A Practical Question That’s Being Ignored at U.S. Supreme Court (Mission Product v. Tempnology)

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A Trademark (photo by Marilyn Swanson)

By: Donald L. Swanson

Oral arguments are scheduled for February 20, 2019, before the U.S. Supreme Court in Mission Product Holdings v. Tempnology, LLC (Case No. 17-1657).

Legal Question – Effect of Rejection

The legal question in Mission Product v. Tempnology is whether the “rejection” of a trademark license agreement—which constitutes a breach of such agreement—terminates rights of the trademark licensee.

Practical Question – Unsecured v. Administrative Claim

The practical question, however, is quite different.

It’s whether the licensee, under the rejected agreement, holds a pre-petition or an administrative claim in the bankruptcy. Here’s how the U.S. First Circuit Court of Appeals describes the practical question:

“What is at issue for these parties, practically speaking, is whether to classify as prepetition [a general unsecured claim] or post-petition liability [an administrative claim] any damages caused by Debtor’s failure to honor its executory obligations.” [Fn. 1]

Mission Product explains the practical question like this in its Supreme Court brief:

Mission Product initially filed a general unsecured claim in the bankruptcy for over $4 million but “reserved the right . . . to assert an administrative claim for damages incurred after the bankruptcy filing if the courts ultimately held that its rights survived rejection. . . . The parties agreed to stay proceedings on Mission’s claim pending this Court’s resolution of this matter.” [Fn. 2]

Significance of the Practical Question

This practical question is highly significant. I’ll try to explain:

1. The Bankruptcy Code provides generally that a party to a rejected agreement holds a general unsecured claim for damages arising from the rejection;

2. General unsecured claims commonly receive little or no distribution in a bankruptcy case;

3. The Bankruptcy Code provides generally that, once an agreement is assumed (as opposed to rejected), any damages from a breach of the assumed agreement hold the status of an administrative claim; and

4. Administrative claims are entitled to 100% payment before any distribution is made to general unsecured claims.

So . . . the practical question in Mission Product v. Tempnology is whether, (i) the normal assumption/rejection rules hold, or (ii) general unsecured claims from contract rejection are, somehow, converted into administrative claims.

This practical question is incredibly important!

Ignoring the Practical Question

Aside from the reference quoted above in Mission Product’s Brief, no one is talking to the Supreme Court in their briefs about this practical question—no one.

Again, the practical question is whether, when the case is concluded, Mission Product will hold a general unsecured claim or an administrative claim from rejection of its trademark license agreement.

This practical question is huge. But it’s not being discussed—not in the briefs of the parties to the dispute, nor in the amici briefs. There are six amici briefs before the Supreme Court: four from intellectual property associations, one from a group of law professors, and one from the Solicitor General. But not one of them even mentions the practical question.

How can this be?

–As a bankruptcy practitioner, if there is anything I would want to know in a bankruptcy case, it’s this: Will the case become administratively insolvent from contract rejections that create administrative claims?  [Here’s a translation of this concern from estate professionals: “Will I get paid, or not?!”]

–Allowing Mission Product to convert its general unsecured claim into an administrative claim will have detrimental consequences for Chapter 11 cases everywhere.

What’s going on here? How can a practical question of this magnitude be ignored?

Priorities of Solicitor General?!

The Solicitor General, in its amici brief, weighs-in favoring the administrative claim side of the practical question.

The Solicitor General is, ostensibly, looking out for the best interests of the bankruptcy system.  But, instead, the Solicitor General gives other interests priority.

Get this: In its disclosure of “interests” at the beginning of its amici brief, the Solicitor General identifies its priorities in the following order of importance:

Priority # 1.  The United States Patent and Trademark Office has “strong” trademark interests to be protected;

Priority # 2.  Interests of the United States and its agencies as creditors in bankruptcy must be protected; and

Priority # 3.  “Finally, United States Trustees are charged with supervising the administration of bankruptcy cases.”

The Solicitor General’s statement of “interests” concludes with this: “The United States therefore has a substantial interest in the resolution of the question presented.”

But note:  In the Solicitor General’s expression of priorities, the interests of effective bankruptcy administration take a distant third place.  Bankruptcy interests arise only “finally” and in unspecified nature, and only after “strong” trademark interests and creditor interests of the U.S.A. are protected.

–As a bankruptcy practitioner, this acknowledgement and prioritization of bankruptcy as an also-ran is frustrating and irritating, indeed!!

Conclusion

Here’s hoping the Supreme Court will press the parties in oral arguments on how the practical question will play out in day-to-day practice.

The practical question, if not properly considered and addressed, could screw up our bankruptcy world—again!

—————————-

Footnote 1: This quotation is from the first paragraph of Part IV of the opinion issued by the U.S. First Circuit Court of Appeals in Mission Product Holdings v. Tempnology, LLC., Case No. 16-9016 (1st Cir., January 12, 2018).

Footnote 2: This quotation is from the Brief of Mission Products (at 11) to U.S. Supreme Court in Mission Product Holdings v. Tempnology, LLC (Supreme Court Case No. 17-1657).  Additionally, Mission Product describes the issue like this in a Bankruptcy Court filing (Pages 3-4 of Doc. 351, in Case No. 15-11400, in the New Hampshire Bankruptcy Court):

“The outcome of the 365(n) Appeal will not affect the existence or validity of the damages, but will affect whether those damages are general unsecured claims, as presently alleged, or whether a portion of those damages are administrative expense claims for post-petition willful breaches.”

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