First Circuit Rejects Seventh Circuit's Approach To Rejection Of Trademark Licenses: Licensees Retain No Post-Rejection Trademark Rights

Author:Mr Paul D. Moore and Keri L. Wintle
Profession:Duane Morris LLP

In one of the first decisions issued this year by the United States Court of Appeals for the First Circuit, the court addressed an issue of first impression. In Mission Products Holdings, Inc. v. Tempnology, LLC, n/k/a Old Cold LLC, No. 16-9016 (1st Cir. Jan. 12, 2018), the First Circuit held that the omission of trademarks from the definition of "intellectual property" in Section 101(35A) of the Bankruptcy Code, as incorporated by Section 365(n), leaves a trademark licensee with nothing more than a claim for damages upon the rejection of its license under Section 365(a). In so holding, the First Circuit joined the majority of bankruptcy courts that have addressed the issue and rejected the view adopted by the United States Court of Appeals for the Seventh Circuit.

Background on Section 365 and Trademarks

Subject to court approval, Section 365(a) of the Bankruptcy Code permits a debtor-in-possession to reject an executory contract. However, Section 365(n) affords special protection to licensees of "intellectual property," as that term is defined by Section 101(35A), in the event of rejection, provided they meet certain requirements and conditions set forth therein.

Section 365(n) was enacted in response to the Fourth Circuit's 1985 decision in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985), which held that that rejection of an intellectual property license under Section 365(a) terminated all of the licensee's rights under the license agreement and provided only for a money damages claim. In conjunction with enacting Section 365(n), Congress also amended the definition of intellectual property set forth in Section 101(35A) to include: trade secrets, patents and patent applications, plant varieties, copyrights and mask work protected under chapter 9 of title 17. It does not include trademarks. The legislative history indicates that trademarks were intentionally omitted, and congressional action "postponed," in order to allow for further study that was deemed necessary.

A majority of bankruptcy courts have inferred that the omission of trademarks from the definition of intellectual property in Section 101(35A) suggests that Congress intended not to extend the protections afforded by Section 365(n) to trademarks, thereby codifying Lubrizol with respect to trademarks. 

In Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012), the Seventh Circuit, however, took a different...

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