor the Bankruptcy Code to address this in the future, the Mission Product Holdings decision generally marks a victory for trademark licensees, because it cements the rights of licensees of trademarks regardless of whether the debtor attempts to reject the license agreement in its bankruptcy filing. It will also likely enhance the negotiating leverage of licensees in bankruptcy cases and make it more difficult for debtors to reorganize.

Our attorneys are always ready, willing and able to meet and discuss any questions you may have. Learn more about Mansour Gavin’s Intellectual Property Group.