Mission Prod. Holdings, Inc. v. Tempnology LLC (In re Tempnology LLC)

• Decision Date: 18 November 2016
• Docket Number: Bankruptcy Case No. 15–11400–JMD,BAP NO. NH 15–065
• Citation: 559 B.R. 809
• Parties: In re Tempnology LLC, n/k/a Old Cold, LLC, Debtor. Mission Product Holdings, Inc., Appellant, v. Tempnology LLC, n/k/a Old Cold, LLC, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, First Circuit

559 B.R. 809

In re Tempnology LLC, n/k/a Old Cold, LLC, Debtor.

Mission Product Holdings, Inc., Appellant,

v.Tempnology LLC, n/k/a Old Cold, LLC, Appellee.

BAP NO. NH 15–065

Bankruptcy Case No. 15–11400–JMD

United States Bankruptcy Appellate Panel of the First Circuit.

November 18, 2016

Robert J. Keach, Esq., and Michael A. Siedband, Esq., on brief for Appellant.

Daniel W. Sklar, Esq., Christopher Desiderio, Esq., and Lee Harrington, Esq., on brief for Appellee.

Before Lamoutte, Hoffman, and Cary, United States Bankruptcy Appellate Panel Judges.

Hoffman, U.S. Bankruptcy Appellate Panel Judge.

Mission Product Holdings, Inc.(“Mission”) appeals from the bankruptcy court's November 12, 2015 order granting the Motion for Determination of Applicability and Scope of Mission Product Holdings, Inc.'s Election Pursuant to 11 U.S.C. § 365(n)(1)(B)(the “365(n) Motion”) filed by Tempnology LLC, n/k/a Old Cold, LLC(the “Debtor”).¹At issue before the bankruptcy court was what rights Mission, as a licensee of intellectual property, retained as a result of its election under Bankruptcy Code § 365(n)² when the Debtor rejected the executory contract that gave rise to the license.The bankruptcy court ruled that Mission retained its nonexclusive license to use the Debtor's intellectual property as set forth in the rejected contract, but not its exclusive product distribution rights or right to use the Debtor's trademark and logo also contained in the contract.For the reasons set forth below, weAFFIRM IN PART and REVERSE IN PART .

BACKGROUND

I.Events Preceding Bankruptcy

Prior to a sale of substantially all its assets in 2015, the Debtor was a Portsmouth, New Hampshire-based material innovation company that developed chemical-free cooling fabrics for use in consumer products under the brand name “Coolcore.”Mission is in the business of marketing and distributing innovative sports technologies.

On November 21, 2012, the Debtor and Mission entered into a Co–Marketing and Distribution Agreement (the “Agreement”).In section 1 of the Agreement, entitled “Territory,” the Debtor granted Mission exclusive distribution rights within the United States and “first rights of notice and of refusal in certain other countries”(collectively defined in the Agreement as the “Exclusive Territory”) with respect to an array of the Debtor's products defined as “Cooling Accessories” and identified on Exhibit A of the Agreement.The Debtor also granted Mission the non-exclusive right to sell Cooling Accessories anywhere else in the world.

In section 5 of the Agreement, entitled “Product Exclusivity,” the Debtor agreed that in the Exclusive Territory it would not license or sell certain specified Cooling Accessories, defined in the Agreement as “Exclusive Cooling Accessories,” to anyone other than Mission during the term of the Agreement.³

In section 6, entitled “Distribution Exclusivity and Collaboration,” the Debtor agreed that in the Exclusive Territory it would not sell any Cooling Accessories and certain other products directly or indirectly to any sporting goods and sport specialty retailers.

Section 7 of the Agreement, entitled “Cooperation and Further Assurances,” provided:

[T]hat (i)[the Debtor] shall take no actions to directly or indirectly frustrate its exclusivity obligations hereunder; (ii)[the Debtor] shall fully cooperate with [Mission] to ensure that no third parties take any actions that frustrate the purposes of the exclusivity provisions herein, and (iii)[the Debtor] shall take such actions as are necessary to enforce [the Debtor]'s intellectual property rights and contractual rights against third parties.

In section 15 of the Agreement, entitled “Intellectual Property,” the Debtor granted Mission the following non-exclusive license (the “IP License”):

Excluding those elements of the CC Property consisting of Marks [and] Domain Names, [the Debtor] hereby grants [Mission] and its agents and contractors a non-exclusive, irrevocable, royalty-free, fully paid-up, perpetual, worldwide, fully-transferable license, with the right to sublicense (through multiple tiers), use, reproduce, modify, and create derivative work based on and otherwise freely exploit the CC Property in any manner for the benefit of [Mission], its licensees and other third parties.

The Agreement defined “CC Property” as:

[A]ll products (including without limitation the Cooling Accessories), personal products, inventions, designs, discoveries, improvements, innovations, ideas, drawings, images, works of authorship, formulas, methods, techniques, concepts, configurations, compositions of matter, packaging, labeling, software applications, databases, computer programs as well as other creative content, methodologies and materials in existence prior to this Agreement (or created outside the scope of this Agreement) or developed or provided by [the Debtor] hereunder and all Intellectual Property Rights with respect to any of the foregoing, excluding any materials provided by [Mission].

(emphasis added).With respect to the Debtor's trademark and logo which were excluded from the IP License, section 15(d) of the Agreement granted Mission a limited license to use the Debtor's Coolcore trademark and logo as follows:

During the Term of the Agreement and the Wind–Down Period, [the Debtor] grants to [Mission] a non-exclusive, non-transferable, limited license, which shall expire upon the termination of this Agreement except as necessary to allow either party to exercise its rights during the Wind–Down Period, to use its Coolcore 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 as contemplated herein....

The upshot of the Agreement was that during the term of the Agreement Mission enjoyed the exclusive right to sell the Cooling Accessories to sporting goods retailers in the United States and potentially certain other countries, and the exclusive right to sell Exclusive Cooling Accessories to anyone in that same territory.Additionally, Mission received a non-exclusive but perpetual license to exploit the Debtor's intellectual property and a limited license during the term of the Agreement to exploit the Coolcore brand and logo.

The Agreement had an initial term of two years and was subject to automatic renewal for additional one-year periods.Either party could terminate the Agreement with or without cause by providing written notice.Any event of termination, however, would trigger a two-year wind-down period during which Mission would retain certain rights to purchase, distribute, and sell the Cooling Accessories in accordance with the Agreement.

On June 30, 2014, Mission exercised its rights to terminate the Agreement without cause, triggering the two-year wind-down period.On July 22, 2014, the Debtor issued a notice of termination for cause, asserting that Mission had breached the Agreement.The ensuing dispute resulted in a two-phase arbitration process.On June 10, 2015, the arbitrator rendered a decision in the first phase of the arbitration, determining that the Agreement remained “in full force and effect.”The second phase of the arbitration—as to whether either party had breached the Agreement—did not get very far as the Debtor's bankruptcy, and accompanying stay, brought the arbitration to a halt.

II.The Bankruptcy Case

On September 1, 2015, the Debtor filed a voluntary petition for reorganization under chapter 11 of the Bankruptcy Code.The next day, the Debtor filed a motion seeking authority to reject certain of its executory contacts, including the Agreement.The Debtor also filed a motion asking the bankruptcy court to approve the sale of substantially all of its assets free and clear of liens, claims, encumbrances, and other interests.

Mission filed an objection to the sale motion and the rejection motion, which included its notice of election pursuant to § 365(n)(1)(B).In its objection, Mission argued that notwithstanding the Debtor's rejection of the Agreement, by making an election under § 365(n) Mission retained its exclusive product distribution rights as well as its rights under the IP License and the limited trademark license and that it could continue to exercise and exploit all those rights without interference from the Debtor or the purchaser of the Debtor's assets.Mission maintained that any sale of the Debtor's assets would be subject to, not free and clear of, Mission's rights under the Agreement.

The Debtor disagreed with Mission's view of the implications of its § 365(n) election.According to the Debtor, § 365(n) protects a non-debtor licensee's rights to intellectual property when a debtor rejects a license agreement embodying intellectual property, not other rights under the contract such as distribution rights.The Debtor contended that the exclusive product distribution provisions in the Agreement did not grant Mission a right to intellectual property but rather addressed the scope of available product distribution rights and, therefore, those distribution rights were not protected by the § 365(n) election.

After an initial hearing, the bankruptcy court entered an order authorizing the Debtor's rejection of certain executory contracts, but deferred its determination of the Debtor's proposed rejection of the Agreement.After additional briefing and another hearing, the bankruptcy court entered an order regarding rejection of the Agreement.The order provided in its entirety:

The motion to reject the contract of Mission Product Holdings pursuant to 11 U.S.C. § 365(a) is granted and the contract is rejected as of the petition date subject to Mission Product Holdings' election to preserve its rights under 11 U.S.C. § 365(n).

This prompted the Debtor to file the 365(n) Motion, seeking a determination that Mission's post-rejection rights were limited exclusively to the IP License and that the balance of Mission's...