May 24, 2019Bankruptcy & Business Reorganization
We are updating our post of March 20, 2019 to report that on May 20, 2019, the U.S. Supreme Court ruled, in an 8-1 decision, that when a debtor in bankruptcy exercises its right to breach lawfully a trademark licensing agreement, the party holding the right to use the trademark does not lose the right to continue using it in accordance with the contract’s terms. Following the reasoning applied to other intellectual property agreements under section 365(n) of the Bankruptcy Code, Justice Kagan wrote that “[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.” Although bankruptcy gives a debtor the right to reject contracts to free itself of obligations, Section 365(n) of the Bankruptcy Code provides special rules that generally protect the licensee but, until the ruling, in this case, made clear, not necessarily trademark licensees. Justice Neil Gorsuch dissented on procedural grounds, arguing that the case should not have been heard by the Court because the license agreement expired in 2016. The decision can be seen as a win for trademark licensees. They now have certainty that their agreements will be treated consistently with other types of contracts in bankruptcy and not subject to being 0unilaterally revoked.
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