In February 2019, the United States Supreme Court heard oral arguments in an appeal from the January 2018 decision of the First Circuit Court of Appeals in Mission Product Holdings, Inc. v. Tempnology, LLC (In re Tempnology, LLC). The case involved the chapter 11 proceedings of a manufacturer of clothing and accessories designed to stay cool when used in exercise sold under the brand name “Coolcore.”
In Tempnology, the First Circuit ruled that the bankrupt trademark licensor could deprive the non-debtor licensee from continued rights to use the licensed trademarks. The licensee appealed to the Supreme Court which agreed to hear the case.
In a decision issued in May 2019, the Supreme Court reversed the First Circuit decision. In so doing, the Supreme Court also rejected the similar logic of the Fourth Circuit’s 1985 opinion in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc.
In its ruling, the Supreme Court adopted the competing view of the Seventh Circuit’s 2012 decision in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC — holding that a debtor licensor’s “rejection” of a license in bankruptcy did not, by itself, deprive a non-debtor licensee of the right to continued usage of the trademarks.
The 8-1 Supreme Court decision, authored by Justice Kagen, brought much needed clarity to a narrow (but important) issue that had divided lower courts for years. Yet, the Supreme Court’s resolution of that issue has had no impact on bringing final resolution to the Tempnology parties. Their battle has continued unabated in the federal courts. Indeed, in the year since the Supreme Court argument, litigation remains pending and a resolution for the parties appears nowhere in sight.
So what has happened in the past year? Soon after the Supreme Court decision was announced in May, 2019, the First Circuit in July, 2019 remanded the case back to the Bankruptcy Court for further proceedings consistent with the Supreme Court’s judgment. Thereafter, the licensee filed an amended proof of claim and an administrative expense motion seeking damages for both the pre-bankruptcy and post-bankruptcy period.
No action has been taken by the Debtor or the Bankruptcy Court on the damage claim issue as of yet however. Instead, by agreement of the parties and the approval of the Bankruptcy Court, the deadline for filing any response has been stayed pending a decision by the First Circuit on yet another appeal of yet another dispute. While the appeal in that dispute remains pending, the parties have agreed to reserve all rights against each other in the underlying bankruptcy case (Case No 15-11400-CJP, Bankr. D. N.H).
What appeal is pending now before the First Circuit? Throughout the time when Supreme Court review was underway in 2019 on the license issue, proceedings continued in the underlying bankruptcy proceeding on other issues. Specifically, the Bankruptcy Court determined that it was not precluded by the pending Supreme Court review from granting relief from stay to the secured lender who had purchased the Debtor’s assets at a bankruptcy auction at the outset of the bankruptcy case. The licensee appealed to the Bankruptcy Appellate Panel (BAP) which affirmed in a decision issued June 18, 2019.
Because no stay pending appeal was issued by either the Bankruptcy Court or the BAP, the debtor distributed the sole remaining estate asset (approximately $500,000 in cash) to the secured lender/buyer. The licensee then appealed that decision to the First Circuit in July 2019, where the dispute remains pending today. (1st Cir. Docket No. 19-9004).
Some observations on the current status:
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- According to press reports, Tempnology was originally formed in 2008. The license agreement at issue was signed in 2012 and Tempnology sought chapter 11 relief in 2015.
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- The parties have already spent more years in litigation over the license (5) than the number of years the deal remained in place (3). At this rate, it is entirely possible that the battle may still rage in 2022 — given the parties as many years of litigation (7) as Tempnology had of corporate life before seeking chapter 11.
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- Could the deal have been structured differently at the outset so as to have avoided the scenario that unfolded? Were there inflection points during the deal where some renegotiation could have occurred that would have avoided the need for chapter 11 and the subsequent five years (and counting) of litigation? How much time, money and effort could have been saved if an alternative path of mutual interest been identified and pursued?
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When entering into a contractual relationship, it is important to think critically not just about the possible upside of the relationship — but also the possible downside and ways to minimize adverse impacts. No matter how the First Circuit ultimately comes out on the most recent dispute — and no matter how the Bankruptcy Court ultimately comes out on the pending damage claims — the title of victor will prove elusive for any party after so many years.