Lead Opinion
Generally speaking, when a company files for protection under Chapter 11 of the Bankruptcy Code, the trustee or the debt- or-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,
I.
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 “Cool-core” and “Dr. Cool” brands. A significant intellectual property portfolio supported Debtor’s 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
Second, Debtor granted Mission a nonexclusive license to Debtor’s intellectual property. This “non-exclusive, irrevocable, royalty-free, fully paid-up, perpetual, worldwide, fully-transferable license” granted Mission the right “to sublicen^e (through multiple tiers), use, reproduce, modify, and create derivative work based on and otherwise freely exploit” Debtor’s products—including Cooling Accessories— and its intellectual property. This irrevocable license, however, expressly excluded any rights to Debtor’s 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 [Debt- or’s] 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 Mission’s hiring of Debtor’s former president violated the Agreement’s restrictive covenants. Pursuant to the Agreement’s terms, Mission’s challenge to Debtor’s 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
Section 365(a) permits a debtor-in-possession,
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-possession’s ability to terminate intellectual property licenses it has granted to other parties.
On September 21, 2015, the bankruptcy court granted Debtor’s 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 Holdings’s election to preserve its rights under 11 U.S.C. § 365(n).” Debtor then moved for a determination of the applicability and scope of Mission’s rights under section 365(n). In that motion, Debtor conceded that Mission retained its nonexclusive, perpetual license to certain of Debtor’s intellectual properties—which did not include its trademarks—but argued that section 365(n) did not cover either Mission’s exclusive distribution rights or the trademark license. Mission again objected, arguing that the relief Debtor requested required an adversary proceeding pursuant to Rule 7001(2) of the Federal Rules of Bankruptcy Procedure.
After holding a nontestimonial hearing, the bankruptcy court concluded that Mission’s election pursuant to section 365(n) did not preserve either the exclusive distribution rights or the trademark license. The court found that section 365(n) only protected intellectual property rights, and Mission’s exclusive distributorship could not, fairly be characterized as, such. With respect to trademarks, the court reasoned that Congress’s decision to leave trademarks off the definitional list of intellectual properties in 11 U.S.C, § 101(35A) left the trademark license unprotected from rejection. Finally, the court rejected Mission’s argument that the Bankruptcy Code required an adversary proceeding to'determine the issue.' The court viewed “the Motion in the context' of rejection under
Mission appealed to the Bankruptcy Appellate Panel for the First’Circuit (“BAP”). The BAP affirmed the bankruptcy court’s order with respect to Mission’s exclusive distribution' rights, concluding that “Mission’s attempt to re-characterize its exclusive product distribution rights under the Agreement as an intellectual property license [is] unsupported by either the letter or the spirit of the Agreement,” Like the bankruptcy court, the BAP read section 365(n)’s protection of “exclusivity provision[s]” as encompassing only the exclusivity attributes, such as they might be, of intellectual property rights. The BAP also affirmed the bankruptcy .court’s determination that the section 365(n) motion did not require Debtor to commence an adversary .proceeding under Bankruptcy Rule 7001.
Regarding trademarks, however, the BAP diverged from the bankruptcy court. Although the BAP agreed that section 365(n) failed to protect Mission’s rights to Debtor’s trademarks, it disagreed as to the effect of that conclusion. Rather than finding that rejection extinguished the non-debtor’s rights, the BAP followed the Seventh Circuit’s ruling in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC,
This appeal ensued. We affirm the bankruptcy court’s determinations! We conclude that section 365(n) does not apply to Mission’s right to be the exclusive distributor of Debtor’s products, or to its trademark license. Unlike the BAP and the Seventh Circuit, we' also hold that Mission’s right to use Debtor’s trademarks did not otherwise survive rejection of the Agreement.
II.
On appeal from a decision by' the BAP, “[w]e accord no special deference to determinations made by the [BAP],” and instead “train the lens of our inquiry directly on the bankruptcy court’s decision.”
HI.
We begin with the statutory framework that defines the scope of Debt- or’s ability, “subject to the court’s approval,” to “assume or reject any executory contract or unexpired lease of the debtor.’? 11 U.S.C. § 365(a). Executory contracts, although not- defined in the Bankruptcy Code, are generally considered to be contracts “on which performance is due to some extent on both sides.” In re FBI
In 1985, the Fourth Circuit was tasked with applying this framework to an intellectual property license granted by a debt- or. See Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc.,
Even though § 365(g) treats rejection as breach, the legislative history of § 365(g) makes clear that the purpose of the provision is to provide only a damages remedy for the non-bankrupt party.... [T]he statutory “breach” contemplated by § 365(g) controls, and provides only a money damages remedy for the non-bankrupt party. ... Allowing specific performance would obviously undercut the core purpose of rejection under § 365(a),
Id.
Three years later, Congress responded. Rather than amending either section 365(a) or section 365(g), Congress enacted a brand new section 365(n). See S. Rep. No. 100-505, at 8 (1988). Section 365(n)(Z) gives to a licensee of intellectual property rights a choice between treating the license as terminated and asserting a claim for pre-petition damages—a remedy the licensee held already under section 365(g)—or retaining its intellectual property rights under the license. It states, in full:
If the trustee rejects an executory contract under which the debtor is a li-censor of a right to intellectual property, the licensee under such contract may elect—
(A) to treat such contract as terminated by such rejection, if such rejection by the trustee amounts to such a breach as would entitle the licensee to treat such contract as terminated by virtue of its own terms, applicable nonbankruptcy law, or an agreement made by the licensee with another entity; or
(B) to retain its rights (including a right to enforce any exclusivity provision of such contract, but excluding any other right under applicable non-bankruptcy law to specific performance of such contract) under suchcontract and under any agreement supplementary to such contract, to such intellectual property (including any embodiment of such intellectual property to the extent protected by applicable nonbankruptcy law), as such rights existed immediately before the case commenced, for—
(i) the duration of such contract; and
(ii) any period for which such contract may be extended by the licensee as of right under applicable nonbankruptcy law.
11 U.S.C. § 365(n)(l).
Congress also amended the definition of intellectual property, thus defining the scope of the new section 365(n)(l). Under 11 U.S.C. § 10K35A),
The term “intellectual property” means—
(A) trade secret;
(B) invention, process, design, or plant protected under title 35;
(C) patent application;
(D) plant variety;
(E) work of authorship protected under title 17; or
(F) mask work protected under chapter 9 of title 17;
to the extent protected by applicable nonbankruptcy law.
IY.
With the foregoing framework in mind, we turn now to Mission’s arguments on appeal. We consider first its contention that its exclusive distribution rights remained unaffected by Debtor’s rejection of the Agreement. We then address Mission’s contention that its trademark license also remained in effect during the two-year Wind-Down Period. What is at issue for these parties, practically speaking, is whether to classify as prepetition or post-petition liability any damages caused by Debtor’s failure to honor its executory obligations during the two-year Wind-Down Period.
A.
Section 365(n)(l)(B) allows Mission “to retain its rights (including a right to enforce any exclusivity provision of such contract ...) under such contract and under any agreement supplementary to such contract, to such intellectual property (including any embodiment of such intellectual property to the extent protected by applicable nonbankruptcy law).” Mission would have us read the words “any exclusivity provision of such contract” in the foregoing parenthetical as meaning any “exclusivity provision” in the entire contract (or any supplementary agreement), whether or not the provision grants exclusive use of a pertinent intellectual property right.
We disagree. We start in section 365(a) with the universe of all executory contracts that a debtor may seek to reject; section 365(n)(l) then focuses on a subset of that universe (“executory contract[s] under which the debtor is a licensor of a right to intellectual property”); subsection (n)(l)(B) then ■ says what happens to intellectual property rights granted under such contracts (the licensee may “retain its rights”); and the parenthetical merely makes clear that those rights “to such intellectual property” include any exclusivity attributes of those rights. In this manner, subsection (n)(l)(B) protects, for example, an exclusive license to use a patent, but does not protect an exclusive right to sell a product merely because that right appears in a contract that also contains a license to use intellectual property.
Our reading aligns with the legislative record. In enacting section 365(n), Congress
Mission’s fallback position is to argue that, in this instance, its exclusive distribution right is, de facto, a provision that renders its right to use Debtor’s intellectual property exclusive. The unstated premise is that because Mission has an exclusive right to sell certain of Debtor’s products made using Debtor’s intellectual property, no one else can use the intellectual property. Hence, Mission reasons, the .exclusive distribution right is an “exclusivity provision” of the intellectual property right.
The most obvious defect in this argument is its premise. The Agreement and record are clear that Debtor can use its intellectual property to make and sell products other than those for which the Agreement grants Mission exclusive distribution rights. The only thing that is exclusive is the right to sell certain products, not the right to practice, for example, the patent that is used to make those products. An exclusive right to sell a product is not equivalent to an exclusive right to exploit the product’s underlying intellectual property.
But, argues Mission, because of its exclusive distribution rights, no one can use the Debtor’s patent to make at least some products if those products are to be sold in Mission’s territory. Perhaps. But this is simply a restriction on the right to sell certain products that, like many products, happen to be made using a patent. And the exclusivity Mission seeks to maintain would apply fully even if there were no patent license at all. Given that the right to sell a. product is clearly not included within the statute’s definition of intellectual property, we are not going to treat it as such merely because of a coincidental practical effect it may have in limiting the scope of the manner in which a patent might be exploited, especially where the Agreement itself expressly makes clear that any patent license is nonexclusive. To hold otherwise would be to find buried in a parenthetical to a statutory subsection an implied exception to rejection that would,
Mission also argues that its nonexclusive license of intellectual property “lacks meaningful value” unless it retains ah exclusive right to sell certain of Debtor’s products. Why this is so is not apparent given that section 365(n) protects the nonexclusive license, hence Mission retained the right to use the intellectual property. The Agreement itself spells out myriad ways that Mission could exploit its nonexclusive intellectual property rights that were presumably unaffected by rejection of its exclusive distribution right: Mission could still “sublicense (through multiple tiers), use, reproduce, modify, and create derivative work based on” Debtor’s intellectual property. And if those rights lacked meaningful value, that hardly becomes a reason for turning rightsithat are not intellectual property rights, into intellectual property rights. Rather, it simply suggests that most of the contract’s value was apparently in the exclusive distribution agreement.
Nor does the reference in section 365(n)(l)(B) to “any embodiment of such intellectual property” help Mission. Embodiment is a term of art associated with intellectual property. The Senate Report includes a letter informing the Judiciary Committee of the Department of Commerce’s view of the bill, which states that “[although ‘embodiment’ is not defined, we assume the term arises from the copyright law.” S. Rep. No. 100-505, at 12. Black’s Law Dictionary tags the term as belonging to patent law, and offers three alternate definitions: (1) “[t]he tangible manifestation of an invention”; (2) “[t]he method for using this tangible form”; or (3) “[t]he part of a patent application or patent that describes a concrete manifestation of the invention,” Embodiment, Black’s Law Dictionary (10th ed. 2014). Black’s Law Dictionary further notes that while intellectual property “is a mental construct” without “physical structure,” an embodiment “is a specific physical form of the invention” and thus “[e]ach embodiment exists in the real world.” Id. (quoting Morgan D. Rosenberg, The Essentials of Patent Claim Drafting xvii (2012)).
Where the statutory language includes a term of art, resort to sources beyond the text is particularly appropriate to make clear the intended meaning of that term. See Molzof v. United States,
[T]he parties might have agreed that the licensor would prepare a prototype incorporating the licensed intellectual property. If such a prototype was prepared prior to the filing of the petition for relief, but had not been delivered tothe licensee at that time, then the licensee can compel the delivery of the prototype in accordance with the terms of the rejected license. Other examples of embodiments include genetic material needed to produce certain biotechnological products and computer program source codes. There are many other possible examples of embodiments, but critical to any right of the licensee to obtain such embodiments under this bill is the prepetition agreement of the parties that the licensee have access to such material and the physical existence of such material on the day of the bankruptcy filing.
S. Rep. No. 100-505, at 9-10 (emphasis added). The Department of Commerce letter states:
Where the licensed intellectual property is not a work of authorship, we assume the term “embodiment” would be interpreted in a similar sense of enablement in a manner reasonable in the circumstances and would not necessarily include all physical manifestations of the intellectual property. For example, an embodiment of a licensed process might be interpreted to include technical data sufficient to enable the licensee to operate the process, but not a manufacturing facility using (or embodying) the process; and an embodiment of a licensed invention might be interpreted to include a sample of the invention, but not all inventory.
S. Rep. No. 100-505, at 12 (emphasis added).
A few common themes appear in these explanations. First, the pre-petition agreement must give the licensee access to the embodiment of intellectual property. Second, an embodiment of intellectual property is a tangible or physical object that exists pre-petition. Third, an embodiment of intellectual property is something inherently limited in number—it is a prototype or example of a product, but does not include all products produced using the intellectual property. Finally, we can infer that the purpose of this' provision is to allow the licensee to exploit its right to the underlying intellectual property.
Here, we have no object to which Mission requires access in order to exploit an intellectual property right. Rather, we have a prosaic, nonexclusive right to use a patented process, and an unremarkable and entirely independent right to be the exclusive distributor of some but not all goods made with that process. There is simply no “embodiment” at issue in the relevant statutory sense.
Nor does this case, as Mission contends, bear on the enforceability of all negative covenants independent of an intellectual property license. If a party possesses an intellectual property license, perhaps the Code may protect from rejection certain negative covenants—such as confidentiality—that do not materially restrict the debtor’s reorganization, are tied closely to the intellectual property license, and are necessary to implement its terms. See Biosafe Int’l, Inc. v. Controlled Shredders, Inc. (In re Szombathy), Nos. 94 B 15536, 95 A 01035,
Finally, we observe that Mission salts its brief with several undeveloped suggestions that rejection under section 365(a), even if allowed, might not extinguish a right to .demand specific performance of the negative covenant implicit in the exclusive distribution rights. Mission attempts to support these suggestions by
B.
We next consider whether Mission retained its rights to use Debtor’s trademarks post-rejection. In defining the intellectual property eligible for the protection of section 365(n), Congress expressly listed six kinds of intellectual property. 11 U.S.C. § 101(35A). Trademark licenses (hardly something one would forget about) are not listed, even though relatively obscure property such as “mask work protected under chapter 9 of title 17” is included. Id. Nor does the statute contain any catchall or residual clause from which one might infer the inclusion of properties beyond those expressly listed.
One might reasonably conclude that Congress’s decision not to include trademark licenses within the protective ambit of section 365(n) must mean that such licenses are not exempt from section 365(a) rejection. On the other hand, the conclusion that an agreement finds no haven from rejection in section 365(n) does not entirely exhaust the possible arguments for finding that a right under that agreement might otherwise survive rejection. For example, we have held that a counter-party’s right to compel the return of its own property survives rejection of a contract under which the debtor has possession of that property. See Abboud v. The Ground Round, Inc. (In re The Ground Round, Inc.),
Regarding trademarks specifically, the Senate Report states that Congress “postpone[d]” action on trademark licenses “to allow the development of equitable treatment of this situation by bankruptcy courts.” S. Rep. No. 100-505, at 5. The only circuit to address this issue squarely has resisted the temptation to find in this ambiguous comment outside the statutory text a toehold for unfettered “equitable” dispensations from section 365(a) rejection when it would otherwise apply. See Sunbeam,
Of course, to be precise, rejection as Congress viewed it does not “va-f porize” a right. Rather, rejection converts the right into a pre-petition claim for damages. Putting that point of vocabulary to one side, and leaving open the possibility that courts may find some-unwritten limitations on the full effects of section 365(a) rejection, we find trademark rights to provide' a poor candidate for such dispensation. Congress's principal aim in providing for rejection was to “release the debtor’s estate-from burdensome obligations that can impede a successful reorganization.” Bildisco & Bildisco,
Careful examination undercuts that premise because the effective licensing of a trademark requires that the trademark owner—here Debtor, followed by any purchaser of its assets—monitor and exercise control over the quality of the goods sold to the public under cover of the trademark. See 3 J. Thomas McCarthy, McCarthy on Trademarks & Unfair Competition § 18:48 (5th ed. 2017) (“Thus, not only does the trademark owner have the right to control quality, when it licenses, it has the duty to control quality.”). Trademarks, unlike patents, are public-facing messages to consumers about the relationship between the goods and the trademark owner. They signal uniform quality and also protect a business from competitors who' attempt to profit from its developed goodwill. See Societe Des Produits Nestle, S.A. v. Casa Helvetia, Inc.,
The Seventh Circuit’s approach, therefore, would allow Mission to retain the use of Debtor’s trademarks in a manner that would force Debtor to choose between performing executory obligations arising from the continuance of the license or risking the permanent loss of its trademarks, thereby diminishing their value to Debtor, whether realized directly or through an asset sale. Such a restriction on Debtor’s ability to free itself from its' executory obligations, even if limited to trademark licenses alone, would depart from the manner in which section 365(a) otherwise operates. And the logic behind that approach (no rights of the counterparty should be “vaporized” in favor of a damages claim) would seem to invite further leakage. If trademark rights categorically survive rejection, then why not exclusive distribution rights as well? Or a right to receive advance notice before termination of performance? And so on.-
Although claiming to follow Sunbeam, our dissenting colleague seems to reject its categorical approach in favor of what Sunbeam itself rejected—an “equitable remedy” that would consider in some unspecified manner the “terms of the Agreement, and non-bankruptcy law.” See Sunbeam,
Even if we did sit in the chancellor’s chair in applying section 365(a), we would likely hesitate to adopt our colleague’s approach. Under such a case-specific, equitable approach, one might in theory preclude rejection only where the burden of quality assurance on the debtor will be minimal. The problem, though, is that in the bankruptcy context especially, where the li-censor and licensee are at odds over continuing to deal with each other, the burden will likely often be greater than normal. Here, for example, the adversarial relationship between Debtor and Mission may portend less eager compliance. More importantly, in all cases there will be some burden, and it will usually not be possible to know at the time of the bankruptcy proceeding how great the burden will prove to be, as it will depend very much on the subsequent actions of the licensee. Conversely, the burden imposed on the counterparty of having its trademark right converted to a prepetition damages claim at a time when the relationship signaled by the trademark is itself ending will in most instances be less than the burden of having patent rights so converted. The coun-terparty may still make and sell its products—or any products—just so long as it avoids- use of the trademark precisely when the message conveyed by the trademark may no longer be accurate. We therefore find unappealing the prospect of saddling bankruptcy proceedings with the added cost and delay of attempting to draw fact-sensitive and unreliable distinctions between greater and lesser burdens of this type. See RadLAX Gateway Hotel, LLC v. Amalgamated Bank,
In sum, the approach taken by Sunbeam entirely ignores the residual enforcement burden it would impose on the debtor just as the Code otherwise allows the debtor to free itself from executory burdens. The approach also rests on a logic that invites further degradation of the debtor’s fresh start options. Our colleague’s alternative, “equitable” approach seems similarly flawed, and has the added drawback of imposing increased uncertainty and costs on the parties in bankruptcy proceedings. For these reasons, we favor the categorical approach of leaving trademark licenses unprotected from court-approved rejection, unless and until Congress should decide otherwise. See James M. Wilton & Andrew G. Devore, Trademark Licensing in the Shadow of Bankruptcy, 68 Bus. Law. 739, 771-76 (2013).
C.
Mission’s final argument is that the bankruptcy court erred by not holding an adversary proceeding under Bankruptcy Rule 7001. Mission contends that because the rule governing adversary proceedings includes within its ambit determinations of an “interest in property,” the bankruptcy court was required to hold such a hearing to determine the scope of Mission's rights. The bankruptcy court instead treated the issue as a contested matter under Rule 9014. We need not address this argument directly, because we find that even if an adversary proceeding was required, any error was harmless.
Y.
For the foregoing reasons, the bankruptcy court’s decision is affirmed.
Notes
. In addition to the United States, the exclusive geographic territory also included "other countries and territories that [Mission] acquires exclusive distribution rights to pursuant to its first rights of refusal and notice.”
. Although this provision of the statute only refers to the powers of a trustee, per 11 U.S.C. § 1107(a), a Chapter 11- "debtor in possession shall have all the rights ,,. and powers, and shall perform all the functions and duties, ... of a trustee serving in a case under this chapter,” See also In re FBI Distrib. Corp.,
. We do nevertheless pay great attention to the considered opinion of the three experienced bankruptcy judges who sit on the BAP. Among other things, our consideration of such an opinion reduces the likelihood that our court of general appellate jurisdiction is blindsided by the effect that a decision might have on matters or issues of bankruptcy law and practice that are beyond the ken of the parties in a particular proceeding.
. Congress ultimately adopted the Senate version, although the language of this section of the House bill is identical to its Senate counterpart.
. Mission cites Encino Bus. Mgmt., Inc. v. Prize Frize, Inc. (In re Prize Frize, Inc.),
Concurrence in Part
(Concurring in part, dissenting in part).
I agree with the majority that 11 U.S.C. § 365(n) does not protect Mission’s exclusive distribution rights or its nonexclusive trademark license. The plain language of this subsection identifies “intellectual property,” which, for purposes of chapter 11, does not encompass trademarks. See 11 U.S.C. § 101(35A). However, I disagree with the majority’s bright-line rule that the omission of trademarks from the protections of section 365(n) leaves a non-rejecting party without any remaining rights to use a debtor’s trademark and logo. As Judge Easterbrook wrote, “an omission is just an omission,” and simply implies that section 365(n) does not determine how trademark licenses should be treated—one way or the other. Sunbeam,
The majority focuses on the Bankruptcy Code’s protection of debtors’ ability to reorganize and to escape “burdensome obligations.” But, as the majority acknowledges, in some situations, the Bankruptcy Code also provides protections to non-debtor parties of an executory contract, allowing the courts to determine an equitable remedy pursuant to the terms of a rejected contract. See Ohio v. Kovacs,
A plain language review reveals section 365’s silence as to the treatment of a trademark license post-rejection. Where a statute is silent, we look to the legislative history for assistance. DiGiovanni v. Traylor Bros., Inc.,
Specific to trademark licenses, the Senate Committee report explains that the purposeful omission of trademarks was not designed to leave trademark licensees unprotected, but rather was “designed to allow more time for study, not to approve Lubrizol.” Sunbeam,
[T]he bill does not address the rejection of executory trademarks],.... While such rejection is of concern because of the interpretation of [§ ] 365 by the Lubrizol, court and others, ... such contracts raise issues beyond the scope of this legislation. In particular, trademark .., relationships depend to a large extent on control of the quality of the products or services sold by the licensee. Since these matters could not be addressed without more extensive study, it was determined to postpone congressional action in this area and to allow the development of equitable treatment of this situation by bankruptcy courts.
S. Rep. No. 100-505, at 5. This legislative history expresses congressional concern about the -application of Lubrizol’s holding to trademarks licenses until further studies are done, and, rather than continue to apply Lubrizol’s holding, encourages “equitable treatment” by the courts to resolve disputes arising in the meantime. Id. Why would Congress have provided this guidance. if it. .meant for Lubrizol—the very case Congress rejected—to apply to trademark licenses? Congress has yet to advise the courts about the results of any further studies; as such, the majority’s judicially created bright-line rule contravenes congressional intent.
The majority’s view infers that the omission5 of trademarks from section 101(35A)’s definition of “intellectual property,” and therefore the protections of section 365(n), implies that section 365 categorically affords no protections to licensees of trademarks. Yet, Congress’s own interpretation of section 365(n) informs us that the bill does not “address of intend any inference to be drawn concerning the treatment of executory contracts which are unrelated to intellectual property.” Id. “In light of these direct congressional statements of-intent, it is simply more freight than negative inference will bear to read rejection of a trademark license to effect the same result as termination of that license.” In re Exide Techs.,
Instead, like the BAP below, I find it appropriate to view a debtor’s section 365(a) rejection through the broader lens of section 365, as the Seventh Circuit did in Sunbeam. Section 365(g) states that “the rejection of an executory contract or unexpired' lease of the debtor constitutes a breach of such contract or lease.” 11 U.S.C. § 365(g). Similar to other contractual breaches outside of the bankruptcy context, a rejection pursuant to section 365(a) does not automatically terminate a non-rejecting party’s, rights under a contract. Sunbeam,
I respect my colleagues’ concern that following the Seventh Circuit’s holding that a section 365(a) rejection does not categorically eviscerate the trademark rights that a debtor-licensor bargained away may “require[ ] that the trademark owner—here Debtor—monitor and exercise control over the quality of the goods sold to the public” post-rejection. However, licensees have trademark quality assurance obligations under the terms of their individual contracts which can be enforced through further legal action and the equitable remedy of specific performance. In the current case, Mission’s obligations are laid out in Section 15(d) of the Agreement, which states that, inter alia, Mission shall not use the trademarks in a disparaging or inaccurate manner, shall comply with written trademark guidelines, and shall not create a unitary composite mark. The majority speculates that the remaining burden on the debtor will be too great in the bankruptcy context, and therefore, if it “were in the chancellor’s chair,” it would not follow this approach. However, we need not enter such a debate as it, is not the role of the courts to legislate, as the majority’s approach effectively does, through the creation of bright-line rules in the face of congressional intent. Congress contemplated the majority’s concern when it enacted section 365(n), recognizing “that there may be circumstances in which the future affirmative performance obligations under a license cannot be performed in a manner that benefits the estate.” S. Rep. No. 100-505, at 4-5. The legislative history indicates that treatment of trademark licenses is one such circumstance.
Accordingly, the BAP was correct to follow thé Seventh Circuit’s lead in finding that, even though 11 U.S.C. § 365(n) does not provide Mission protection of its license to use Debtor’s trademarks, Debt- or’s rejection of the executory contract does not rescind the Agreement and eviscerate any of Mission’s remaining trademark rights. Instead, as Congress has instructed the bankruptcy courts to do, the effect of Debtor’s rejection on Mission’s trademark license should be guided by the terms of the Agreement, and non-bankruptcy law, to determine the appropriate equitable remedy of the functional breach of contract. I respectfully dissent.