Trademark licensing is a driving force in business relationships. One common example is where one business owns a trademark, which it licenses out to other companies who manufacture and sell the products bearing the mark. But, what happens if the trademark owner goes bankrupt? Bankruptcy law gives a debtor the right to “reject” contracts to free itself of obligations, but if a trademark owner/licensor “rejects” a trademark license agreement, how does that affect the trademark licensee?

Currently, there are two countervailing schools of thought on this situation. One approach, articulated most famously by the Seventh Circuit, is that “rejection” of a trademark license through bankruptcy merely constitutes a breach of the contract, but not the termination of the agreement. The licensee retains the right to continue using the licensed mark and its obligation to continue complying with the terms of license. The other approach, advanced by the Fourth Circuit, is that “rejection” of trademark license through bankruptcy means rescission of the agreement in toto. That is, after bankruptcy of the licensor, the licensee retains no right to continue using the mark.

The Supreme Court recently granted certiorari in a First Circuit case called Mission Product Holdings, Inc. v. Tempnology, LLC to resolve this split. The First Circuit, following the Fourth Circuit’s reasoning, held that courts should not force debtors to monitor how their trademarks are being used because those are the very kinds of obligations that bankruptcy law is designed to void. Congress carved out exceptions for a debtor’s right to “reject” contracts involving patents, copyrights, and other forms of intellectual property, but left trademarks off the list. However, two amicus curiae briefs have already been filed, one by the International Trademark Association (“INTA”) and the other by a collection of bankruptcy law professors, that disagree vehemently with the First Circuit’s reasoning. Both favor the Seventh Circuit’s approach instead, arguing that it “enhances the value of trademark licenses and promotes the stability of the trademark system.” They argue that the Fourth Circuit’s original decision was based on a flawed reading of the bankruptcy statute, and that if someone built a business around licensed trademark rights it would be inequitable for them to lose those rights—and their entire business—just because the licensor went bankrupt.

Takeaway: This case will unify a glaring split in authority regarding trademark licenses, which may affect the negotiated value of license agreements and royalties. Trademark licensors and licensees are advised to monitor its resolution.