The United States Supreme Court recently decided an issue involving trademark licenses in bankruptcy that for years had split the lower courts. Prior to this decision, when a trademark licensor entered bankruptcy it had a choice to either continue with any existing trademark license agreements or terminate the agreements. The effect was trademark licensors would terminate trademark license agreements it deemed in its business judgment were unfavorable leaving the trademark licensee in a difficult spot.
In an 8-1 decision, the U.S. Supreme Court decided that trademark licensors will no longer have this choice. Instead, a trademark licensor that rejects a trademark license while in a bankruptcy proceeding is breaching not terminating the trademark license. Jay L. Westbrook, a professor at the University of Texas School of Law, in an article for Bloomberg Law said the decision “establishes the basic principle that once you transfer a property right, it won’t vaporize if the transferor files bankruptcy.” Professor Westbrook is right that this decision prevents the trademark licensee’s right from vaporizing overnight. But that does not mean the right will not eventually vaporize.
A trademark owners obligation to engage in quality control is a legal not contractual obligation. The purpose of a trademark is to indicate a single source of goods or services, and this is accomplished by the trademark licensor’s exercise of control of the quality of the goods and services offered under the licensed trademark. The legal consequence of not exercising quality control is an abandonment of all trademark rights.
Generally, trademark licensees want to be left alone from the trademark licensor. And trademark licensors are happy to oblige, which is why the trademark licensor’s exercise of actual quality control in couched in terms that leave it to the discretion of the trademark licensor. However, with this recent Supreme Court decision, trademark licensees may need to change their position on this even if it means more oversight from trademark licensors.
The practical effect of the U.S. Supreme Court’s decision will likely be that trademark licensors in bankruptcy will not reject trademark licenses because they do not want to be in breach of contract. They will simply stop exercising any quality control. Nothing in the U.S. Supreme Court decision forces trademark licensors to engage in quality control. Trademark licensees will still need to implement a Plan B, just later than they otherwise would have under the old law.
To guard against this possibility and to provide the trademark licensee with some recourse, trademark licensees may need to negotiate an affirmative contractual obligation on trademark licensors to engage in quality control.