879 F.3d 389 (1st Cir. 2018), 16-9016, In re Tempnology, LLC
|Citation:||879 F.3d 389, 65 Bankr.Ct.Dec. 23|
|Opinion Judge:||KAYATTA, Circuit Judge.|
|Party Name:||IN RE: TEMPNOLOGY, LLC, n/k/a Old Cold LLC, Debtor. v. Tempnology, LLC, n/k/a Old Cold LLC, Appellee. Mission Product Holdings, Inc., Appellant,|
|Attorney:||Robert J. Keach, with whom Lindsay K.Z. Milne and Bernstein, Shur, Sawyer & Nelson, P.A., Portland, ME, were on brief, for appellant. Lee A. Harrington, Boston, MA, with whom Daniel W. Sklar and Nixon Peabody LLP, Manchester, NH, were on brief, for appellee.|
|Judge Panel:||Before Torruella, Lynch, and Kayatta, Circuit Judges. TORRUELLA, Circuit Judge (Concurring in part, dissenting in part).|
|Case Date:||January 12, 2018|
|Court:||United States Courts of Appeals, Court of Appeals for the First Circuit|
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[Copyrighted Material Omitted]
APPEAL FROM THE BANKRUPTCY APPELLATE PANEL FOR THE FIRST CIRCUIT
Robert J. Keach, with whom Lindsay K.Z. Milne and Bernstein, Shur, Sawyer & Nelson, P.A., Portland, ME, were on brief, for appellant.
Lee A. Harrington, Boston, MA, with whom Daniel W. Sklar and Nixon Peabody LLP, Manchester, NH, were on brief, for appellee.
Before Torruella, Lynch, and Kayatta, Circuit Judges.
KAYATTA, Circuit Judge.
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. § § 365(a), 1107(a); see
NLRB v. Bildisco & Bildisco, 465 U.S. 513, 531-32, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984); Mason v. Official Comm. of Unsecured Creditors, for FBI Distrib. Corp. & FBC Distrib. Corp. (In re FBI Distrib. Corp.), 330 F.3d 36, 43-44 (1st Cir. 2003). 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 debtors duty to license the intellectual property. 11 U.S.C. § 365(n)(1). In this case, Tempnology, LLC (" Debtor" )— a debtor-in-possession seeking to reorganize under Chapter 11— rejected an agreement giving certain marketing and distribution rights to Mission Product Holdings, Inc. The parties agree that Mission can insist that the rejection not apply to nonexclusive patent licenses contained in the rejected agreement. They disagree as to whether the rejection applies to the agreements grants of a trademark license and of exclusive rights to sell certain of Debtors goods. In the case of the trademark license, resolving that disagreement poses for this circuit an issue of first impression concerning which other circuits are split. For the following reasons, we agree with the bankruptcy court that the rejection left Mission with only a pre-petition damages claim in lieu of any obligation by Debtor to further perform under either the trademark license or the grant of exclusive distribution rights.
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 Debtors 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.1 These products, called " Cooling Accessories," were defined in the Agreement as " products of the specific types listed on Exhibit A" and " manufactured by or on behalf of [Debtor]." They also included " additional products that are hereafter developed by [Debtor]." Exhibit A broke down the thirteen listed products into two categories: " Exclusive" and " Non-Exclusive" Cooling Accessories. For " Exclusive Cooling Accessories" — comprised of towels, wraps, hoodies, bandanas, multi-chills, and doo rags— Debtor agreed that " it will not license or sell" the products " to anyone other than [Mission] during the Term." Missions rights with respect to the remaining Cooling Accessories— comprised of socks, headbands, wristbands, sleeves, skullcaps, yoga mats, and baselayers— were nonexclusive because Debtor reserved for itself the " right to sell ... to vertically integrated companies as well as customers that are not Sports Distributors or retailers in the Sporting Channel."
Second, Debtor granted Mission a nonexclusive license to Debtors 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" Debtors products— including Cooling Accessories— and its intellectual property. This irrevocable license, however, expressly excluded any rights to Debtors trademarks.
Trademarks were the subject of the third bucket of rights. Section 15(d) of the Agreement granted Mission a " nonexclusive, non-transferable, limited license" for the term of the Agreement " to use [Debtors] trademark and logo (as well as any other Marks licensed hereunder) for the limited purpose of performing its obligations hereunder, exercising its rights and promoting the purposes of this Agreement." This license came with limitations. Mission was forbidden from using the trademarks in a manner that was disparaging, inaccurate, or otherwise inconsistent with the terms of the Agreement. Further, Mission was required to " comply with any written trademark guidelines" and Debtor had " the right to review and approve all uses of its Marks," except for certain pre-approved uses.
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 Missions hiring of Debtors former president violated the Agreements restrictive covenants. Pursuant to the Agreements terms, Missions challenge to Debtors 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.
Intervening events, however, put an earlier end to the parties contractual relationship. Although Debtor posted profits in 2012, its financial outlook dimmed. After
accruing multi-million dollar net operating losses in 2013 and 2014, Debtor filed a voluntary petition for Chapter 11 bankruptcy on September 1, 2015. The following day, Debtor moved to reject seventeen of its contracts, including the Agreement, pursuant to 11 U.S.C. § 365(a).
Section 365(a) permits a debtor-in-possession,2 with the courts approval, to " reject any executory contract" that, in the debtors business judgment, is not beneficial to the company. See Agarwal v. Pomona Valley Med. Grp., Inc. (In re Pomona Valley Med. Grp., Inc.), 476 F.3d 665, 669-71 (9th Cir. 2007); see also Bildisco & Bildisco, 465 U.S. at 520, 523, 104 S.Ct. 1188. In its memoranda supporting its motion, Debtor informed the bankruptcy court that it sought to reject the Agreement because it hindered Debtors ability to derive revenue from other marketing and distribution opportunities. Debtor faulted Mission— and particularly the Agreements grant of exclusive distribution rights— for its bankruptcy. It alleged that the Agreement " suffocated the Debtors ability to market and distribute its products" after Mission failed to fulfill its obligations, " essentially starving the Debtor from any income."
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-possessions ability to terminate intellectual property licenses it has granted to other parties.
On September 21, 2015, the bankruptcy court granted Debtors motion to reject certain executory contracts, except for the Agreement, for which it ordered further hearing. In a subsequent one-sentence order, the bankruptcy court granted the motion to reject the Agreement, " subject to Mission Product Holdingss election to preserve its rights under 11 U.S.C. § 365(n)." Debtor then moved for a...
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