Mission Prod. Holdings, Inc. v. Tempnology, LLC

Decision Date20 May 2019
Docket NumberNo. 17-1657,17-1657
Citation139 S.Ct. 1652
Parties MISSION PRODUCT HOLDINGS, INC., Petitioner v. TEMPNOLOGY, LLC, nka Old Cold LLC
CourtU.S. Supreme Court

Danielle Spinelli, Washington, DC, for petitioner.

Zachary D. Tripp, for the United States as amicus curiae, by special leave of the Court, in support of the petitioner.

Douglas Hallward-Driemeier, Washington, DC, for respondent.

Robert J. Keach, Lindsay Z. Milne, Bernstein, Shur, Sawyer & Nelson, Portland, ME, Danielle Spinelli, Craig Goldblatt, Joel Millar, James Barton, Wilmer Cutler Pickering, Hale and Dorr LLP, Washington, DC, for petitioner.

James Wilton, Patricia Chen, Ropes & Gray LLP, Boston, MA, Lee Harrington, George Skelly, Nixon Peabody, LLP, Boston, MA, Daniel W. Sklar, Nixon Peabody, LLP, Manchester, NH, Douglas Hallward-Driemeier, Jonathan Ference-Burke, Ropes & Gray LLP, Washington, DC, Gregg Galardi, Ropes & Gray LLP, New York, NY, Christopher M. Desiderio, Nixon Peabody, LLP, New York, NY, for respondent.

Justice KAGAN delivered the opinion of the Court.

Section 365 of the Bankruptcy Code enables a debtor to "reject any executory contract"—meaning a contract that neither party has finished performing. 11 U.S.C. § 365(a). The section further provides that a debtor’s rejection of a contract under that authority "constitutes a breach of such contract." § 365(g).

Today we consider the meaning of those provisions in the context of a trademark licensing agreement. The question is whether the debtor-licensor’s rejection of that contract deprives the licensee of its rights to use the trademark. We hold it does not. A rejection breaches a contract but does not rescind it. And that means all the rights that would ordinarily survive a contract breach, including those conveyed here, remain in place.

I

This case arises from a licensing agreement gone wrong. Respondent Tempnology, LLC, manufactured clothing and accessories designed to stay cool when used in exercise. It marketed those products under the brand name "Coolcore," using trademarks (e.g., logos and labels) to distinguish the gear from other athletic apparel. In 2012, Tempnology entered into a contract with petitioner Mission Product Holdings, Inc. See App. 203–255. The agreement gave Mission an exclusive license to distribute certain Coolcore products in the United States. And more important here, it granted Mission a non-exclusive license to use the Coolcore trademarks, both in the United States and around the world. The agreement was set to expire in July 2016. But in September 2015, Tempnology filed a petition for Chapter 11 bankruptcy. And it soon afterward asked the Bankruptcy Court to allow it to "reject" the licensing agreement. § 365(a).

Chapter 11 of the Bankruptcy Code sets out a framework for reorganizing a bankrupt business. See §§ 1101–1174. The filing of a petition creates a bankruptcy estate consisting of all the debtor’s assets and rights. See § 541. The estate is the pot out of which creditors’ claims are paid. It is administered by either a trustee or, as in this case, the debtor itself. See §§ 1101, 1107.

Section 365(a) of the Code provides that a "trustee [or debtor], subject to the court’s approval, may assume or reject any executory contract." § 365(a). A contract is executory if "performance remains due to some extent on both sides." NLRB v. Bildisco & Bildisco , 465 U. S. 513, 522, n. 6, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984) (internal quotation marks omitted). Such an agreement represents both an asset (the debtor’s right to the counterparty’s future performance) and a liability (the debtor’s own obligations to perform). Section 365(a) enables the debtor (or its trustee), upon entering bankruptcy, to decide whether the contract is a good deal for the estate going forward. If so, the debtor will want to assume the contract, fulfilling its obligations while benefiting from the counterparty’s performance. But if not, the debtor will want to reject the contract, repudiating any further performance of its duties. The bankruptcy court will generally approve that choice, under the deferential "business judgment" rule. Id., at 523, 104 S.Ct. 1188.

According to Section 365(g), "the rejection of an executory contract[ ] constitutes a breach of such contract." As both parties here agree, the counterparty thus has a claim against the estate for damages resulting from the debtor’s nonperformance. See Brief for Petitioner 17, 19; Brief for Respondent 30–31. But such a claim is unlikely to ever be paid in full. That is because the debtor’s breach is deemed to occur "immediately before the date of the filing of the [bankruptcy] petition," rather than on the actual post-petition rejection date. § 365(g)(1). By thus giving the counterparty a pre-petition claim, Section 365(g) places that party in the same boat as the debtor’s unsecured creditors, who in a typical bankruptcy may receive only cents on the dollar. See Bildisco , 465 U. S. at 531–532, 104 S.Ct. 1188 (noting the higher priority of post-petition claims).

In this case, the Bankruptcy Court (per usual) approved Tempnology’s proposed rejection of its executory licensing agreement with Mission. See App. to Pet. for Cert. 83–84. That meant, as laid out above, two things on which the parties agree. First, Tempnology could stop performing under the contract. And second, Mission could assert (for whatever it might be worth) a pre-petition claim in the bankruptcy proceeding for damages resulting from Tempnology’s nonperformance.

But Tempnology thought still another consequence ensued, and it returned to the Bankruptcy Court for a declaratory judgment confirming its view. According to Tempnology, its rejection of the contract also terminated the rights it had granted Mission to use the Coolcore trademarks. Tempnology based its argument on a negative inference. See Motion in No. 15–11400 (Bkrtcy. Ct. NH), pp. 9–14. Several provisions in Section 365 state that a counterparty to specific kinds of agreements may keep exercising contractual rights after a debtor’s rejection. For example, Section 365(h) provides that if a bankrupt landlord rejects a lease, the tenant need not move out; instead, she may stay and pay rent (just as she did before) until the lease term expires. And still closer to home, Section 365(n) sets out a similar rule for some types of intellectual property licenses: If the debtor-licensor rejects the agreement, the licensee can continue to use the property (typically, a patent), so long as it makes whatever payments the contract demands. But Tempnology pointed out that neither Section 365(n) nor any similar provision covers trademark licenses. So, it reasoned, in that sort of contract a different rule must apply: The debtor’s rejection must extinguish the rights that the agreement had conferred on the trademark licensee. The Bankruptcy Court agreed. See In re Tempnology, LLC , 541 B. R. 1 (Bkrtcy. Ct. NH 2015). It held, relying on the same "negative inference," that Tempnology’s rejection of the licensing agreement revoked Mission’s right to use the Coolcore marks. Id., at 7.

The Bankruptcy Appellate Panel reversed, relying heavily on a decision of the Court of Appeals for the Seventh Circuit about the effects of rejection on trademark licensing agreements. See In re Tempnology, LLC , 559 B. R. 809, 820–823 (Bkrtcy. App. Panel CA1 2016) ; Sunbeam Products, Inc. v. Chicago Am. Mfg., LLC , 686 F. 3d 372, 376–377 (CA7 2012). Rather than reason backward from Section 365(n) or similar provisions, the Panel focused on Section 365(g) ’s statement that rejection of a contract "constitutes a breach." Outside bankruptcy, the court explained, the breach of an agreement does not eliminate rights the contract had already conferred on the non-breaching party. See 559 B. R. at 820. So neither could a rejection of an agreement in bankruptcy have that effect. A rejection "convert[s]" a "debtor’s unfulfilled obligations" to a pre-petition damages claim. Id., at 822 (quoting Sunbeam , 686 F. 3d at 377 ). But it does not "terminate the contract" or "vaporize[ ]" the counterparty’s rights. 559 B. R. at 820, 822 (quoting Sunbeam , 686 F. 3d at 377 ). Mission could thus continue to use the Coolcore trademarks.

But the Court of Appeals for the First Circuit rejected the Panel’s and Seventh Circuit’s view, and reinstated the Bankruptcy Court decision terminating Mission’s license. See In re Tempnology, LLC , 879 F. 3d 389 (2018). The majority first endorsed that court’s inference from Section 365(n) and similar provisions. It next reasoned that special features of trademark law counsel against allowing a licensee to retain rights to a mark after the licensing agreement’s rejection. Under that body of law, the majority stated, the trademark owner’s "[f]ailure to monitor and exercise [quality] control" over goods associated with a trademark "jeopardiz[es] the continued validity of [its] own trademark rights." Id., at 402. So if (the majority continued) a licensee can keep using a mark after an agreement’s rejection, the licensor will need to carry on its monitoring activities. And according to the majority, that would frustrate "Congress’s principal aim in providing for rejection": to "release the debtor’s estate from burdensome obligations." Ibid. (internal quotation marks omitted). Judge Torruella dissented, mainly for the Seventh Circuit’s reasons. See id., at 405–407.

We granted certiorari to resolve the division between the First and Seventh Circuits. 586 U. S. ––––, 139 S.Ct. 397, 202 L.Ed.2d 309 (2018). We now affirm the Seventh’s reasoning and reverse the decision below.1

II

Before reaching the merits, we pause to consider Tempnology’s claim that this case is moot. Under settled law, we may dismiss the case for that reason only if "it is impossible for a court to grant any effectual relief whatever" to Mission assuming it prevails. Chafin v. Chafin , 568 U. S. 165, 172, 133 S.Ct. 1017, 185 L.Ed.2d 1 (2013) (internal...

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