Trademark Licensees Retain Rights After Licensors’ Bankruptcy
Resolving a circuit split, the U.S. Supreme Court held that a trademark owner’s rejection of a license agreement during a Chapter 11 proceeding does not extinguish the licensee’s rights under that agreement.
The 8-1 opinion in Mission Product Holdings, Inc. v. Tempnology, LLC should bring a great deal of comfort to trademark licensees whose continued ability to use and leverage licensed marks is no longer at risk in the event of a licensor’s insolvency, says Michelle Zimmermann, a shareholder in Leydig’s Chicago office.
“This decision puts licensees in the driver’s seat when their licensor files for bankruptcy and rejects their agreement,” she says. “If the license is profitable, they can keep on using it without disruption. If, on the other hand, the agreement has become a losing proposition, they are now free to walk away without any repercussions.”
At issue in the case was Section 365 of the Bankruptcy Code, which allows a Chapter 11 debtor to “reject” executory contracts as part of its reorganization efforts. Such rejections are treated as breaches of contract, with the effect of such breaches being the same as they would be under applicable non-bankruptcy law.
After Tempnology rejected its license agreement with Mission during its Chapter 11 proceeding, the bankruptcy court concluded the rejection terminated Mission’s rights. The Bankruptcy Appellate Panel reversed, however, relying on the U.S. Court of Appeals for the Seventh Circuit’s decision in Sunbeam Products, Inc. v. Chicago American Manufacturing, in which it concluded that since Section 365 deems a rejection to be a breach of contract, a licensee’s rights survive that rejection.
Ruling on Mission’s appeal, the U.S. Court of Appeals for the First Circuit saw things differently. In affirming the bankruptcy court’s initial decision, the First Circuit adopted the view of the Fourth Circuit by deciding that a licensee’s rights to continue using a licensed mark end upon rejection.
In an opinion authored by Justice Kagan, the Court reversed the First Circuit and affirmed the Seventh Circuit’s conclusion in Sunbeam that non-debtor parties, including trademark licensees, retain whatever rights they would have under applicable non-bankruptcy law following a breach of the agreement.
“A rejection breaches a contract but does not rescind it. And that means all the rights that would ordinarily survive a contract breach, including those conveyed here [the trademark license], remain in place,” Kagan wrote. After rejecting a contract, the debtor “can stop performing its remaining obligations under the agreement. But the debtor cannot rescind the license already conveyed. So the licensee can continue to do whatever the license authorizes.”
While the Court’s decision clarifies this issue, it also creates complications and quandaries for trademark licensors-debtors, says Stella Brown, an associate in Leydig’s Chicago office.
“An insolvent licensor will have to decide whether to use its limited resources to continue monitoring and exercising quality control over the licensee’s use of the mark or risk losing its rights in the mark, which may be one of the few valuable assets it has left,” she says.
The Court addressed this issue in its opinion, dismissing Tempnology’s argument that imposing these continuing and costly burdens on a bankrupt licensor seems contrary to the whole idea of rejection, which is to free a debtor from such burdens so it can reorganize.
“However serious Tempnology’s trademark-related concerns, that would allow the tail to wag the Doberman,” the Court noted.
PTAB Issues Flurry of Precedential Decisions
From 2013-2018, the Patent Trial and Appeal Board (PTAB) designated 12 decisions as precedential – cases that become binding authority for the Board in subsequent matters involving similar facts or issues. The Board has nearly matched that total in a mere 10 months since revising its standard operating procedure regarding precedential designations in September 2018.
This flurry of precedential decisions is neither an accident nor a surprise. It reflects not only the procedural changes contained in Revised SOP2 – specifically, the ability of parties to nominate cases for designation – but also PTAB’s desire to provide clarity and direction for those affected, says Aaron Feigelson, a shareholder in Leydig’s Chicago office.
“After the America Invents Act (AIA), inter partes review (IPR) proceedings, post-grant reviews (PGR) and covered business method (CBM) cases flooded PTAB, necessitating a dramatic increase in the number of judges and panels hearing cases,” Feigelson says. “When combined with many statutory gaps in the procedural rules and substantive considerations applicable to these nascent proceedings, this plethora of panels created a frustrating lack of predictability for litigants. I think these designations are part of PTAB’s efforts to remedy that.”
Under Revised SOP2, anyone may nominate a previously issued decision as being precedential. The nominated decision must undergo a multilevel review process that involves a screening committee, an executive judge’s committee, and PTAB’s director. The Board can also apply the designation independently, as was the case under the previous procedure.
The 11 precedential decisions designated since last fall involve IPRs, PGRs, and CBMs, addressing such issues as motions to amend, real parties in interest, and joinder. Collectively, these opinions reflect, in part, what Feigelson calls a “course correction” by PTAB; an attempt to counter the widely held perception that proceedings have been unfair and prejudicial to patent holders.
“Along with recent Supreme Court and Federal Circuit decisions that will likely result in fewer challenges and an increase in refusals to institute, some of these precedential opinions make life harder for petitioners and provide greater opportunities for patent owners,” Feigelson says. “While all parties benefit from the clarity and predictability that come from these designations, the PTAB pendulum generally seems to be swinging back toward patentees.”
USPTO Updates Guidance on Computer-Implemented Inventions
In a self-described effort “to ensure consistent, predictable, and correct application” of the law, the U.S. Patent and Trademark Office (USPTO) recently provided new guidance as to how it will address and analyze subject matter eligibility under 35 U.S.C. §101 and how it will apply 35 U.S.C. §112 to computer-implemented inventions.
Subject matter eligibility
The USPTO’s revised guidance regarding the application of Section 101, in view of the Supreme Court’s decision in Alice v. CLS Bank and subsequent court interpretations of the decision, “extracts and synthesizes key concepts courts have identified as abstract ideas to explain that the abstract idea exception includes certain groupings of subject matter: mathematical concepts, certain methods of organizing human activity, and mental processes,” it said in announcing the changes.
If a claim does not “fall within” one of the three specifically enumerated categories, then the claim is likely directed to patentable subject matter under the revised guidance.
This guidance is not intended to change the scope of the abstract idea exception, but it seeks to clarify the procedure examiners use to determine whether a claim is eligible for patenting, says Mark Joy, a shareholder in Leydig’s Chicago office.
“The USPTO guidance seeks to replace highly subjective criteria by drawing a clear line between abstract ideas and patent-eligible subject matter, and thus make clear what the USPTO will allow and what it will not,” Joy says. “It will improve the ability of a party to assess the patentability of their invention at the outset.”
“This guidance is not without its controversy,” he adds. “Namely, the USPTO’s guidance appears to identify patent-eligible claims in its examples that are considered to potentially contradict Federal Circuit precedent.”
This concern was realized on April 1 when the Federal Circuit specifically criticized and rejected an example provided in the USPTO guidance for a patent-eligible claim directed to diagnosing a biological condition in a human. In finding the claims invalid under Section 101, the Federal Circuit specifically stated that it is not bound by the USPTO guidance. While the Federal Circuit has not specifically commented on other examples accompanying the USPTO’s guidance, the Federal Circuit’s express rejection of one specific example serves as a reminder that USPTO determinations of patent eligibility do not provide a safe harbor in subsequent litigation. One may also expect the USPTO to revise its guidance in view of subsequent court decisions.
The USPTO’s recent guidance also provides a secondary determination that may save an invention that was deemed to fall within one of the three above-mentioned categories of traditional abstract ideas. In particular, a claim falling within one of the three traditional areas of abstract ideas may be patent-eligible if the examiner determines that the otherwise abstract idea “is integrated into a practical application of that exception.”
“This clarification also does not change the process for inventors, but in the area of computer technology, it does reinforce the need for parties to identify a technological problem they are solving with their technology and provide a detailed description of how their invention addresses the technological problem,” Joy says. “In other words, an application should describe with a high degree of clarity and detail how the claimed solution works.”
The takeaway from the recent developments in the USPTO and the subsequent court decisions is that while a concerted effort is underway to clarify the line between ineligible abstract ideas and patentable technological innovations, the line is unclear and controversial. One can improve the chances of avoiding invalidity under Section 101/Alice, however, by clearly identifying a technological problem and describing (in detail) a technological solution. The description of a technological solution involves describing the functionality of the invention and how the functionality is carried out.
The “Computer-Implemented Functional Claim Limitations Guidance” as to Section 112 aims to help USPTO personnel examine claims “that contain functional language, particularly patent applications where functional language is used to claim computer-implemented inventions.”
The Section 112 guidance focuses on the need to provide sufficient technical detail related to the implementation of a claimed function and how an intended outcome or solution is accomplished.
In making a determination of whether to interpret a claim term under 35 U.S.C. § 112(f), the guidance states that “examiners should check whether: (1) the specification provides a description sufficient to inform one of ordinary skill in the art that the term denotes structure; (2) general and subject matter specific dictionaries provide evidence that the term has achieved recognition as a noun denoting structure; and (3) the prior art provides evidence that the term has an art-recognized structure to perform the claimed function.”
When a claim term is interpreted as a means-plus-function limitation, the specification must disclose components and/or an algorithm for performing the function, or else the claim may be indefinite under 35 U.S.C. § 112(b).
To satisfy the written description requirement under Section 112(a), the guidance provides that “the specification must describe the claimed invention in sufficient detail such that one skilled in the art can reasonably conclude that the inventor had possession of the claimed invention at the time of filing. For instance, the specification must provide a sufficient description of an invention, not an indication of a result that one might achieve.”
This guidance means that the specification for computer-implemented inventions cannot include only “black box” drawings that give short shrift to the underlying system components that achieve a specific result, says Brian Loker, counsel in Leydig’s San Francisco Bay Area office.
“When you draft claims directed to computer-implemented inventions, the specification needs to disclose the hardware and software algorithms in sufficient detail,” Loker says. “Claimants should always include structural diagrams that lay out the system components and flowcharts showing the steps of any algorithms to satisfy the disclosure requirements under the new guidance.”
Awards and Announcements
- Chambers USA has recognized Leydig as a leading intellectual property firm, with H. Michael Hartmann receiving individual recognition.
- Managing IP recommended Leydig in the areas of Patent Prosecution, Patent Contentious, Trademark, and Life Sciences. Bruce Gagala, H. Michael Hartmann, John Kilyk, Tammy Miller, Chip Mottier, Wes Mueller, Pam Ruschau, Steve Sklar and Claudia Stangle were recognized as IP Stars.
- The World Trademark Review has selected Mark Liss as a 2019 Global Leader.
- Max Snow joins our Frankfurt office as an Associate. He holds a Bachelor of Science degree in mechanical engineering from the University of Illinois and a law degree from the University of Chicago.
- Michael Burleigh joins our Boulder office as an Associate. He holds a Bachelor of Science degree in chemical engineering from the University of Colorado and a law degree from the University of Denver.