A bankrupt debtor may breach a trademark licensing agreement, but it may not rescind it.

So ruled the Supreme Court today in a case that had split the circuits over the handling of trademarks deals in bankruptcy.

Justice Elena Kagan wrote that the parties and the court had offered up a stark choice in Mission Products Holdings v. Tempnology: Treating the breach of a trademark contract like any other outside bankruptcy, or terminating the entire agreement along with the intellectual property rights it conferred.

“The debtor can stop performing its remaining obligations under the agreement,” Kagan wrote. “But the debtor cannot rescind the license already conveyed. So the licensee can continue to do whatever the license authorizes.”

Mission Product sits at the intersection of bankruptcy and trademark law. It has split the circuits and stumped Congress.

The First Circuit had followed the logic of the Fourth Circuit's 1985 ruling in Lubrizol Enterprises v. Richmond Metal Finishers, which said the rejection of an IP license under Section 365(a) of the Bankruptcy Code abrogates the licensee's rights. Congress overruled Lubrizol three years later, but only for patents and copyrights. It carved out trademarks, saying they require more study because of the ongoing quality control licensors must maintain over their marks.

New York-based Mission Product Holdings Inc. and a squadron of amici curiae had called on the Supreme Court to adopt the Seventh Circuit's position in Sunbeam Products v. Chicago American. Judge Frank Easterbrook had written that licensees should be free to continue using the marks they've bargained for and, in many cases, invested their own money in, rather than seeing them “vaporized.”

New Hampshire-based Tempnology LLC argued the First Circuit properly ruled that trademark licenses are swept into the bankruptcy estate as would any other “executory” contract, leaving the licensee with a pre-petition claim for damages that is typically worth pennies on the dollar. Mission Product argued that it shouldn't lose the trademark rights that it bargained for.

Kagan put Lubrizol to rest when it comes to trademarks: “Congress's repudiation of Lubrizol for patent contracts does not show any intent to ratify that decision's approach for almost all others.” Rather, as outlined by Sunbeam, “The debtor cannot rescind the license already conveyed. So the licensee can continue to do whatever the license authorizes,” she wrote.

Justice Sonia Sotomayor concurred with the understanding that while licenses surviving bankruptcy would be the default, special terms in a licensing contract or state law could affect the outcome in individual cases.

Justice Neil Gorsuch dissented, saying the case should have been dismissed as improvidently granted because Mission Product's license has expired, and it's not clear any case or controversy remains.

Tempnology is a developer of chemical-free cooling fabrics designed to make towels, socks and headbands not retain heat during exercise. It entered into a co-marketing and distribution agreement with Mission Product in 2012 that gave Mission the exclusive right to sell certain products in the United States. Either party could terminate the agreement without cause, subject to a two-year winding-down period.

The relationship soured in 2014. An arbitrator ruled that Mission was entitled to maintain its distribution and trademark rights through July 2016, even though Mission had made clear it didn't intend to make any further orders.

Tempnology filed for Chapter 11 protection in 2015, saying that Mission had “starved” it of income. The company moved to reject its executory contracts—that is, contracts like the marketing agreement where both sides had ongoing obligations to perform—and sold off its assets, including its trademarks.

Ropes & Gray partner Douglas Hallward-Driemeier had argued that trademark licenses are unique. “The property is really just the property interest in the owner's reputation,” he said. “Without that control, it ceases to exist.”

Zachary Tripp, assistant to the solicitor general, had supported licensee Mission Products. If a trademark owner stops performing quality control, “that does not instantly destroy the mark,” he argued. In the meantime, “the licensee should maintain its rights, and can perform quality control itself.”

On behalf of Mission Product, Wilmer Cutler Pickering Hale and Dorr partner Danielle Spinelli argued that Congress never intended that bankruptcy entities could take back rights already conveyed to a licensee.

Kagan agreed: “By insisting that the same counterparty rights survive rejection as survive breach, the rule prevents a debtor in bankruptcy from recapturing interests it had given up.”

Kenneth Parker, an IP partner at Haynes and Boone who's not involved in the case, called that “the touchstone of the opinion”—that a debtor-licensor can't gain things of value by breaching agreements. That's a win not only for licensees, but also licensors in the long term, he said. “It creates more certainty. More certainty makes licenses more valuable.”

Debevoise & Plimpton partners Jeffrey Cunard and Henry Lebowitz, who were among the authors of an amicus curia brief on behalf of the International Trademark Association, said licensees sometimes tried to negotiate for bankruptcy contingencies, but doing so required a lot of extra contracting and overhead. And even then, “there's no such thing as a bankruptcy proof vehicle,” Cunard said.

“The court invites Congress to do something different,” Cunard said. “But I think there's a decent chance that, due to an 8-1 opinion, that the issue will now be regarded as settled.”

Ropes & Gray's  Hallward-Driemeier said the decision will make reorganization more difficult for trademark holders. But he said, the court turned away Mission Product's claim to an exclusive right to Tempnology's mark, and without that claim “it appears that Mission has no basis for any claim against Tempnology.”