Image: Prada

Few big-name fashion brands make money by selling runway looks – or clothing at all, in no small number of cases. Their revenue is largely derived from branded handbags and footwear, as well as a slew of more accessibly-priced products, such as those that are created by others under their names. Chanel, Prada, and Versace’s sunglasses, for instance, are made by another company: eyewear giant Luxottica. Celine’s eyewear comes from Marcolin. Gucci’s branded beauty products are made Coty, and all of these arrangements, among many others, fall neatly within the industry’s well-established penchant for licensing.

Given the prevalence of licensed goods within the fashion industry, and the significant role that these big-money partnerships – which see brands trade off the right to use their names and logos (i.e., their trademarks) in certain goods categories in exchange for oft-hefty royalties – play in terms of luxury brands’ bottom lines, paired with the increasingly long list of retail bankruptcies, a recent decision from the Supreme Court is of interest. On Monday, the highest court in the U.S. sounded off on what happens to a license agreement between a brand and the licensee when a brand goes bankrupt.

The case, Mission Product Holdings, Inc. v. Tempnology, LLC, centers on a licensing agreement between Mission Product and Tempnology in which Mission was granted the right to make, market, and sell athletic apparel using Tempnology’s trademark and logo. Three years after they entered into the agreement, Tempnology filed for Chapter 11 bankruptcy and issued a rejection of their ongoing licensing agreement. Mission filed suit to determine whether the contract breach by Tempnology could legally revoke their agreement, and thus, rob Mission of its right to use Tempnology’s trademarks.

Writing for the 8-1 majority, Justice Elena Kagan stated on Monday, “The question is whether the [bankrupt brand’s] rejection of [an existing licensing] contract deprives the licensee of its rights to use the trademark. We hold it does not.” Instead, Justice Kagan asserts that such “a rejection breaches [the] contract but does not rescind it. And that means all the rights that would ordinarily survive a contract breach, including those conveyed here, remain in place.”

In short: just because a brand files for bankruptcy does not mean that it can terminate existing licensing deals as a result.

As Mark A. Salzberg, a partner in Squire Patton Boggs’ Washington, DC office, wrote on Monday, “The importance of Mission Product cannot be overstated,” especially for an industry as prone to bankruptcy as retail. “While prior to today the post-rejection rights of trademark licensees were questionable and largely dependent upon where the bankruptcy case was filed, [the Supreme Court’s] holding makes clear that rejection of a trademark license does not rescind the license.”

Instead, he states, “The trademark licensee, post-rejection, has the same rights they would have had outside of bankruptcy had the licensor breached the license.  But, as Justice Sotomayor wrote, Congress may now need to come in and provide further clarity on the post-rejection obligations of a trademark licensee.”