Protecting Exclusive Distribution Rights For Patented Products And Other Licensed IP

• Published date: 03 August 2020
• Subject Matter: Intellectual Property, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Licensing & Syndication, Patent, Trademark
• Law Firm: Sheppard Mullin Richter & Hampton
• Author: Ms Kandace P. Watson and Jeannie Kim

This post originally appeared as an article in the July/August 2020 issue of the Journal of Corporate Renewal (JCR), the official publication of the Turnaround Management Association (TMA).

The ability of companies to continue as going concerns has become more challenging than ever. As companies pivot and move forward with product production and sales, they must consider not only their financial viability but the financial viability of their customers, suppliers, and licensors.

For companies that offer or sell products that are protected under third-party intellectual property rights, preserving a company's rights to continue to make, use, sell, offer for sale, and import the products that are subject to third-party patent rights is a key consideration. Additionally, the ability to market and distribute products under third-party protected brand names or trademarks may be important.

What happens to a company's exclusive distribution rights or rights to use licensed trademarks granted under a contract when the licensor becomes a debtor in a case under the U.S. Bankruptcy Code? A company's ability to protect its contractual rights may very well depend on how it structured its contract. Last year, the U.S. Supreme Court resolved a circuit split regarding this question when it decided Mission Products Holdings, Inc. v. Tempnology, LLC.¹

This article revisits the Supreme Court's ruling and suggests strategies distributors and licensees may consider employing at the outset when negotiating exclusive distribution and licensing agreements to protect themselves in the event a grantor or licensor ends up in bankruptcy.

The Parties' Dispute

Less than two years before filing for bankruptcy, Tempnology LLC, a manufacturer of athletic clothing and accessories designed to keep wearers cool during exercise, entered into a co-marketing and distribution agreement with Mission Products Holdings Inc. for an initial term of two years, subject to automatic oneyear renewals. More specifically, Tempnology granted to Mission:

1. Exclusive distribution rights to sell certain branded products covered by patents and copyrights held by Tempnology (Coolcore Products) to sporting goods retailers in the United States during the term of the agreement and the wind-down period
2. Exclusive distribution rights to sell a particular subset of the Coolcore Products to anyone in the United States during the term
3. A nonexclusive, fully paid irrevocable, perpetual, worldwide, fully transferable license to use Tempnology's intellectual property other than trademarks (IP license)²
4. A limited, nonexclusive license to use the trademarks associated with the Coolcore Products during the term

The agreement separated the provisions granting the exclusive distribution rights from the provisions granting the IP license. Further, either party could terminate the agreement at any time without cause by giving written notice to the other party. Upon such a termination, a two-year winddown period would ensue, during which Mission would continue to have rights to purchase, distribute, and sell the Coolcore Products with the same exclusivity rights that existed pretermination. (Though not confirmed explicitly in the lower court opinions, it is reasonable to assume, for reasons discussed later in this article, that the agreement also provided for termination for cause and elimination of the wind-down period if the agreement was terminated by the grantor for cause in accordance with its terms.)

Less than two years after the parties entered into the agreement, Mission notified Tempnology that it was exercising its termination rights without cause, purportedly triggering the commencement of the two-year wind-down period. Tempnology, in turn, notified Mission that it was terminating the agreement for cause based on the alleged breach of the agreement by Mission. The dueling notices precipitated an arbitration proceeding, in the first phase of which the arbitrator determined that the agreement remained in full force and effect.³ Before the arbitration could be completed, however, Tempnology filed a petition for relief under Chapter 11 of the Bankruptcy Code. That filing stayed the arbitration proceeding.

Almost immediately after filing for bankruptcy, Tempnology sought to reject the agreement under...