When the US Supreme Court rules on cases, the rulings have a lot of impact for how other, similar cases will be handled in State and Federal court. Recently, the Supreme Court heard a case called Mission Product Holdings v. Tempnology (“Mission Product”). This case was about the effects of bankruptcy on trademark licenses.
In this case, the Supreme Court was tasked with deciding whether a trademark licensor’s rejection of a licensing agreement during bankruptcy proceedings terminates the rights of the licensee, which would otherwise survive a licensor’s breach of contract under applicable non-bankruptcy law. The decision the court made holds that the “rejection” of an “executory contract” in a bankruptcy, is only a breach of the contract, and does not equate to rescission of the contract altogether. This has a number of implications, particularly for parties with a bankruptcy record:
For the most part, it no longer matters whether a contract is “executory” in a bankruptcy case. The outcome tends to be the same, regardless of contract type.
Rules Regarding Licensing Benefitting the Licensee
If a licensor who is going through bankruptcy tries to reject a license of any intellectual property, including trademarks, the license is not terminated. This occurs even without the help of Bankruptcy Code section 365(n), which permits a licensee to retain the rights to a license of certain intellectual property if the licensor rejects it in bankruptcy. The Supreme Court decided that section 365(n) was not needed, as its enactment was based on a misconception that rejection equates to rescission. This means that licensees can skip heavy, specific language regarding section 365(n) in contracts.
Most importantly, if a bankrupt licensee rejects a license, the licensee should be able to retain the licensed rights even without making any further payments. There can be contracts that expressly permit the licensor to terminate, but these are very rare. This means that in most cases, a bankrupt licensee can reject a license, not pay anything further to the licensor, and still retain the rights.
Impact on Hollywood and the Entertainment Industry
The entertainment industry is heavily impacted by this ruling, mainly because licensing is a very significant part of the business. Screenplays, songs, and many other things that make up the films and shows are licensed. Licenses make up a significant part of movie and show budgets. High profile bankruptcies happen in Hollywood, and now the actions that are taken around such events are going to be changing.
An example of a high profile Hollywood bankruptcy is the The Weinstein Company bankruptcy case, where Lantern Capital acquired the assets of the bankrupt licensees. Before the Supreme Court ruling, this was permitted, and now it is not. This translates to the largest risk facing licensors and their financiers, and has the potential to change how the back end of the entertainment business is run. Financiers and licensors will now need to be extra cautious when creating contracts with licensees, in order to mitigate the risk that would come up should bankruptcy enter the picture. This could drive up licensing fees, and firm up terms about payment, such as requiring earlier payment of licensing fees.
Opinions about the Ruling
This ruling is a big break for businesses facing bankruptcy, that are also involved in licensing deals as licensees. Other parties will likely look at this ruling negatively. Licensing lawyers, for example, will doubt the Supreme Court’s treatment of an intellectual-property license as fundamentally a conveyance of property rather than a pure commitment not to litigate for infringement. Bankruptcy attorneys will likely ponder the reasoning the Supreme Court used to conclude that the Mission Product Holdings case is not moot – there is the possibility that a claim to reopen the plan and recover funds already distributed to creditors will happen. Criticism of the Supreme Court’s rulings are common, and very much a part of the US legal system.
While only time will tell how big of an impact this ruling will have on all businesses in US that rely on licensing, the preliminary opinions seem to point to this ruling having the potential to be a game-changer for how business is conducted when bankruptcy is part of the equation.