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Mission Prod. Holdings, Inc. v. Tempnology, LLC (In re Tempnology, LLC) - 879 F.3d 389 (1st Cir. 2018)

Rule:

Generally speaking, when a company files for protection under Chapter 11 of the Bankruptcy Code, the trustee or the debtor-in-possession may secure court approval to reject any executory contract of the debtor, meaning that the other party to the contract is left with a damages claim for breach, but not the ability to compel further performance. 11 U.S.C.S. §§ 365(a)1107(a). When the rejected contract, however, is one under which the debtor is a licensor of a right to intellectual property, the licensee may elect to retain its rights to such intellectual property, thereby continuing the debtor's duty to license the intellectual property. 11 U.S.C.S. § 365(n)(1)

Facts:

Debtor made specialized products -- such as towels, socks, headbands, and other accessories -- designed to remain at low temperatures even when used during exercise, which it marketed under the "Coolcore" and "Dr. Cool" brands. A significant intellectual property portfolio supported Debtor's products. This portfolio consisted of two issued patents, four pending patents, research studies, and a multitude of registered and pending trademarks. On November 21, 2012, Mission and Debtor executed a Co-Marketing and Distribution Agreement, which serves as the focal point of this appeal. The Agreement provided Mission with three relevant categories of rights. First, Debtor granted Mission distribution rights to certain of its manufactured products within the United States. Second, Debtor granted Mission a nonexclusive license to Debtor's intellectual property. This "non-exclusive, irrevocable, royalty-free, fully paid-up, perpetual, worldwide, fully-transferable license" granted Mission the right "to sublicense (through multiple tiers), use, reproduce, modify, and create derivative work based on and otherwise freely exploit" Debtor's products -- including Cooling Accessories -- and its intellectual property. This irrevocable license, however, expressly excluded any rights to Debtor's trademarks. The Agreement also included a provision permitting either party to terminate the Agreement without cause. On June 30, 2014, Mission exercised this option, triggering a "Wind-Down Period" of approximately two years. Debtor, in turn, issued a notice of immediate termination for cause on July 22, 2014, claiming that Mission's hiring of Debtor's former president violated the Agreement's restrictive covenants. Pursuant to the Agreement's terms, Mission's challenge to Debtor's immediate termination for cause went before an arbitrator. The arbitrator determined that Debtor had waived any grounds for immediate termination under the restrictive covenant and that the Agreement remained in effect until the expiration of the Wind-Down Period. That ruling meant that Mission was contractually entitled to retain its distribution and trademark rights until July 1, 2016, and its nonexclusive intellectual property rights in perpetuity. Mission objected to the rejection motion, arguing that 11 U.S.C. § 365(n) allowed Mission to retain both its intellectual property license and its exclusive distribution rights. Section 365(n) provides an exception from section 365(a)'s broad rejection authority by limiting the debtor-in-possession's ability to terminate intellectual property licenses it has granted to other parties.

Issue:

Does 11 U.S.C.S. § 365(n) apply to the business's right to be the exclusive distributor of the debtor's products, or to its trademark license, and the business's right to use the debtor's trademarks?

Answer:

No.

Conclusion:

Decision was affirmed. Debtor seeking to reorganize under Chapter 11 rejected an agreement giving certain marketing and distribution rights to the business, and the court agreed with the bankruptcy court that the rejection left the business with only a pre-petition damages claim in lieu of any obligation by the debtor to further perform under either the trademark license or the grant of exclusive distribution rights; 11 U.S.C.S. § 365(n) did not apply to the business's right to be the exclusive distributor of the debtor's products, or to its trademark license, and the business's right to use the debtor's trademarks did not otherwise survive rejection of the agreement; There was no "embodiment" at issue in the relevant statutory sense; The court favors the categorical approach of leaving trademark licenses unprotected from court-approved rejection, unless and until Congress should decide otherwise.

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