Trademark license agreements can be very lucrative for both the licensor and licensee. The licensor often receives an up-front payment, a royalty or a combination of the two in exchange for licensing to the licensee certain rights to commercially exploit the right, which the licensee will do in order to turn its own profits.
However, trademark licensees need to be extra cautious about not only conducting diligence on the legitimacy of the mark(s) at issue in the license, but also the entity serving as the licensor.
What if the licensor can escape a license agreement through bankruptcy? It could have a chilling effect on a potential licensee who is not completely comfortable with the financial situation of the proposed licensor, particularly if the licensor is not willing to voluntarily open its books to the licensee.
An interesting development took place in this space earlier this year in the case of In re Tempnology, LLC, 879 F.3d 389 (1st Cir. 2018). Tempnology LLC entered into a co-marketing and distribution agreement with Mission Product Holdings, Inc. in 2012, giving Mission distribution rights in the U.S. for certain products and a non-exclusive license on Tempnology’s intellectual property, not including trademarks, which were licensed under a separate agreement.
In 2015, Tempnology filed for Chapter 11 bankruptcy and the 1st Circuit Court of appeals said that Mission’s right to use Tempnology’s trademarks did not survive Tempnology rejecting the agreement in the bankruptcy process.
“The counterparty may still make and sell its products-or any products-just so long as it avoids use of the trademark precisely when the message conveyed by the trademark may no longer be accurate,” said the court.
The decision seems to give power to the licensor while stripping it from the licensee, should the licensor go through the bankruptcy process. If the licensor wants to reject a trademark license, it may do so, but is not necessarily off the hook for damages.
Not all jurisdictions are in agreement with this ruling, which means that it could be an issue for the U.S. Supreme Court and is certainly something to consider whether you are a potential trademark licensor or licensee. If you are a licensee, you will want to at least try to contractually protect your rights through a pre-petition agreement whereby the licensor waives the right to reject the license in bankruptcy.