Mission Prod. Holdings, Inc. v. Tempnology, LLC
I was among the crowd of lawyers sitting in Court Room 2, United States Bankruptcy
Court for the District of New Hampshire; November 3, 2015; listening to the argument;
nothing extraordinary; technical arguments about the extent of an election under 11 U.S.C.
§365(n); not a mention of 11 U.S.C. §363(g); no mention of the fundamental concept of
rejection; no arguments that the Court should rethink the meaning of rejection; the Bankruptcy
Court heard the technical arguments and entered the order (that seemed trivial at the time) that 11
U.S.C. §363(n), which does not mention trademarks, does not protect a licensee’s rights to
trademarks. Three and a half years later, and almost three years after the license expired by it
terms, the United States Supreme Court reversed, not by saying that §363(n) applies to
trademarks (every appellate court that addressed the issue agreed it did not), but by overturning
the understandings expressed by every lawyer in the Courtroom that day as to the meaning or
effect of the rejection of an executory contract. Mission Prod. Holdings, Inc. v. Tempnology,
LLC, No. 17-1657, 2019 WL 2166392 (U.S. May 20, 2019). This comment will argue that the
decision is poorly decided because the Court ignores the distinction between the debtor and the
bankruptcy estate and because the Court fails to inquire or require inquiry into whether the
licensee has a property right in the controverted trademark.
Tempnology starts with a new technology start up story. The company had patents for
the design of athletic cooling fabric. Mission agreed to purchase and distribute Tempnology
products using Tempnology’s trademarks. In their agreement, Mission obtained the exclusive
right to sell Tempnology products in certain territories over certain time periods, a permanent
non- exclusive license to the patented technology and a right to use the trade-marks during the
term of the agreement and thereafter for two years – the windup period. Mission terminated the
agreement on June 30, 2014.1
Mission’s two year continued use period was to expire on July 1,
2016. On September 1, 2015, Tempnology filed its petition under Chapter of 11 of the
Tempnology proposed to sell all of its assets including its patents and trademarks. As
part of that process Tempnology also proposed to reject the agreement with Mission. Mission
bid at the sale, objected to the sale, objected to the proposed rejection of the agreement and
made an election under 11 U.S.C. §365(n).
In support of its attempt to reject the Mission contract, Tempnology moved for an order
determining exactly what rights were protected by Mission’s Section 365(n) election.
Tempnology took the view that the election protected the license of the patent but not exclusive
distribution rights and not the license of the trademarks. Mission asserted that the §365(n)
election protected the license of the patent rights, the exclusive distribution rights and the license
of the trademarks during the two year wind down. The Bankruptcy Court ruled that the §365(n)
election protected the license of the patent rights (as both parties agreed), but not the exclusive
distribution rights and not the trademark license.
In the course of its order the Court, quite naturally given the way the issues were framed,
[s]ection 101(35A) identifies six categories of intellectual property that
will be subject to protection under § 365(n), while trademarks were
knowingly omitted. … the omission of trademarks from the definition of
intellectual property in § 101(35A) indicates that Congress did not intend
for them to be treated the same as the six identified categories. Therefore,
Mission does not retain rights to the Debtor’s trademarks and logos postrejection.
Mission Product Holdings, Inc.,’s (I) Objection to Debtor’s – (A) Rejection Motion, (B) Sale Motion, and (C) DIP
Financing Motion and (II) Notice of Election Pursuant to 11 U.S.C. §365(n)(1)(b) (And Incorporated Memorandum
of Law), United States Bankruptcy Court for the District of New Hampshire In Re Tempnology, LLC, 15-11400-CJP
D.E. 99 ¶8,
In re Tempnology, LLC, 541 B.R. 1, 7–8 (Bankr. D.N.H. 2015), aff’d in part, rev’d in part sub
nom. In re Tempnology LLC, 559 B.R. 809 (B.A.P. 1st Cir. 2016), aff’d in part, rev’d in part sub
nom. In re Tempnology, LLC, 879 F.3d 389 (1st Cir. 2018), rev’d and remanded sub nom.
Mission Prod. Holdings, Inc. v. Tempnology, LLC, No. 17-1657, 2019 WL 2166392 (U.S. May
20, 2019), and aff’d, 879 F.3d 389 (1st Cir. 2018), and rev’d and remanded sub nom. Mission
Prod. Holdings, Inc. v. Tempnology, LLC, No. 17-1657, 2019 WL 2166392 (U.S. May 20, 2019).
Every appellate judge has agreed with the Bankruptcy Court’s interpretation of Section
365(n): it provides no succor for Mission’s claim to either the exclusive distribution rights or the
license of the trademarks. Nevertheless, the US Supreme Court reversed and remanded.
The issue the Supreme Court addressed was not the subject of debate in the bankruptcy
courtroom that November day, it was not the (boring and technical) issue of the extent of the
§365(n) election’s availability for trademarks as intellectual property but instead the Supreme
Court ruled on the much more fundamental issue of the effect of any rejection of any executory
contract. In sum, said Justice Kagan, “[r]ejection of a contract—any contract—in bankruptcy
operates not as a rescission but as a breach.” Tempnology, LLC supra at *5.
By setting the dichotomous choice as one between two contract remedial concepts, the
Supreme Court has erred because it ignores the true dichotomy between the debtor and the estate
and it ignores the effect of 11 U.S.C. § 541.
The Supreme Court, of course, is correct to quote §365(g) that “the rejection of an
executory contract[ ] constitutes a breach of such contract.” Id. at *3.2
But subsection (g) of
Section 365 is not the entirety of what it means to assume or reject but merely one part. The part
Although such an observation omits §365(g)’s function to confirm that such a breach is a pre-petition breach.
E.g., 11 U.S.C. §365(g)(1).
that is §365(g) works in conjunction with §541 and it works upon the Trustee and the estate not
Justice Kagan reasoned from §365(g) that because rejection constitutes a breach, the
consequences of rejection are the same as the consequences of a breach. She uses the
hypothetical of a copier lease. Assuming a breach by the lessor, the lessee has (at least) two
options: redeliver the copier and sue for damages or retain the copier, continue payment and sue
for damages: “[t]he choice to terminate the agreement and send back the copier is for the
[lessee]. By contrast, the dealer has no ability, based on its own breach, to terminate the
agreement.” Tempnology, LLC, supra at *5. From that hypothetical Justice Kagan finds the
following rules on rejection:
A rejection does not terminate the contract. When it occurs, the debtor and
counterparty do not go back to their pre-contract positions. Instead, the
counterparty retains the rights it has received under the agreement. As
after a breach, so too after a rejection, those rights survive.
All of this, it will hardly surprise you to learn, is not just about
photocopier leases. Sections 365(a) and (g) speak broadly, to “any
executory contract[s].” Many licensing agreements involving trademarks
or other property are of that kind (including, all agree, the TempnologyMission contract). The licensor not only grants a license, but provides
associated goods or services during its term; the licensee pays continuing
royalties or fees. If the licensor breaches the agreement outside bankruptcy
(again, barring any special contract term or state law), everything said
above goes. In particular, the breach does not revoke the license or stop
the licensee from doing what it allows. … And because rejection
“constitutes a breach,” § 365(g), the same consequences follow in
bankruptcy. The debtor can stop performing its remaining obligations
under the agreement. But the debtor cannot rescind the license already
conveyed. So the licensee can continue to do whatever the license
“[T]he trustee, subject to the court’s approval, may assume or reject any executory contract …of the debtor…” 11
U.S.C. §365(a) (emphasis added). It is, of course, true that the debtor-in-possession is granted the powers of a
trustee but, the debtor-in-possession is nevertheless still acting as trustee for the bankruptcy estate. 11 U.S.C. §
Id. at *6.
Justice Kagan’s language uses repeated inaccurate references to the “debtor” but the
“debtor” is a party to these proceedings only in its capacity as trustee for the bankruptcy estate
created by 11 U.S.C. §541. Upon the happening of the bankruptcy proceeding, the debtor ceased
“performing its remaining obligations” and the matters that §365 deals with are whether the
bankruptcy estate will perform those obligations.
The distinction between the debtor and the Trustee on behalf of the estate finds resonance
in §541. Per §541, upon the filing of the bankruptcy petition, the debtor no longer holds title to
any of its property and all now belongs to the estate including all trademarks. Justice Kagan,
though, modifies the effect of §541 with the following:
[s]o if the not-yet debtor was subject to a counterparty’s contractual right
(say, to retain a copier or use a trademark), so too is the trustee or debtor
once the bankruptcy petition has been filed. The rejection-as-breach rule
(but not the rejection-as-rescission rule) ensures that result. By insisting
that the same counterparty rights survive rejection as survive breach, the
rule prevents a debtor in bankruptcy from recapturing interests it had
Id. at *6. That reasoning ignores the distinction between the estate and the debtor and it modifies
Take a hypothetical, the two parties are the parties to an agreement for the sale and
purchase of an automobile. The Buyer agrees to pay $20,000. The Seller agrees to find for the
Buyer, sell and deliver a Bentley in exchange for the price. Seller has made many similar bad
business deals and files a bankruptcy petition. Seller has found no Bentley. Seller’s Trustee
rejects the contract. Do the same “counterparty rights” survive rejection as would survive
breach? Can the Buyer tender the $20,000.00 and demand the vehicle of the bankruptcy trustee
even in the face of a rejection? The words Justice Kagan suggest yes but that cannot be the
result. It is not the result because, having rejected, the estate is not bound.4
The estate was never a party to the contract and by rejection did not become a party. It
only becomes a party to the contract if the contract is assumed. Rejection of an executory
contract means that neither the bankruptcy estate, the bankruptcy trustee nor the debtor in its
capacity as debtor in possession are bound. The corporate debtor is bound, and, unless a
discharge enters under 11 U.S.C. § 1141, will always be bound. The Court’s language ignores
the distinction between the debtor and the estate.
The Court’s reasoning modifies §541. §541 brings into the estate all property (including
the trademark) and the Court’s ruling carves out from the reach of §541 contract limitations
whether or not those contract limitations give rise to rights in property and whether or not those
contract limitations are avoidable.
Take the same hypothetical, the two parties are the parties to an agreement for the sale
and purchase of an automobile. The buyer agrees to pay $20,000. This time the Seller has the
Bentley in stock. Seller realizes he or she could sell it for $50,000. Seller files a bankruptcy
petition. Seller’s trustee rejects the contract. Do the same “counterparty rights” survive rejection
as would survive breach? Can the Buyer tender the $20,000.00 and demand the vehicle even in
the face of a rejection thereby forcing the trustee to convey and depriving Seller’s creditors of the
$30,000? The words of Justice Kagan say yes. But if the estate has rejected the contract it is
not a party to the contract and ought not be bound simply because there is a contract that the
debtor made but that is not binding on the estate.
4 The seller remains bound unless a discharge enters. If the seller is an entity there would be no discharge in Chapter
7 nor in a liquidating 11.
The only way that Justice Kagan’s result makes sense is if the Buyer has, or may assert,
an equitable title to the vehicle by virtue of the purchase and sale agreement. In that
circumstance one could say that the property brought into the estate was the vehicle encumbered
by the equitable title in another. The equitable title in the counterparty may exist at the outset of
the case but the transfer of that equitable title was a transfer of property of the Debtor prepetition which, unless protected by certain formalities, would most likely be avoidable under 11
U.S.C. § 544(a).5
Applying the reasoning from those hypotheticals to the Tempnology license to Mission
Products one reaches the following conclusions:
1. If the license was a property right that could be said to encumber the trademark rights
of the Debtor, then the Trustee in bankruptcy cannot avoid that property right by
rejection; however, the property right might be, and probably would be, vulnerable to
challenge as an unperfected transfer.
2. If the license is not a property right encumbering the trademark rights but is, instead,
merely a contract right arising out of the contract that was rejected, then the
bankruptcy estate, being not a party to the contract, cannot be bound by the contract.
The Tempnology opinion does not address whether the license is a right in property, or
merely a contract right or whether that distinction is important. The Court leaves it open to
future litigants to expand the kind of contract situations in which the non-debtor counterparty
will claim “that the same counterparty rights survive rejection as survive breach” and that
therefore the “debtor” (but really meaning the bankruptcy estate) is bound. Id. at *6.
5 The ordinary means of perfecting a security interest in a general intangible would be to record a UCC-1 Financing
Statement in the applicable Secretary of State’s office. Mission Products did not record such a UCC-1. Mission
Products did not file a secured proof of claim and thereby did not claim a property interest in the trademark. Old
Cold, LLC, 15-11400-CJP, Claim 6-1.
Edmond J. Ford
May 27, 2019
Ford, McDonald & Borden, P.A.
10 Pleasant Street
Portsmouth, NH 03801