On May 20, 2019, the Supreme Court decided Mission Product Holdings, Inc. v. Tempnology, LLC, No. 17–1657, holding that a bankruptcy debtor’s rejection of an executory trademark license under § 365 of the Bankruptcy Court acts as a pre-petition breach of the contract, not a rescission of the contract. Thus, the other party retains whatever rights it had under the contract before its breach.
Section 365(a) of the Bankruptcy Code enables a debtor to “reject” executory contracts — i.e., contracts as to which performance remains due to some extent on both sides. And § 365(g) provides that when a debtor rejects an executory contract, the rejection constitutes a breach of the contract that is deemed to occur immediately before the filing of the bankruptcy petition (i.e., a pre-petition breach).
Tempnology made clothing and accessories designed to stay cool during exercise. In 2012, it gave Mission Product Holdings an exclusive domestic license to distribute its products and a non-exclusive global license to use its trademarks. In 2015, Tempnology filed bankruptcy. And soon after filing, it rejected the license agreement under § 365(a).
The question became whether Tempnology’s rejection of the trademark licenses deprived Mission of the right to continue to use the trademarks. The Bankruptcy Court declared that Tempnology’s rejection of the license agreement terminated Mission’s right to use the marks. The Bankruptcy Appellate Panel for the First Circuit reversed, holding that rejection of an executory contract constitutes only a pre-petition breach by the debtor, not a rescission of the contract, and that Mission continued to have the right to use the marks. The First Circuit reversed, thus reinstating the Bankruptcy Court’s ruling.
The Supreme Court reversed. The Court stated that § 365(g) specifically provides that rejection of an executory contract “constitutes a breach” of the contract. Because “breach” is not defined in the Bankruptcy Code, it has the same meaning as it does under non-bankruptcy contract law. And under basic contract law, breach of a contract gives the other party the right to sue for damages caused by the breach as well as the right to either terminate or continue with the contract. Because Tempnology had no right outside of bankruptcy to force a rescission of the contract by breaching it (it was Mission’s choice whether to treat the breach as a rescission or not), Tempnology had no right to force a rescission of the contract through rejection in bankruptcy either.
Justice Kagan delivered the opinion for the Court, joined by Chief Justice Roberts and Justices Thomas, Ginsburg, Breyer, Alito, Sotomayor, and Kavanaugh. Justice Gorsuch filed a dissenting opinion.