I previously wrote about the issue of what happens to a trademark license when the brand owner goes bankrupt.
The Supreme Court’s decision seems to be good news for trademark licensees and bad news for trademark licensors.
On May 20, 2019, an 8-1 Supreme Court ruled that a bankrupt company’s decision to “reject” an existing contract does not revoke a trademark’s licensee’s right to continue using the trademark. The Court reasoned, “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 right that would ordinarily survive a contract breach, including those conveyed here, remain in place.”
Thus, under the 1988 amended Bankruptcy Code, the licensee has the option of either treating the license as terminated and pursuing a claim for damages or to continue to abide by the terms of the license agreement and pay all royalties or other payments due thereunder.
The main argument against this holding is that trademark licensors are obligated to maintain the quality and nature of the products or services bearing the licensor’s trademarks. If the licensor is bankrupt, who would undertake this obligation? Stay tuned.