Supreme Court Decision on Trademarks May Impact Union Contract Rejection Cases

At first glance, the Supreme Court’s recent decision in a trademark dispute appears to have nothing to do with unions and collective bargaining agreements.  But the decision, Mission Product Holdings, Inc. v. Tempnology, LLC, Case No. 17-1657 (U.S. May 20, 2019), may give unions ammunition to argue that if an employer rejects a collective bargaining agreement in a Chapter 11 case, the employer breaches the contract, giving the union a claim for damages.

What does it mean to get rejected?  It’s a question that haunts the social lives of teenagers.  But it is also a question that has left a trail of uncertainty in bankruptcy jurisprudence.  Until now, that is.  In Mission, the Supreme Court pronounced definitively that “a rejection is a breach.”

Section 365 of the Bankruptcy Code, 11 U.S.C. §365(a), allows a bankrupt company to “reject” a contract that has not yet been fully performed.  But courts have differed regarding the effect of rejection.  Some have said that rejection amounts to a breach of the contract, giving the other party a claim for damages.  Others, however, have taken the position that rejection amounts to a rescission of the agreement, terminating it along with the rights it conferred.

In Mission, a clothing manufacturer had a contract authorizing a distributor to sell its products and to use its trademarked logos and labels.  After filing for Chapter 11, the manufacturer obtained the bankruptcy court’s permission to reject the contract under Section 365.  The manufacturer claimed that the rejection constituted a rescission of the contract, revoking the distributor’s contractual right to use its trademark.  The bankruptcy court agreed, but appeals followed, with a bankruptcy appellate panel taking one view of the issue and a federal appeals court taking another.

In her opinion ending the debate, Justice Kagan explained that the rejection breached the contract, but did not rescind it.  The manufacturer, she wrote, could stop performing its obligations under the contract but could not withdraw the trademark license it had already conveyed to the distributor.  She pointed out that a bankrupt company does not possess anything more than it did before the bankruptcy, and that interpreting contract rejection as a breach rather than a rescission “prevents a debtor in bankruptcy from recapturing interests it had given up.”

So what does this have to do with unions and collective bargaining agreements?  Congress created a special procedure, in Section 1113 of the Bankruptcy Code, 11 U.S.C. §1113, for bankrupt employers to reject collective bargaining agreements.  But Section 1113 does not explain the effect of a collective bargaining agreement rejection and courts have differed on whether it is a breach or something else.

One unfortunate view holds that a rejected collective bargaining agreement is not breached but “abrogated.”  See Northwest Airlines Corp., 483 F.3d 160, 172 (2d Cir. 2007); see also AMR Corp., 2018 WL 6523965, at *3 (Bankr. S.D.N.Y. 2018).  The term “abrogated” appears nowhere in Section 1113.  But some courts use it to conclude that rejecting a union contract under Section 1113 has the effect of both “terminating the parties’ agreed-to working conditions” and of “effectively shielding [the employer] from a charge of breach.”  Northwest, 483 F3d at 174.

Mission throws in doubt the already dubious conclusion that an employer “abrogates” a collective bargaining agreement by rejecting it under Section 1113.  Courts embracing that view have tried to construct a doctrinal wall distinguishing Section 1113 from Section 365 cases.  But Mission did not limit its rejection-as-breach holding to Section 365 cases.  Judge Kagan based her holding in part, but not entirely, on the text of Section 365, explaining that the rejection-as-breach principle also rested on “fundamental principles of bankruptcy law.”  She emphasized that “[r]ejection of a contract — any contract — in bankruptcy operates not as a rescission but as a breach.”  (Emphasis added).

Since rejection of “any” contract is a breach, and since collective bargaining agreements are contracts, it would follow from Mission that rejection of union contracts, too, amounts to nothing more than a breach.  Indeed, the word “reject” is identical in Section 1113 and Section 365.  No good reason exists to conclude that Congress used it to mean one thing in one section of the Bankruptcy Code and something else in another.

In light of Mission’s holding that rejection of “any” contract is a breach, courts in future cases may be hard pressed to conclude that rejecting a union contract under Section 1113 “shield[s]” an employer “from a charge of breach.”  Moreover, because Mission explains that rejection-as-breach “prevents a debtor in bankruptcy from recapturing interests it had given up,” courts may now find it difficult to conclude that Section 1113 lets an employer take back contract terms it promised employees, without at least giving the union a claim for damages.

Some employers would like to see Section 1113 as the legal equivalent of a paper shredder.  We now have a Supreme Court decision that will help dispel that notion.

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