Rejected Executory Contracts Made Simple: Mission v. Tempnology

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A Trademark (photo by Marilyn Swanson)

By: Donald L. Swanson

Rejection of a contract—any contract—in bankruptcy operates not as a rescission but as a breach.”

Essential declaration of law from U.S. Supreme Court opinion on trademark issues in Mission Product Holdings, Inc. v. Tempnology, LLC, (Case No. 17-1657), issued May 20, 2019.

Photocopier Lease Illustration

The Supreme Court’s opinion illustrates and clarifies how such a declaration of law works, with this hypothetical:

–dealer leases a photocopier to a law firm and agrees to service the copier every month, and the law firm commits to pay a monthly fee.

During the lease term, dealer stops providing service and, thereby, breaches the agreement. The law firm has a choice: it can either, (i) continue paying for use of the copier, while suing for damages from the service breach, or (ii) call the whole deal off, halting its own payments, returning the copier, and suing for damages. But the choice to terminate the agreement and send the copier back is for the law firm.

The dealer, by contrast has no ability to get the copier back by refusing to provide service. It cannot unilaterally revoke the law firm’s continuing rights in the copier.

Then, bankruptcy is added to the equation as follows:

  • In the hypothetical, the dealer files Chapter 11 and rejects its copier agreement with the law firm;
  • That means, (i) the dealer will stop servicing the copier, and (ii) the law firm has a choice—to continue the contract or walk away and sue for damages;
  • But here is the bankruptcy-specific twist: the firm’s damages suit is treated as a pre-petition claim against the estate, which is likely to receive little-to-no distribution; and
  • Rejection does not terminate the contract—instead, the law firm retains its rights under the agreement.

Concurring Opinion

Justice Sotomayor agrees with the majority opinion but adds two clarifications in a concurring opinion:

  1. Trademark licensees do not necessarily have “an unfettered right” to continue using a rejected trademark. The “baseline inquiry” is this: do licensee rights survive a breach under nonbankruptcy law. Specific contract terms and state law provisions must be considered.
  2. Rights and remedies of a trademark licensee after rejection are different from those established by §365(n) for patents, copyrights, etc. Justice Sotomayor seems to urge action by Congress on this point with the following:

“To the extent trademark licensees are treated differently from licensees of other forms of intellectual property, that outcome leaves Congress with the option to tailor a provision for trademark licenses, as it has repeatedly in other contexts.”

Dissenting Opinion

Justice Gorsuch is a lone dissenter—on grounds of mootness: “I would dismiss the petition as improvidently granted.”

Justice Gorsuch explains:

“Maybe Mission’s able lawyers will conjure something better on remand. But, so far at least, the company hasn’t come close to articulating a viable legal theory on which a claim for damages could succeed. . . . If the legal questions here are of sufficient importance, a live case presenting them will come along soon enough; there is no need to press the bounds of our constitutional authority to reach them today.”

Remand

The majority opinion concludes with this:

“We accordingly reverse the judgment of the Court of Appeals and remand the case for further proceedings consistent with this opinion.”

Mission Product reserved the right in Bankruptcy Court to assert an administrative claim for post-petition damages in the event its rights survive rejection. And the parties agreed to stay proceedings on such claim until the Supreme Court ruled.

So, the administrative claim issue can now be addressed on remand. Presumably, both the majority and dissenting opinions have anticipated such an issue in the following respects:

  1. The majority opinion emphasizes the statutory limitation on rejection damages to pre-petition/general unsecured status; and
  2. The dissent emphasizes that Mission “hasn’t come close to articulating a viable legal theory” for recovering damages.

Conclusion

There’s nothing unusual or surprising or complicated in the Supreme Court’s Mission v. Tempnology opinion. The opinion is consistent with basic bankruptcy theory that’s been around since the beginning of the Bankruptcy Code. And it’s helpful to get a clarification on the issue and on variations that have arisen.

What we have, in this Mission v. Tempnology opinion, is the U.S. Supreme Court fulfilling its duty, established by Article I, Sec. 8, of the U.S. Constitution, of assuring that we have “uniform Laws on the subject of Bankruptcies throughout the United States.”

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