The U.S. Supreme Court clarified a vexing bankruptcy issue causing conflicts between U.S. Circuit Courts of Appeal. In Mission Products Holding v. Tempnology (In re Tempnology), the court clarified the intersection of bankruptcy and trademark law, and held that rejection under Section 365 of the Bankruptcy Code “constitutes a breach” of an executory contract by the debtor. This reverses the decision of the U.S. Court of Appeals for the First Circuit which treated the rejection as a termination of the contract akin to a rescission. Justice Elena Kagan wrote for the majority, and was the most active questioner at oral argument.

The debtor, Tempnology, licensed clothing and accessories to Mission Products, and filed bankruptcy so that it could “reject” burdensome contract such as held by Mission Products. Section 365 of the Bankruptcy Code enables a debtor to “reject any executory contract—meaning a contract that neither party has finished performing” wrote Kagan. Tempnology rejected the license so that it could, as a business strategy, jettison this burdensome contract, or perhaps resell or renegotiate the license. Mission Products argued that that because rejection is considered a breach, traditional contract law would allow the nonbreaching party the options of retaining the rights granted by the breaching licensor, damages or both.