Trademark Licenses . . . Again (Update No. 1)
Our January 22 post discussed “a long-running issue concerning the treatment of trademark licenses in bankruptcy” and its resolution in the January 12 decision of the First Circuit in Mission Product Holdings, Inc. v. Tempnology, LLC.[1] On May 17, the U.S. Bankruptcy Court for the District of Connecticut came down on the Sunbeam[2] side of the issue and rejected the holding and reasoning of Tempnology.[3] It may therefore become the vehicle for the Second Circuit to speak on the question upon which the First, Third, Fourth and Seventh Circuit Courts of Appeals have spoken.[4]
Unfortunately, the SIMA Court did not engage with the issues that trademark law uniquely raises in a (hypothetical) situation of license rejection followed by continued use of the mark, which Tempnology had discussed. “[T]rademark licensing is permitted so long as the licensor maintains adequate control over the nature and quality of goods and services sold under the mark by the licensee.”[5] A licensor has “the affirmative duty of policing in a reasonable manner the activities of his licensees.”[6] Failure to police the licensee “can often result in . . . ‘abandonment’ and invalidity” of the mark.[7] The SIMA debtor is being liquidated--it is a Chapter 7 case--so it is unclear who, if anyone, would undertake those policing obligations.
Some of the legal reasoning on this issue has been spiked with unfortunate metaphorical language. Sunbeam speaks of contractual rights being “vaporized,”[8] and SIMA quotes with approval a Southern District of New York decision that rejects “disappear[ing]” contracts.[9] Over 90 years ago Judge Cardozo cautioned courts about the risks of metaphorical language. He wrote,
The whole problem of the relation between parent and subsidiary corporations is one that is still enveloped in the mists of metaphor. Metaphors in law are to be narrowly watched, for starting as devices to liberate thought, they end often by enslaving it.[10]
At some risk of diminishing colorful language, it may be helpful to substitute precise analytical language for the metaphors on this issue which Congress has avoided for nearly 30 years and upon which respected appellate judges have disagreed.
[1] 879 F.3d 389 (1st Cir. Jan. 12, 2018).
[2] SeeSunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir.), cert. den. 568 U.S. 1076 (2012). See also Patterson Belknap Client Alert, November 2012.
[3] In re SIMA International, Inc., 2018 Bankr. LEXIS 1455 (Bankr. D. Conn. May 17, 2018). SIMA might not have had to come down on one side or the other of the Sunbeam/Tempnology divide because, unlike in either of those cases, the trademark that the debtor had licensed to the non-debtor party was inextricably intertwined with other licensed IP which the non-debtor party had an indisputable right to continue to use notwithstanding the rejection of the license by virtue of its effective exercise with respect to such other IP of the option to continue to do so provided by Bankruptcy Code Section 365(n). Nevertheless, “[t]his Court respectfully declines to follow the First Circuit holding [in Tempnology] and similarly aligns with the plain language reading of Section 365(g) advanced by Judge Easterbrook [in Sunbeam].” SIMA at *20. Its option to align with Sunbeam may therefore be dicta or, at best, an alternative holding.
[4] I understand that a petition for certiorari is being filed in Tempnology. The Supreme Court may resolve the issue before the Second Circuit has an opportunity to speak on it.
[5] 3 McCarthy on Trademarks and Unfair Competition § 18-42, at 18-105 (5th ed. 2018).
[6] Dawn Donut Co. v. Hart’s Food Stores, Inc., 267 F.2d 358, 367 (2d Cir. 1959).
[7] McCarthy § 18-48, at 18-131.
[8] 686 F.3d at 377.
[9] SIMA at *20, quoting Cohen v. Drexel Burnham Lambert Group, 138 B.R. 687, 703 (Bankr. S.D.N.Y. 1992).
[10] Berkey v. Third Ave. Railway Co., 244 N.Y. 84, 94 (1926).