Tag: Insolvency

Cool Tech Hot Mess: Tempnology — An Update

Pixabay at Pexels

The First Circuit Court of Appeals recently issued another opinion (the court’s third)  in the long running saga of  Tempnology LLC (now known as Old Cold, LLC).    The opinion, Mission Product Holdings, Inc. v. Schleicher & Stebbins Hotels, does not blaze any new legal trails.  Rather, it upholds the entry of an order granting a secured creditor relief from stay to foreclose on certain collateral. 

Read only for  its holding — the decision is unremarkable.   But when read as part of the long history of litigation rooted in a  deal described by the Supreme Court with some understatement  as “a licensing agreement gone wrong”  — the value of the decision emerges.  Indeed, as noted in my post earlier this year,  Cool Tech — Hot Mess: Tempnology a Year After SCOTUS Argument, litigation over fallout from the deal has lasted years longer than the deal itself.   If such outcomes can be avoided, then this blog’s objective of advocating for  forward thinking deal-making will be met. 

The Debtor, the Lender and the Licensee

The litigation relates to disputes involving the following three parties:   

(i)  Tempnology — the  Debtor which manufactured  “Coolcore” branded clothing and accessories designed to stay cool when used in exercise;

(ii) Schleicher & Stebbins Hotels — the Debtor’s secured lender,  which also purchased the Debtor’s assets at a bankruptcy auction conducted under Section 363 of the Bankruptcy Code; and 

 (iii) Mission Product Holdings, Inc. –the Debtor’s trademark  licensee, which bid for the Debtor’s assets at the auction but lost out to the secured lender.    

Prior First Circuit Decisions 

The First Circuit’s  prior opinions were both issued in  January 2018.   In the first decision, the First Circuit rejected  the licensee’s attempt to unwind the sale and have its  own bid recognized as the winner.   The First Circuit ruled that the sale had already closed and the lender had been deemed “a good faith purchaser” entitled to protection under section Bankruptcy Code 363(m) from having the sale unwound.  

In the second decision, the First Circuit held that the Debtor’s rejection of the applicable trademark license agreement left the licensee with only a pre-petition damages claim and no further rights to the licensed rights.  The licensee appealed that  decision to the United States Supreme Court, which reversed in an opinion issued in  May 2019  —  holding that a debtor-licensor’s rejection of a trademark  license did not deprive a licensee of  rights provided for in the license. 

Relief from Stay Litigation 

 As noted in the  prior post, the Supreme Court decision did not bring an end to  issues pending in the bankruptcy case. Specifically, proceedings continued  concerning the rights of the secured lender to relief from the automatic stay with respect to certain remaining collateral in the estate excluded from the sale. 

On that issue, in the fall of 2018, the Bankruptcy Court held that the Supreme Court review of the license issues did  not preclude the Bankruptcy Court  from granting relief from stay to the secured lender.   The  licensee opposed the relief then  appealed the order to the Bankruptcy Appellate Panel (BAP) which affirmed in a decision issued June 18, 2019.   The licensee appealed that decision to the First Circuit in July 2019.  

First Circuit’s October 2020 Opinion

In its decision issued this week, the First Circuit affirmed the order granting the secured lender relief from stay. 

The First Circuit began by confirming that the  licensee’s appeal was not moot and that the Court possessed jurisdiction to decide the appeal.   The Court  then reviewed the merits of the licensee’s argument  on an abuse of discretion standard.   On three fundamental points raised by the licensee, the First Circuit left little doubt about its ruling.  Specifically, the Court: 

      • characterized as “poppycock” the licensee’s principal argument that the secured lender waived its liens, either implicitly or explicitly, by virtue of its participation in the bidding process;        
      • concluded  that there was “no question” that the lender held valid liens in excess of the value of the debtor’s  remaining assets and that the lender  thus satisfied its burden of proof needed to prevail on a motion for relief from stay; and        
      • rejected the licensee’s contention that the Bankruptcy Court abused its discretion by refusing to grant discovery and a full evidentiary hearing before granting relief from stay — on this point the First Circuit determined there “clearly” was no such abuse and that the licensee’s contention that the secured lender “waived its liens made no sense for a slew of  reasons.” 

Looking Ahead

Although the First Circuit’s opinion should bring to a close the dispute over the relief from stay issue, the bankruptcy case remains open.   The licensee previously filed an amended proof of claim and an administrative expense motion seeking damages for both the pre-bankruptcy and post-bankruptcy period. 

Last year, the parties agreed to defer any action on the damage claims pending the First Circuit’s decision on the challenge to the relief from stay order.   With the First Circuit ruling now issued, the parties will need to evaluate  whether to exercise rights previously reserved against each other.  

While that plays out to an inevitable conclusion at some point, others entering into business agreements of any type should keep the Tempnology situation in mind when crafting an appropriate agreement at the outset of a deal as well as strategically overcoming  obstacles that  arise.  

 

SJC Examines Nonprofit Director Immunity from Wage Act Claims

The Massachusetts Supreme Judicial Court recently issued an important decision (Lynch v. Crawford) involving a  volunteer board member’s invocation of immunity from  liability for claims made under the Massachusetts Wage Act.

The basic facts of the case are not complex. In 2013 a nonprofit health center encountered distress and closed without paying wages immediately.  Employees brought a class action lawsuit against the volunteer board chair (who was also serving as acting CEO). The board chair sought to have the suit dismissed.  He pointed to both state law (MGL c. 231, sec 85W) and federal law (42 USC sec 14503) – both of which generally seek to protect volunteers in connection with their service to nonprofits.  Although the employees were eventually paid from the entity, they nevertheless continued their Wage Act complaint (seeking treble damages and attorneys’ fees).

The trial judge denied the director’s motion to dismiss.  The  Massachusetts Appeals Court also refused to dismiss.   Neither court was convinced the above statutes necessarily provided the volunteer director absolute immunity from a Wage Act claim.    The issue  before the SJC was twofold:  (i) procedurally – was the volunteer director entitled to bring an appeal of the denial of the motion to dismiss immediately or did he need to await a final judgement; and (ii) under what circumstances (if at all) does an unpaid volunteer board member have immunity from a Wage Act suit.

In its decision, the SJC considered the intersection of the Mass Wage Act and the various immunity statues for service to a nonprofit and held that the volunteer board member was entitled to bring an immediate appeal of the lower court’s denial of his motion for summary judgement.   That holding, of course, is welcome news to any volunteer board member as the SJC recognized the importance of allowing immediate review to a board member seeking  immunity from liability by statute.

The SJC did not stop its analysis there however.   Rather, it further held that on the particular facts of the case presented, genuine issues of material fact existed that justified the denial of the director’s summary judgement motion.    Specifically, the SJC pointed to language in the state immunity law excepting “any acts or omissions intentionally  designed to harm.”   When viewing the record in the light most favorable to the nonmoving party (the Wage Act plaintiffs), the SJC determined that a genuine issue of of fact existed on that issue making denial of summary judgement appropriate.

As a result of this decision, nonprofit board members should be especially mindful of engaging in managerial acts that could be construed later as intentionally inflicting harm.  In the Crawford opinion, the SJC pointed specifically to facts indicating that the board member directed certain vendor claims to be paid before employee claims.   Although the volunteer will have the opportunity to dispute this factual issue at trial, the mere existence of such a factual issue proved sufficient to put his entitlement to immunity in jeopardy.

Filing Urges Supreme Court To Decline Review of Case Involving Trademark Rights After License Rejection

Although there has been much attention on the Supreme Court this week, a filing made earlier  today  will draw little popular notice.  Yet, the filing could have significant impact on whether the Court decides to accept a case this term which would impact the rights of trademark licensors and trademark licensees.

The filing  was made by Tempnology, LLC in opposition to a petition for a writ of certiorari filed by Mission Products Holdings, Inc. in June 2018.  Mission filed the petition to  seek Supreme Court review of a  January, 2018 opinion from the United States Court of Appeals for the First Circuit.   In that decision, the First Circuit determined that Mission, a licensee, retained no rights to continue to use trademarks previously licensed from Tempnology upon the rejection of the  license agreement by Tempnology in its chapter 11 proceeding.  See here for a copy of the petition for writ of certiorari along with a brief in support filed this summer by The International Trademark Association and another brief  in support from a  group of law professors.

The litigation over the trademark rights has been brewing for quite some time.  I wrote about the First Circuit decision in January 2018 as a LinkedIn article here and wrote about the Bankruptcy Appellate Panel opinion which proceeded that for the American Bankruptcy Institute Journal here (co-authored with Andrew Hellman).   For the past three years, I have included discussion of the issues in chapters contributed to the Norton Annual Survey of Bankruptcy Law (2018 edition due out soon, 2017 edition, and 2016 edition).

In seeking Supreme Court review of the First Circuit decision, Mission  emphasized the existence of a circuit split with the Seventh Circuit’s reasoning in Sunbeam Products Inc. v. Chicago American Manufacturing LLC, which held that although rejection constitutes a breach of contract, rejection does not terminate a trademark license or strip the nondebtor licensee of its post-breach rights under applicable nonbankruptcy law.  The First Circuit’s 2-1 decision  specifically rejected the Seventh Circuit’s reasoning in  Sunbeam.

Today’s filing acknowledges the existence of the circuit split but urges the Court to deny review on three fundamental grounds:

  • “First, the Petition overstates the depth and duration of the circuit split by attempting to recast the issue as implicating all types of intellectual property rights including patents. That way, according to the Petition, a 1985 Fourth Circuit decision on patent rights, Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985), gets swept into the calculus. But not only is Lubrizol a patent case, the issues it raised were squarely addressed by Congress and put to bed in 1988 by the enactment of 11 U.S.C. § 365(n)(1).”
  • “That brings us to the second, perhaps more fundamental, reason that the Court should deny the Petition: Congressional intent. In passing section 365(n)(1) to address issues raised by the decision in Lubrizol, Congress expressly considered the impact of rejection under the then-new statute on other intellectual property rights such as patents, but deliberately chose not to include trademarks at that time, given the disparate and complex issues involving trademarks. Instead, the legislative history reflects that Congress intended to leave issues involving trademarks for further development and evolution in the courts. At the Court of Appeals level, that exploration has only just begun. In the three decades since the enactment of section 365(n)(1), this issue has only arisen a handful of times and only twice at the Court of Appeals. Until the issues are further fleshed out by other Courts of Appeals, it would be premature for the United States Supreme Court to step in and terminate the judicial developments that Congress envisioned.”
  • “Third, even assuming a single split of circuit authority warrants the attention of this Court, the present case is not the proper vehicle for the Court to resolve these complex issues. This case is a particularly poor choice for the Supreme Court to forestall either bankruptcy court evolution of the law or appropriate legislative action to try to create new standards, because key points such as the burdens on the debtor of the continued policing of the trademark, the debtor’s balancing of those costs versus any benefits derived from that effort, and the impact of a “stranding” of the trademark were the mark to become “abandoned,” were not litigated on a developed evidentiary record below. If the Court were to take up this abstract question on such a thin evidentiary record, that would likely lead either to new standards based largely on speculation, or a further remand for fleshing out the evidence. Far better to await further development of the issues involving trademark licenses in courts as Congress expressly intended or to allow Congress to address the issue as it also contemplated.”

 If the Supreme Court declines review of the First Circuit decision, then confusion will continue to reign about trademark rights in the event of license rejection by a debtor licensor.   Although greater clarity might come someday through Congressional action or a future case finding its way to the Supreme Court neither of those paths seem likely at the moment.  Well drafted license agreements tailored to the needs of the parties and monitored carefully can help save parties years of litigation given the current legal uncertainty.