Month: December 2018

Supreme Court Set to Tackle Key IP/Insolvency Issue

In the fall of 2018, the  United States Supreme Court agreed to review the January 2018 decision of the First Circuit Court of Appeals in  Mission Product Holdings, Inc. v. Tempnology, LLC (In re Tempnology, LLC).  In Tempnology,  the First Circuit ruled that a trademark owner that files for bankruptcy can deprive a  nondebtor licensee from any rights to use trademarks of the owner licensed to the licensee.

Although the First Circuit’s opinion cites with approval the Fourth Circuit’s  1985 decision  in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. as supporting  the stripping away of a  licensee’s rights, more recent authority from the  Seventh Circuit in  2012 in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC  cut the other way and provided protection to a trademark licensee.

Last Friday, the Supreme Court set February 20, 2019 as the date for oral argument in the Tempnology case.  Within the past month, no fewer than six briefs have been filed by various neutral parties urging the Court to reverse the First Circuit and protect the rights of a trademark licensee upon rejection by a debtor licensor.  Briefs have been filed by the Intellectual Property Owners Association,  American Intellectual Property Law Association,  International Trademark Association and New York Intellectual Property Law Association.  In addition to those organizations,  the United States of America also weighed in with a brief as did a group of several law professors.   Copies of all the briefs and other documents pending before the Supreme Court are available here.

An example of the practical issue before the Supreme Court is evident in an opinion issued by the United States Bankruptcy Court for the District of Connecticut in May, 2018.  In In re SIMA International Inc.,  a chapter 7 trustee sought to reject a debtor licensor’s trademark license on the grounds that rejection would benefit creditors by yielding a higher sale price for the trademarks if no continued rights existed for the licensee.   Not surprisingly, the licensee argued that it should have continued rights to the trademarks it had previously licensed.  In ruling for the licensee, the Bankruptcy Court in Connecticut  (which is located in the Second Circuit and not bound by opinions from the First Circuit) rejected the First Circuit’s Tempnology decision.   The SIMA decision  cited with approval the Seventh Circuit’s Sunbeam decision that rejection did not “abrogate” the licensee’s right to use the trademarks or somehow make the license agreement “disappear.”

In sum, in agreeing to review the Tempnology case, the Supreme Court is poised to deliver much needed clarity to all parties with an interest in trademarks in distressed situations including licensors, licensees, buyers, creditors and others.   In addition to resolving the particular dispute that has divided the lower courts, the Supreme Court decision may also shed light on what role  equity can or should play in the context of interpreting plain statutory language concerning intellectual property issues in insolvency matters.

Trade Creditor Strategies

I was pleased to join Adrienne Walker from Mintz and Lindsay Zahradka Milne from Bernstein Shur on a business panel  yesterday hosted by Massachusetts Continuing Legal Education.   Our focus was on strategies for trade creditors to obtain  (and keep) payment in light of  issues arising in recent financial meltdowns including Sports Authority, Toys R Us, Sears,  Papa Gino’s and many other distressed companies.

We covered a lot of territory in a short amount of time with thoughtful insights and commentary from the audience.  Topics included  maximizing lien rights, obtaining critical vendor status, risks associated with post-petition administrative claim recoveries,  the value of reclamation claims, recent consignment issues, and minimizing preference exposure.

My focus was on lien issues which included the practicality of obtaining and perfecting a security interest under Article 9 of the Uniform Commercial Code.  The discussion also covered various non Article 9 liens including judgment liens, state statutory liens (including mechanics liens) and federal statutory liens (including the Perishable Agriculture Commodities Act).

My top takeaways for trade creditors from the session:

  •  Be Proactive:   Trade creditors who actively monitor and manage receivables are best positioned to avoid the pain of a customer’s financial distress.   Understand the reality that a customer’s  filing could completely extinguish all amounts owed and could also result in the forced return of certain funds paid to the creditor before filing as a “preference.”   Avoid putting off dealing with the unpleasantness of a customer issue; rather make it a priority to protect your right to payment.

 

  • Explore Lien Rights Early:   Creditors often explore lien rights only after experiencing non-payment.  A better strategy is to consider the possibility of lien rights at the outset of a business relationship.   Establishing lien rights requires strict compliance with detailed statutory elements such as those created by Article 9 of the UCC or other statutes.   If lien rights are important, take the time to ensure that the lien is properly created and not subject to attack.

 

  •  Understand Consignment:    Some trade vendors believe that shipping goods to a customer “on consignment” can insulate the vendor from any financial issues of the customer.   However, the law of consignment is highly complex drawing from both the common law and operative provisions of the Uniform Commercial Code enacted by the states.   If you intend to be protected by a consignment relationship, it is imperative that the relationship withstand judicial scrutiny.   Two decisions (available here)  issued on November 26 2018  in the Sports Authority case drill down into these issues and provide a sense of the complexities that can arise.

 

  • Treat DIPs with Care:  “DIP” stands for “debtor in possession” — the term used to describe a company that has filed for chapter 11 relief.    Conventional wisdom teaches that supplying a company in chapter 11 (a DIP) offers some protection to a creditor as claims arising from amounts due post-petition constitute “administrative expense claims” and not just mere “general unsecured claims” (the term given to amounts due for obligations arising pre-petition).   In Toys R Us, however, vendors holding millions of dollars in “admin” claims faced the prospect of no payment whatsoever given the retailer’s cessation of restructuring efforts and implementation of a liquidation.  Although a settlement was reached which provided some payment to holders of admin claims, the recovery was nowhere near 100 percent.   In short, before supplying any company operating in chapter 11, be careful to understand the dynamics of the case and the practical ability to compel payment.

 

  • Understand Preference Risk:    A trade creditor that receives payment in the 90 day period before a customer’s bankruptcy filing is at risk of having that payment examined and potentially challenged as an “avoidable preference.”   There are several defenses available to a trade creditor to defend against such an action.   The best defenses rest on good facts.  Thus, it is imperative that a creditor obtaining payment from a financially distressed firm do so with an eye towards strengthening available defenses in case of a later challenge.    Our session highlighted several recent decisions impacting the ordinary course of business defense, subsequent new value defense and other theories.   The time to think  about such issues is well before a preference lawsuit is filed.

In sum, the opportunity to collaborate with Adrienne and Lindsay was terrific.  The conference also included an excellent presentation on non-judicial options for restructuring and sales as well as an insightful judicial forum.