United States: The Supreme Court Decision Mission Product Holdings, Inc. v. Tempnology, LLC Has Broad Implications For Licenses And Other Agreements In Bankruptcy: Analysis

On May 20, 2019, the United States Supreme Court decided the case Mission Product Holdings, Inc. v. Tempnology, LLC. The facts of the case and its potential implications were discussed previously on this blog here. In the 8-1 decision authored by Justice Kagan, the court ruled that agreements rejected by a debtor in bankruptcy will not be deemed terminated or rescinded. Rather, the non-debtor party will retain whatever rights it would have under applicable non-bankruptcy law following a breach of the agreement. While the decision dealt with a rejected trademark license, the court made clear that the ruling applied broadly to every type of agreement rejected by a debtor under section 365 of the Bankruptcy Code. Rejection of agreements very often serves as a critical tool in Chapter 11 by allowing a debtor to walk away from burdensome obligations. The fact that non-debtor parties will retain certain post-rejection rights will require debtors – and potential debtors – to consider how rejection will address their reorganization goals. Non-debtor parties, on the other hand, should consider how best to use the negotiating leverage granted to them by the Supreme Court.

The Mission Products case involved Tempnology, LLC, a company that manufactured athletic sportswear and licensed the right to use its COOLCORE trademark and related rights to a licensee called Mission Product Holdings, Inc. In summary, Tempnology attempted to use its Chapter 11 bankruptcy filing as a means to reject a trademark license with Mission, and thus terminate Mission's rights under the license. Many courts have held that, following the rejection of an agreement such as a license in a bankruptcy case, non-debtor parties are limited to filing a general unsecured claim. Depending on the case, general unsecured claimants may receive much less than the face value of their claims. However, some courts – including the Seventh Circuit Court of Appeals in a 2012 case called Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC – have held that rejection does not terminate a licensee's rights and that the non-debtor licensee retains certain post-rejection enforcement rights. To that point, outside of the bankruptcy context, a licensor's breach of a trademark license agreement does not mean that the licensee no longer has any rights in the license. In fact, state law provides a number of licensee remedies short of termination.

In the Mission Products case, the bankruptcy court held that termination of the license agreement revoked Mission's right to use the COOLCORE marks. The Bankruptcy Appellate Panel reversed, relying upon the Sunbeam court's rationale. On appeal to the First Circuit, the court reinstated the bankruptcy court decision that rejection effectively terminated the license agreement. The Supreme Court granted certiorari to address the split between the Seventh and First Circuits.

Justice Kagan began the court's analysis by disposing of any argument that the matter was moot. Tempnology argued that there was no live controversy because the license agreement terminated by its terms and all assets had been distributed in the bankruptcy case. The court found that the matter was not moot for several reasons, including that Mission may be able to "seek the unwinding of prior distributions to get its fair share of the estate." However, while eight justices found that the matter was not moot, Justice Gorsuch wrote a short dissent, asserting that the inability of Mission's lawyers to articulate a theory that would actually result in a claim for damages mooted the matter.

As to the substance of the case, the court directly addressed the meaning and effect of rejection under bankruptcy law. The court noted that two competing views had arisen. On one side – articulated in the Sunbeam decision – rejection acts merely as a breach and the non-debtor party has not only a claim for damages against the debtor, but also retains the post-breach rights the non-debtor party would have outside of bankruptcy. On the other side – articulated by the First Circuit – rejection acts as a rescission of the agreement, leaving the non-debtor party with the sole remedy of filing a claim in the bankruptcy case. The court came down firmly on the Sunbeam side of the dispute, largely based on a finding that Bankruptcy Code section 365(g) unambiguously states that rejection of a license or other "executory contract" constitutes a breach of such agreement, which is deemed to have occurred immediately before the filing of the bankruptcy case.

Critical to the court's decision was a finding that a party – including a debtor in bankruptcy – should not be permitted to use its breach to deny the other party its rights under a contract. The court set forth a hypothetical involving a copy machine lease to make the point. Assume, the court stated, that a law firm leased a copy machine from a dealer and the lease required the dealer to provide monthly service in exchange for a fee. Assume further that the dealer later breaches the agreement by refusing to provide service. The law firm is thereby presented with a choice. The firm could retain the copier, continue to make the service payments, and sue the dealer for damages. Alternatively, the firm could cease making payments, return the copier to the dealer, and sue for damages. The key issue, the court pointed out, is that the decision of whether to terminate the agreement and return the copier is for the law firm to make. The dealer cannot, based on its own breach, terminate the agreement and reclaim the copy machine. Likewise, the court reasoned, if the dealer had filed Chapter 11 bankruptcy, the dealer would not be able to use rejection – which is deemed a breach under section 365(g) – to terminate the lease and to reclaim the copier. The court reasoned that to determine otherwise would be to grant the debtor with avoidance powers not set forth in the Bankruptcy Code. The court noted that powers such as avoiding a fraudulent transfer can be invoked only in narrow circumstances and that interpreting section 365 to provide for a new – very broad – avoidance power "would subvert everything the Code does to keep avoidances cabined."

The court also rejected Tempnology's arguments that there was a "negative implication" created by other provisions in Bankruptcy Code section 365, such as sections 365(h) and 365(n). Those sections provide specified post-rejection protections to certain parties, including non-residential real property tenants in the case of 365(h) and intellectually property licensees in the case of section 365(n). Tempnology argued that because Congress provided post-rejection protections to such specifically identified parties, it followed that all other parties had no post-rejection rights. The court reviewed the legislative history of the subsections of section 365 and found no grand plan by Congress to protect certain parties, while leaving others behind. Rather, the enactments occurred "over a span of half a century" as a result of a "mash-up of legislative intervention." The court also made clear that, while section 365(n) applies to certain intellectual property licenses, it does not apply to trademark licenses. Thus, in a somewhat ironic twist, the fact that Congress left trademark licensees out of the "protection" of section 365(n) means that trademark licensees may be better off post-rejection because they are not required to fit within the confines of the 365(n) terms.

Finally, the court addressed Tempnology's concern that allowing trademark licensees to retain post-rejection rights is contrary to the reorganization policies of Chapter 11 because it will require the debtor/licensor "to choose between expending scarce resources on quality control and risking the loss of a valuable asset," i.e., the mark. The court rejected this argument for a number of reasons, including that section 365 involves all types of leases and executory contracts and thus to allow a particular concern relating to trademark licenses to define the meaning of rejection "would allow the tail to wag the Doberman." More broadly, the court noted that while the Bankruptcy Code favors reorganizations, "it does not permit anything and everything that might advance that goal."

As such, the court reversed the First Circuit decision and remanded the case to the bankruptcy court. In addition, Justice Sotomayor wrote a concurring opinion "to highlight two potentially significant features" of the holding. First, Justice Sotomayor noted that the decision should not be read to grant every trademark licensee the unfettered right to continue using the mark post-rejection. Rather, a case-by-case inquiry must be made to determine whether, in fact, the licensee's rights would survive a breach under applicable non-bankruptcy law. Second, the court's decision sets forth separate post-rejection effects for trademark licensees versus licensees of other types of intellectual property. Justice Sotomayor suggested that, given that outcome, Congress may wish to tailor post-rejection remedies that specifically apply to trademark licensees.

While the Mission Products case answers the question of whether a rejection should be treated as a termination or a rescission, the case is certain to raise other questions in future cases. As Justice Sotomayor stated in her concurrence, it will be necessary to conduct an analysis of non-bankruptcy law to determine the scope of the non-debtor party's post-rejection rights. That likely will inject a degree of uncertainty into the planning and strategy of many potential Chapter 11 bankruptcy cases. In addition, disputes over such post-rejection rights may lead to higher Chapter 11 costs. This may exacerbate the existing concerns among many that Chapter 11 is too expensive. That said, while Mission Products may limit the options of some debtors, certain powerful tools (the automatic stay, lien avoidance, non-consensual "cram down" contract modifications) exist only in bankruptcy. Without a doubt, creative debtors' counsel will determine how to continue making use of such powerful bankruptcy tools, even though the concept of rejection is not quite as powerful as some lower courts interpreted it to be.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions