IN RE: TEMPNOLOGY, LLC, n/k/a Old Cold LLC, Debtor.
v.
TEMPNOLOGY, LLC, n/k/a Old Cold LLC, Appellee. MISSION PRODUCT HOLDINGS, INC., Appellant,
APPEAL
FROM THE BANKRUPTCY APPELLATE PANEL FOR THE FIRST CIRCUIT
Robert
J. Keach, with whom Lindsay K.Z. Milne and Bernstein, Shur,
Sawyer & Nelson, P.A. were on brief, for appellant.
Lee A.
Harrington, with whom Daniel W. Sklar and Nixon Peabody LLP
were on brief, for appellee.
Before
Torruella, Lynch, and Kayatta, Circuit Judges.
KAYATTA, Circuit Judge.
Generally
speaking, when a company files for protection under Chapter
11 of the Bankruptcy Code, the trustee or the
debtor-in-possession may secure court approval to
"reject" any executory contract of the debtor,
meaning that the other party to the contract is left with a
damages claim for breach, but not the ability to compel
further performance. 11 U.S.C. §§ 365(a), 1107(a);
see NLRB v. Bildisco & Bildisco, 465 U.S. 513,
531-32 (1984); Mason v. Official Comm. of Unsecured
Creditors, for FBI Distrib. Corp. & FBC Distrib.
Corp. (In re FBI Distrib. Corp.), 330 F.3d 36,
43-44 (1st Cir. 2003). When the rejected contract, however,
is one "under which the debtor is a licensor of a right
to intellectual property, " the licensee may elect to
"retain its rights . . . to such intellectual property,
" thereby continuing the debtor's duty to license
the intellectual property. 11 U.S.C. § 365(n)(1). In
this case, Tempnology, LLC ("Debtor") -- a
debtor-in-possession seeking to reorganize under Chapter 11
-- rejected an agreement giving certain marketing and
distribution rights to Mission Product Holdings, Inc. The
parties agree that Mission can insist that the rejection not
apply to nonexclusive patent licenses contained in the
rejected agreement. They disagree as to whether the rejection
applies to the agreement's grants of a trademark license
and of exclusive rights to sell certain of Debtor's
goods. In the case of the trademark license, resolving that
disagreement poses for this circuit an issue of first
impression concerning which other circuits are split. For the
following reasons, we agree with the bankruptcy court that
the rejection left Mission with only a pre-petition damages
claim in lieu of any obligation by Debtor to further perform
under either the trademark license or the grant of exclusive
distribution rights.
I.
Debtor
made specialized products -- such as towels, socks,
headbands, and other accessories -- designed to remain at low
temperatures even when used during exercise, which it
marketed under the "Coolcore" and "Dr.
Cool" brands. A significant intellectual property
portfolio supported Debtor's products. This portfolio
consisted of two issued patents, four pending patents,
research studies, and a multitude of registered and pending
trademarks.
On
November 21, 2012, Mission and Debtor executed a Co-Marketing
and Distribution Agreement, which serves as the focal point
of this appeal. The Agreement provided Mission with three
relevant categories of rights.
First,
Debtor granted Mission distribution rights to certain of its
manufactured products within the United States.[1] These products,
called "Cooling Accessories, " were defined in the
Agreement as "products of the specific types listed on
Exhibit A" and "manufactured by or on behalf of
[Debtor]." They also included "additional products
that are hereafter developed by [Debtor]." Exhibit A
broke down the thirteen listed products into two categories:
"Exclusive" and "Non-Exclusive" Cooling
Accessories. For "Exclusive Cooling Accessories" --
comprised of towels, wraps, hoodies, bandanas, multi-chills,
and doo rags -- Debtor agreed that "it will not license
or sell" the products "to anyone other than
[Mission] during the Term." Mission's rights with
respect to the remaining Cooling Accessories -- comprised of
socks, headbands, wristbands, sleeves, skullcaps, yoga mats,
and baselayers -- were nonexclusive because Debtor reserved
for itself the "right to sell . . . to vertically
integrated companies as well as customers that are not Sports
Distributors or retailers in the Sporting Channel."
Second,
Debtor granted Mission a nonexclusive license to Debtor's
intellectual property. This "non-exclusive, irrevocable,
royalty-free, fully paid-up, perpetual, worldwide,
fully-transferable license" granted Mission the right
"to sublicense (through multiple tiers), use, reproduce,
modify, and create derivative work based on and otherwise
freely exploit" Debtor's products -- including
Cooling Accessories -- and its intellectual property. This
irrevocable license, however, expressly excluded any rights
to Debtor's trademarks.
Trademarks
were the subject of the third bucket of rights. Section 15(d)
of the Agreement granted Mission a "nonexclusive,
non-transferable, limited license" for the term of the
Agreement "to use [Debtor's] trademark and logo (as
well as any other Marks licensed hereunder) for the limited
purpose of performing its obligations hereunder, exercising
its rights and promoting the purposes of this
Agreement." This license came with limitations. Mission
was forbidden from using the trademarks in a manner that was
disparaging, inaccurate, or otherwise inconsistent with the
terms of the Agreement. Further, Mission was required to
"comply with any written trademark guidelines" and
Debtor had "the right to review and approve all uses of
its Marks, " except for certain pre-approved uses.
The
Agreement also included a provision permitting either party
to terminate the Agreement without cause. On June 30, 2014,
Mission exercised this option, triggering a "Wind-Down
Period" of approximately two years. Debtor, in turn,
issued a notice of immediate termination for cause on July
22, 2014, claiming that Mission's hiring of Debtor's
former president violated the Agreement's restrictive
covenants. Pursuant to the Agreement's terms,
Mission's challenge to Debtor's immediate termination
for cause went before an arbitrator. The arbitrator
determined that Debtor had waived any grounds for immediate
termination under the restrictive covenant and that the
Agreement remained in effect until the expiration of the
Wind-Down Period. That ruling meant that Mission was
contractually entitled to retain its distribution and
trademark rights until July 1, 2016, and its nonexclusive
intellectual property rights in perpetuity.
Intervening
events, however, put an earlier end to the parties'
contractual relationship. Although Debtor posted profits in
2012, its financial outlook dimmed. After accruing
multi-million dollar net operating losses in 2013 and 2014,
Debtor filed a voluntary petition for Chapter 11 bankruptcy
on September 1, 2015. The following day, Debtor moved to
reject seventeen of its contracts, including the Agreement,
pursuant to 11 U.S.C. § 365(a).
Section
365(a) permits a debtor-in-possession, [2] with the
court's approval, to "reject any executory
contract" that, in the debtor's business judgment,
is not beneficial to the company. See Agarwal v. Pomona
Valley Med. Grp., Inc. (In re Pomona Valley Med.
Grp., Inc.), 476 F.3d 665, 669-71 (9th Cir. 2007);
see also Bildisco & Bildisco, 465 U.S. at 520,
523. In its memoranda supporting its motion, Debtor informed
the bankruptcy court that it sought to reject the Agreement
because it hindered Debtor's ability to derive revenue
from other marketing and distribution opportunities. Debtor
faulted Mission -- and particularly the Agreement's grant
of exclusive distribution rights -- for its bankruptcy. It
alleged that the Agreement "suffocated the Debtor's
ability to market and distribute its products" after
Mission failed to fulfill its obligations, "essentially
starving the Debtor from any income."
Mission
objected to the rejection motion, arguing that 11 U.S.C.
§ 365(n) allowed Mission to retain both its intellectual
property license and its exclusive distribution rights.
Section 365(n) provides an exception from section
365(a)'s broad rejection authority by limiting the
debtor-in-possession's ability to terminate intellectual
property licenses it has granted to other parties.
On
September 21, 2015, the bankruptcy court granted Debtor's
motion to reject certain executory contracts, except for the
Agreement, for which it ordered further hearing. In a
subsequent one-sentence order, the bankruptcy court granted
the motion to reject the Agreement, "subject to Mission
Product Holdings's election to preserve its rights under
11 U.S.C. § 365(n)." Debtor then moved for a
determination of the applicability and scope of Mission's
rights under section 365(n). In that motion, Debtor conceded
that Mission retained its nonexclusive, perpetual license to
certain of Debtor's intellectual properties -- which did
not include its trademarks -- but argued that section 365(n)
did not cover either Mission's exclusive distribution
rights or the trademark license. Mission again objected,
arguing that the relief Debtor requested required an
adversary proceeding pursuant to Rule 7001(2) of the Federal
Rules of Bankruptcy Procedure.
After
holding a nontestimonial hearing, the bankruptcy court
concluded that Mission's election pursuant to section
365(n) did not preserve either the exclusive distribution
rights or the trademark license. The court found that section
365(n) only protected intellectual property rights, and
Mission's exclusive distributorship could not fairly be
characterized as such. With respect to trademarks, the court
reasoned that Congress's decision to leave trademarks off
the definitional list of intellectual properties in 11 U.S.C.
§ 101(35A) left the trademark license unprotected from
rejection. Finally, the court rejected Mission's argument
that the Bankruptcy Code required an adversary proceeding to
determine the issue. The court viewed "the Motion in the
context of rejection under § 365, which is a contested
matter under Fed.R.Bankr.P. 9014."
Mission
appealed to the Bankruptcy Appellate Panel for the First
Circuit ("BAP"). The BAP affirmed the bankruptcy
court's order with respect to Mission's exclusive
distribution rights, concluding that "Mission's
attempt to re-characterize its exclusive product distribution
rights under the Agreement as an intellectual property
license [is] unsupported by either the letter or the spirit
of the Agreement." Like the bankruptcy court, the BAP
read section 365(n)'s protection of "exclusivity
provision[s]" as encompassing only the exclusivity
attributes, such as they might be, of intellectual property
rights. The BAP also affirmed the bankruptcy court's
determination that the section 365(n) motion did not require
Debtor to commence an adversary proceeding under Bankruptcy
Rule 7001.
Regarding
trademarks, however, the BAP diverged from the bankruptcy
court. Although the BAP agreed that section 365(n) failed to
protect Mission's rights to Debtor's trademarks, it
disagreed as to the effect of that conclusion. Rather than
finding that rejection extinguished the non-debtor's
rights, the BAP followed the Seventh Circuit's ruling in
Sunbeam Products, Inc. v. Chicago American Manufacturing,
LLC, 686 F.3d 372 (7th Cir. 2012). The BAP held that,
because section 365(g) deems the effect of rejection to be a
breach of contract, and a licensor's breach of a
trademark agreement outside the bankruptcy context does not
necessarily terminate the licensee's rights, rejection
under section 365(g) likewise does not necessarily eliminate
those rights. Thus, the BAP reversed the bankruptcy
court's determination that Mission no longer had
protectable rights in Debtor's trademarks and trade
names.
This
appeal ensued. We affirm the bankruptcy court's
determinations. We conclude that section 365(n) does not
apply to Mission's right to be the exclusive distributor
of Debtor's products, or to its trademark license. Unlike
the BAP and the Seventh Circuit, we also hold that
Mission's right to use Debtor's trademarks did not
otherwise survive rejection of the Agreement.
II.
On
appeal from a decision by the BAP, "[w]e accord no
special deference to determinations made by the [BAP], "
and instead "train the lens of our inquiry directly on
the bankruptcy court's decision."[3] Wheeling
& Lake Erie Ry. Co. v. Keach (In re Montreal,
Maine & Atl. Ry., Ltd.), 799 F.3d 1, 5 (1st Cir.
2015). In doing so, we review the bankruptcy court's
factual findings for clear error and its conclusions of law
de novo. DeGiacomo v. Traverse (In re
Traverse), 753 F.3d 19, 24 (1st Cir. 2014).
III.
We
begin with the statutory framework that defines the scope of
Debtor's ability, "subject to the court's
approval, " to "assume or reject any executory
contract or unexpired lease of the debtor." 11 U.S.C.
§ 365(a). Executory contracts, although not defined in
the Bankruptcy Code, are generally considered to be contracts
"on which performance is due to some extent on both
sides." In re FBI Distrib. Corp., 330 F.3d at
40 n.5 (quoting Bildisco & Bildisco, 465 U.S. at
522 n.6); see also Parkview Adventist Med. Ctr. v. United
States ex rel. Dep't of Health & Human Servs.,
842 F.3d 757, 763 n.12 (1st Cir. 2016). Section 365(a)
permits the debtor-in-possession to assume those contracts
that are beneficial and reject those that may hinder its
recovery. In re FBI Distrib. Corp., 330 F.3d at 42.
It provides an "elixir for use in nursing a business
back to good health" by allowing the trustee or
debtor-in-possession to "prescribe it as an emetic to
purge the bankruptcy estate of obligations that promise to
hinder a reorganization." Thinking Machs. Corp. v.
Mellon Fin. Servs. Corp. (In re Thinking Machs.
Corp.), 67 F.3d 1021, 1024 (1st Cir. 1995). Section
365(a) thus furthers Chapter 11's "paramount
objective" of rehabilitating debtors. In re FBI
Distrib. Corp., 330 F.3d at 41. In lieu of the rejected
obligation, a debtor is left with a liability for what the
Code deems to be a pre-petition breach of the contract. 11
U.S.C. § 365(g) ("[T]he rejection of an executory
contract or unexpired lease of the debtor constitutes a
breach of such contract or lease . . . immediately before the
date of the filing of the petition . . . .").
In
1985, the Fourth Circuit was tasked with applying this
framework to an intellectual property license granted by a
debtor. See Lubrizol Enters., Inc. v. Richmond Metal
Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985).
The Fourth Circuit held that the term "executory
contract" in section 365(a) encompassed intellectual
property licenses, id. at 1045, and that under
section 365(g) the effect of rejection was to terminate an
intellectual property license, id. at 1048. The
court based its reasoning on what it saw as the animating
principles behind section 365(g), thus distinguishing
"statutory breach" from common law breach:
Even though § 365(g) treats rejection as breach, the
legislative history of § 365(g) makes clear that the
purpose of the provision is to provide only a damages remedy
for the non-bankrupt party. . . . [T]he statutory
"breach" contemplated by § 365(g) controls,
and provides only a money damages remedy for the non-bankrupt
party. . . . Allowing specific performance would obviously
undercut the core purpose of rejection under § 365(a).
Id.
Three
years later, Congress responded. Rather than amending either
section 365(a) or section 365(g), Congress enacted a brand
new section 365(n). See S. Rep. No. 100-505, at 8
(1988). Section 365(n)(1) gives to a licensee of intellectual
property rights a choice between treating the license as
terminated and asserting a claim for pre-petition damages --
a remedy the licensee held already ...