MISSION PRODUCT HOLDINGS, INC.
TEMPNOLOGY, LLC, NKA OLD COLD LLC
February 20, 2019
WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR
THE FIRST CIRCUIT
Petitioner Mission Product Holdings, Inc., entered into a
contract with Respondent Tempnology, LLC, which gave Mission
a license to use Tempnologyâs trademarks in connection with
the distribution of certain clothing and accessories.
Tempnology filed for Chapter 11 bankruptcy and sought to
reject its agreement with Mission. Section 365 of the
Bankruptcy Code enables a debtor to âreject any executory
contractââ meaning a contract that neither party has finished
performing. 11 U. S. C. Â§365(a). It further provides that
rejection âconstitutes a breach of such contract.â Â§365(g).
The Bankruptcy Courtapproved Tempnologyâs rejection and
further held that the rejectionterminated Missionâs rights to
use Tempnologyâs trademarks. The Bankruptcy Appellate Panel
reversed, relying on Section 365(g)âs statement that
rejection âconstitutes a breachâ to hold that rejectiondoes
not terminate rights that would survive a breach of contract
outside bankruptcy. The First Circuit rejected the Panelâs
judgment and reinstated the Bankruptcy Courtâs decision.
1. This case is not moot. Mission presents a plausible claim
for money damages arising from its inability to use
Tempnology's trademarks, which is sufficient to preserve
a live controversy. See Chafin v. Chafin, 568 U.S.
165, 172. Tempnology's various arguments that Mission is
not entitled to damages do not so clearly preclude recovery
as to render this case moot. Pp. 6-7.
2. A debtor's rejection of an executory contract under
Section 365 of the Bankruptcy Code has the same effect as a
breach of that contract outside bankruptcy. Such an act
cannot rescind rights that the contract previously granted.
(a) Section 365(g) provides that rejection "constitutes
a breach." And "breach" is neither a defined
nor a specialized bankruptcy term-it means in the Code what
it means in contract law outside bankruptcy. See Field v.
Mans, 516 U.S. 59, 69. Outside bankruptcy, a
licensor's breach cannot revoke continuing rights given
to a counterparty under a contract (assuming no special
contract term or state law). And because rejection
"constitutes a breach," the same result must follow
from rejection in bankruptcy. In preserving a
counterparty's rights, Section 365 reflects the general
bankruptcy rule that the estate cannot possess anything more
than the debtor did outside bankruptcy. See Board of
Trade of Chicago v. Johnson, 264 U.S. 1, 15. And
conversely, allowing rejection to rescind a
counterparty's rights would circumvent the Code's
stringent limits on "avoidance" actions-the
exceptional cases in which debtors may unwind pre-bankruptcy
transfers that undermine the bankruptcy process. See,
e.g., §548(a). Pp. 8-12.
(b) Tempnology's principal counterargument rests on a
negative inference drawn from provisions of Section 365
identifying categories of contracts under which a
counterparty may retain specified rights after rejection. See
§§365(h), (i), (n). Tempnology argues that these
provisions indicate that the ordinary consequence of
rejection must be something different-i.e., the
termination of contractual rights previously granted. But
that argument offers no account of how to read Section 365(g)
(rejection "constitutes a breach") to say
essentially its opposite. And the provisions Tempnology
treats as a reticulated scheme of exceptions each emerged at
a different time and responded to a discrete problem-as often
as not, correcting a judicial ruling of just the kind
Tempnology's remaining argument turns on how the special
features of trademark law may affect the fulfillment of the
Code's goals. Unless rejection terminates a
licensee's right to use a trademark, Tempnology argues, a
debtor must choose between monitoring the goods sold under a
license or risking the loss of its trademark, either of which
would impede a debtor's ability to reorganize. But the
distinctive features of trademarks do not persuade this Court
to adopt a construction of Section 365 that will govern much
more than trademark licenses. And Tempnology's plea to
facilitate reorganizations cannot overcome what Section
365(a) and (g) direct. In delineating the burdens a debtor
may and may not escape, Section 365's edict that
rejection is breach expresses a more complex set of aims than
Tempnology acknowledges. Pp. 12-16.
879 F.3d 389, reversed and remanded.
J., delivered the opinion of the Court, in which ROBERTS, C.
J., and and THOMAS, GINSBURG, BREYER, ALITO, SOTOMAYOR, and
KAVANAUGH, JJ., joined. SOTOMAYOR, J., filed a concurring
opinion. GORSUCH, J., filed a dissenting opinion.
365 of the Bankruptcy Code enables a debtor to "reject
any executory contract"-meaning a contract that neither
party has finished performing. 11 U.S.C. §365(a). The
section further provides that a debtor's rejection of a
contract under that authority "constitutes a breach of
such contract." §365(g).
we consider the meaning of those provisions in the context of
a trademark licensing agreement. The question is whether the
debtor-licensor's rejection of that contract deprives the
licensee of its rights to use the trademark. We hold it does
not. A rejection breaches a contract but does not rescind it.
And that means all the rights that would ordinarily survive a
contract breach, including those conveyed here, remain in
case arises from a licensing agreement gone wrong. Respondent
Tempnology, LLC, manufactured clothing and accessories
designed to stay cool when used in exercise. It marketed
those products under the brand name "Coolcore,"
using trademarks (e.g., logos and labels) to
distinguish the gear from other athletic apparel. In 2012,
Tempnology entered into a contract with petitioner Mission
Product Holdings, Inc. See App. 203-255. The agreement gave
Mission an exclusive license to distribute certain Coolcore
products in the United States. And more important here, it
granted Mission a non-exclusive license to use the Coolcore
trademarks, both in the United States and around the world.
The agreement was set to expire in July 2016. But in
September 2015, Tempnology filed a petition for Chapter 11
bankruptcy. And it soon afterward asked the Bankruptcy Court
to allow it to "reject" the licensing agreement.
11 of the Bankruptcy Code sets out a framework for
reorganizing a bankrupt business. See §§1101- 1174.
The filing of a petition creates a bankruptcy estate
consisting of all the debtor's assets and rights. See
§541. The estate is the pot out of which creditors'
claims are paid. It is administered by either a trustee or,
as in this case, the debtor itself. See §§1101,
365(a) of the Code provides that a "trustee [or debtor],
subject to the court's approval, may assume or reject any
executory contract." §365(a). A contract is
executory if "performance remains due to some extent on
both sides." NLRB v. Bildisco & Bildisco,
465 U.S. 513, 522, n. 6 (1984) (internal quotation marks
omitted). Such an agreement represents both an asset (the
debtor's right to the counterparty's future
performance) and a liability (the debtor's own
obligations to perform). Section 365(a) enables the debtor
(or its trustee), upon entering bankruptcy, to decide whether
the contract is a good deal for the estate going forward. If
so, the debtor will want to assume the contract, fulfilling
its obligations while benefiting from the counterparty's
performance. But if not, the debtor will want to reject the
contract, repudiating any further performance of its duties.
The bankruptcy court will generally approve that choice,
under the deferential "business judgment" rule.
Id., at 523.
to Section 365(g), "the rejection of an executory
contract[ ] constitutes a breach of such contract." As
both parties here agree, the counterparty thus has a claim
against the estate for damages resulting from the
debtor's nonperformance. See Brief for Petitioner 17, 19;
Brief for Respondent 30-31. But such a claim is unlikely to
ever be paid in full. That is because the debtor's breach
is deemed to occur "immediately before the date of the
filing of the [bankruptcy] petition," rather than on the
actual post-petition rejection date. §365(g)(1). By thus
giving the counterparty a pre-petition claim, Section 365(g)
places that party in the same boat as the debtor's