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11 U.S.C.S. § 365(a) and (g) speak broadly, to any executory contracts. Many licensing agreements involving trademarks or other property are of that kind. 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 (barring any special contract term or state law), 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 authorizes.
Petitioner Mission Product Holdings, Inc., entered into a contract with Respondent Tempnology, LLC, which gave Mission a license to use Tempnology's trademarks in connection with the distribution of certain clothing and accessories. Tempnology filed for Chapter 11 bankruptcy and sought to reject its agreement with Mission. The Bankruptcy Court approved Tempnology's rejection and further held that the rejection terminated Mission's rights to use Tempnology's trademarks. The Bankruptcy Appellate Panel reversed, relying on Section 365(g)s statement that rejection “constituted a breach” to hold that rejection did not terminate rights that would survive a breach of contract outside bankruptcy. The First Circuit rejected the Panel's judgment and reinstated the Bankruptcy Court's decision.
Did the debtor’s rejection of the trademark licensing agreement revoke the license and deprive the licensee of its rights to use the trademark?
The Court held that the debtor's rejection of the trademark licensing agreement could not revoke the license and did not deprive the licensee of its rights to use the trademark because, under 11 U.S.C.S. § 365, a debtor's rejection of an executory contract in bankruptcy had the same effect as a breach outside bankruptcy. Such an act could not rescind rights that the contract previously granted. Accordingly, the judgment was reversed and the case was remanded.