`
`
`
`APPENDICES
`APPENDICES
`
`
`
`1a
`
`APPENDIX A
`
`UNITED STATES COURT OF APPEALS
`FIRST CIRCUIT
`
`
`879 F.3d 389
`No. 16-9016
`
`
`IN RE TEMPNOLOGY, LLC, N/K/A OLD COLD LLC,
`Debtor,
`
`
`MISSION PRODUCT HOLDINGS, INC.,
`Appellant,
`
`v.
`
`TEMPNOLOGY, LLC, N/K/A OLD COLD LLC,
`Appellee.
`
`
`January 12, 2018
`
`Before Torruella, Lynch, and Kayatta, Circuit Judges.
`
`OPINION
`
`
`KAYATTA, Circuit Judge.
`Generally speaking, when a company files for pro-
`tection under Chapter 11 of the Bankruptcy Code, the
`trustee or the debtor-in-possession may secure court
`approval to “reject” any executory contract of the
`debtor, meaning that the other party to the contract is
`left with a damages claim for breach, but not the ability
`to compel further performance. 11 U.S.C. §§ 365(a),
`
`
`
`
`
`2a
`
`1107(a); see NLRB v. Bildisco & Bildisco, 465 U.S. 513,
`531–32, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984); Mason v.
`Official Comm. of Unsecured Creditors, for FBI Dis-
`trib. Corp. & FBC Distrib. Corp. (In re FBI Distrib.
`Corp.), 330 F.3d 36, 43–44 (1st Cir. 2003). When the re-
`jected contract, however, is one “under which the debt-
`or is a licensor of a right to intellectual property,” the
`licensee may elect to “retain its rights ... to such intel-
`lectual property,” thereby continuing the debtor’s duty
` 11 U.S.C.
`to
`license the
`intellectual property.
`§ 365(n)(1). In this case, Tempnology, LLC (“Debt-
`or”)—a debtor-in-possession seeking to reorganize un-
`der Chapter 11—rejected an agreement giving certain
`marketing and distribution rights to Mission Product
`Holdings, Inc. The parties agree that Mission can insist
`that the rejection not apply to nonexclusive patent li-
`censes contained in the rejected agreement. They dis-
`agree as to whether the rejection applies to the agree-
`ment’s grants of a trademark license and of exclusive
`rights to sell certain of Debtor’s goods. In the case of
`the trademark license, resolving that disagreement
`poses for this circuit an issue of first impression con-
`cerning which other circuits are split. For the following
`reasons, we agree with the bankruptcy court that the
`rejection left Mission with only a pre-petition damages
`claim in lieu of any obligation by Debtor to further per-
`form under either the trademark license or the grant of
`exclusive distribution rights.
`
`
`Debtor made specialized products—such as towels,
`socks, headbands, and other accessories—designed to
`remain at low temperatures even when used during ex-
`ercise, which it marketed under the “Coolcore” and
`“Dr. Cool” brands. A significant intellectual property
`
`
`
`
`
`3a
`
`portfolio supported Debtor’s products. This portfolio
`consisted of two issued patents, four pending patents,
`research studies, and a multitude of registered and
`pending trademarks.
`On November 21, 2012, Mission and Debtor execut-
`ed a Co-Marketing and Distribution Agreement, which
`serves as the focal point of this appeal. The Agreement
`provided Mission with three relevant categories of
`rights.
`First, Debtor granted Mission distribution rights to
`certain of its manufactured products within the United
`States.1 These products, called “Cooling Accessories,”
`were defined in the Agreement as “products of the spe-
`cific types listed on Exhibit A” and “manufactured by
`or on behalf of [Debtor].” They also included “addition-
`al products that are hereafter developed by [Debtor].”
`Exhibit A broke down the thirteen listed products into
`two categories: “Exclusive” and “Non-Exclusive” Cool-
`ing Accessories. For “Exclusive Cooling Accesso-
`ries”—comprised of towels, wraps, hoodies, bandanas,
`multi-chills, and doo rags—Debtor agreed that “it will
`not license or sell” the products “to anyone other than
`[Mission] during the Term.” Mission’s rights with re-
`spect to the remaining Cooling Accessories—comprised
`of socks, headbands, wristbands, sleeves, skullcaps, yo-
`ga mats, and baselayers—were nonexclusive because
`Debtor reserved for itself the “right to sell ... to verti-
`cally integrated companies as well as customers that
`are not Sports Distributors or retailers in the Sporting
`Channel.”
`
`1 In addition to the United States, the exclusive geographic
`territory also included “other countries and territories that [Mis-
`sion] acquires exclusive distribution rights to pursuant to its first
`rights of refusal and notice.”
`
`
`
`
`
`4a
`
`Second, Debtor granted Mission a nonexclusive li-
`cense to Debtor’s intellectual property. This “non-
`exclusive, irrevocable, royalty-free, fully paid-up, per-
`petual, worldwide, fully-transferable license” granted
`Mission the right “to sublicense (through multiple ti-
`ers), use, reproduce, modify, and create derivative
`work based on and otherwise freely exploit” Debtor’s
`products—including Cooling Accessories—and its intel-
`lectual property. This irrevocable license, however,
`expressly excluded any rights to Debtor’s trademarks.
`Trademarks were the subject of the third bucket of
`rights. Section 15(d) of the Agreement granted Mission
`a “nonexclusive, non-transferable, limited license” for
`the term of the Agreement “to use [Debtor’s] trade-
`mark and logo (as well as any other Marks licensed
`hereunder) for the limited purpose of performing its
`obligations hereunder, exercising its rights and promot-
`ing the purposes of this Agreement.” This license came
`with limitations. Mission was forbidden from using the
`trademarks in a manner that was disparaging, inaccu-
`rate, or otherwise inconsistent with the terms of the
`Agreement. Further, Mission was required to “comply
`with any written trademark guidelines” and Debtor
`had “the right to review and approve all uses of its
`Marks,” except for certain pre-approved uses.
`The Agreement also included a provision permit-
`ting either party to terminate the Agreement without
`cause. On June 30, 2014, Mission exercised this option,
`triggering a “Wind-Down Period” of approximately two
`years. Debtor, in turn, issued a notice of immediate
`termination for cause on July 22, 2014, claiming that
`Mission’s hiring of Debtor’s former president violated
`the Agreement’s restrictive covenants. Pursuant to
`the Agreement’s terms, Mission’s challenge to Debtor’s
`immediate termination for cause went before an arbi-
`
`
`
`
`
`5a
`
`trator. The arbitrator determined that Debtor had
`waived any grounds for immediate termination under
`the restrictive covenant and that the Agreement re-
`mained in effect until the expiration of the Wind-Down
`Period. That ruling meant that Mission was contractu-
`ally entitled to retain its distribution and trademark
`rights until July 1, 2016, and its nonexclusive intellec-
`tual property rights in perpetuity.
`Intervening events, however, put an earlier end to
`the parties’ contractual relationship. Although Debtor
`posted profits in 2012, its financial outlook dimmed. Af-
`ter accruing multi-million dollar net operating losses in
`2013 and 2014, Debtor filed a voluntary petition for
`Chapter 11 bankruptcy on September 1, 2015. The fol-
`lowing day, Debtor moved to reject seventeen of its
`contracts,
`including the Agreement, pursuant to
`11 U.S.C. § 365(a).
`Section 365(a) permits a debtor-in-possession,2 with
`the court’s approval, to “reject any executory contract”
`that, in the debtor’s business judgment, is not beneficial
`to the company. See Agarwal v. Pomona Valley Med.
`Grp., Inc. (In re Pomona Valley Med. Grp., Inc.), 476
`F.3d 665, 669–71 (9th Cir. 2007); see also Bildisco &
`Bildisco, 465 U.S. at 520, 523, 104 S.Ct. 1188. In its
`memoranda supporting its motion, Debtor informed the
`bankruptcy court that it sought to reject the Agree-
`ment because it hindered Debtor’s ability to derive
`revenue from other marketing and distribution oppor-
`
`
`2 Although this provision of the statute only refers to the
`powers of a trustee, per 11 U.S.C. § 1107(a), a Chapter 11 “debtor
`in possession shall have all the rights ... and powers, and shall per-
`form all the functions and duties, ... of a trustee serving in a case
`under this chapter.” See also In re FBI Distrib. Corp., 330 F.3d at
`42 n.8 (citing this provision).
`
`
`
`
`
`6a
`
`tunities. Debtor faulted Mission—and particularly the
`Agreement’s grant of exclusive distribution rights—for
`its bankruptcy. It alleged that the Agreement “suffo-
`cated the Debtor’s ability to market and distribute its
`products” after Mission failed to fulfill its obligations,
`“essentially starving the Debtor from any income.”
`Mission objected to the rejection motion, arguing
`that 11 U.S.C. § 365(n) allowed Mission to retain both
`its intellectual property license and its exclusive distri-
`bution rights. Section 365(n) provides an exception
`from section 365(a)’s broad rejection authority by limit-
`ing the debtor-in-possession’s ability to terminate intel-
`lectual property licenses it has granted to other parties.
`On September 21, 2015, the bankruptcy court
`granted Debtor’s motion to reject certain executory
`contracts, except for the Agreement, for which it or-
`dered further hearing. In a subsequent one-sentence
`order, the bankruptcy court granted the motion to re-
`ject the Agreement, “subject to Mission Product Hold-
`ings’s election to preserve its rights under 11 U.S.C.
`§ 365(n).” Debtor then moved for a determination of
`the applicability and scope of Mission’s rights under
`section 365(n). In that motion, Debtor conceded that
`Mission retained its nonexclusive, perpetual license to
`certain of Debtor’s intellectual properties—which did
`not include its trademarks—but argued that section
`365(n) did not cover either Mission’s exclusive distribu-
`tion rights or the trademark license. Mission again ob-
`jected, arguing that the relief Debtor requested re-
`quired an adversary proceeding pursuant to Rule
`7001(2) of the Federal Rules of Bankruptcy Procedure.
`After holding a nontestimonial hearing, the bank-
`ruptcy court concluded that Mission’s election pursuant
`to section 365(n) did not preserve either the exclusive
`
`
`
`
`
`7a
`
`distribution rights or the trademark license. The court
`found that section 365(n) only protected intellectual
`property rights, and Mission’s exclusive distributorship
`could not fairly be characterized as such. With respect
`to trademarks, the court reasoned that Congress’s de-
`cision to leave trademarks off the definitional list of in-
`tellectual properties in 11 U.S.C. § 101(35A) left the
`trademark license unprotected from rejection. Finally,
`the court rejected Mission’s argument that the Bank-
`ruptcy Code required an adversary proceeding to de-
`termine the issue. The court viewed “the Motion in the
`context of rejection under § 365, which is a contested
`matter under Fed. R. Bankr. P. 9014.”
`Mission appealed to the Bankruptcy Appellate
`Panel for the First Circuit (“BAP”). The BAP affirmed
`the bankruptcy court’s order with respect to Mission’s
`exclusive distribution rights, concluding that “Mission’s
`attempt to re-characterize its exclusive product distri-
`bution rights under the Agreement as an intellectual
`property license [is] unsupported by either the letter or
`the spirit of the Agreement.” Like the bankruptcy
`court, the BAP read section 365(n)’s protection of “ex-
`clusivity provision[s]” as encompassing only the exclu-
`sivity attributes, such as they might be, of intellectual
`property rights. The BAP also affirmed the bankrupt-
`cy court’s determination that the section 365(n) motion
`did not require Debtor to commence an adversary pro-
`ceeding under Bankruptcy Rule 7001.
`Regarding trademarks, however, the BAP di-
`verged from the bankruptcy court. Although the BAP
`agreed that section 365(n) failed to protect Mission’s
`rights to Debtor’s trademarks, it disagreed as to the
`effect of that conclusion. Rather than finding that re-
`jection extinguished the non-debtor’s rights, the BAP
`followed the Seventh Circuit’s ruling in Sunbeam
`
`
`
`
`
`8a
`
`Products, Inc. v. Chicago American Manufacturing,
`LLC, 686 F.3d 372 (7th Cir. 2012). The BAP held that,
`because section 365(g) deems the effect of rejection to
`be a breach of contract, and a licensor’s breach of a
`trademark agreement outside the bankruptcy context
`does not necessarily terminate the licensee’s rights, re-
`jection under section 365(g) likewise does not neces-
`sarily eliminate those rights. Thus, the BAP reversed
`the bankruptcy court’s determination that Mission no
`longer had protectable rights in Debtor’s trademarks
`and trade names.
`This appeal ensued. We affirm the bankruptcy
`court’s determinations. We conclude that section
`365(n) does not apply to Mission’s right to be the exclu-
`sive distributor of Debtor’s products, or to its trade-
`mark license. Unlike the BAP and the Seventh Circuit,
`we also hold that Mission’s right to use Debtor’s
`trademarks did not otherwise survive rejection of the
`Agreement.
`
`
`On appeal from a decision by the BAP, “[w]e accord
`no special deference to determinations made by the
`[BAP],” and instead “train the lens of our inquiry di-
`rectly on the bankruptcy court’s decision.”3 Wheeling
`& Lake Erie Ry. Co. v. Keach (In re Montreal, Maine &
`Atl. Ry., Ltd.), 799 F.3d 1, 5 (1st Cir. 2015). In doing so,
`
`
`3 We do nevertheless pay great attention to the considered
`opinion of the three experienced bankruptcy judges who sit on the
`BAP. Among other things, our consideration of such an opinion
`reduces the likelihood that our court of general appellate jurisdic-
`tion is blindsided by the effect that a decision might have on mat-
`ters or issues of bankruptcy law and practice that are beyond the
`ken of the parties in a particular proceeding.
`
`
`
`
`
`9a
`
`we review the bankruptcy court’s factual findings for
`clear error and its conclusions of law de novo. DeGia-
`como v. Traverse (In re Traverse), 753 F.3d 19, 24 (1st
`Cir. 2014).
`
`
`We begin with the statutory framework that de-
`fines the scope of Debtor’s ability, “subject to the
`court’s approval,” to “assume or reject any executory
`contract or unexpired lease of the debtor.” 11 U.S.C. §
`365(a). Executory contracts, although not defined in
`the Bankruptcy Code, are generally considered to be
`contracts “on which performance is due to some extent
`on both sides.” In re FBI Distrib. Corp., 330 F.3d at 40
`n.5 (quoting Bildisco & Bildisco, 465 U.S. at 522 n.6,
`104 S.Ct. 1188); see also Parkview Adventist Med. Ctr.
`v. United States ex rel. Dep’t of Health & Human
`Servs., 842 F.3d 757, 763 n.12 (1st Cir. 2016). Section
`365(a) permits the debtor-in-possession to assume
`those contracts that are beneficial and reject those that
`may hinder its recovery. In re FBI Distrib. Corp., 330
`F.3d at 42. It provides an “elixir for use in nursing a
`business back to good health” by allowing the trustee
`or debtor-in-possession to “prescribe it as an emetic to
`purge the bankruptcy estate of obligations that promise
`to hinder a reorganization.” Thinking Machs. Corp. v.
`Mellon Fin. Servs. Corp. (In re Thinking Machs.
`Corp.), 67 F.3d 1021, 1024 (1st Cir. 1995). Section 365(a)
`thus furthers Chapter 11’s “paramount objective” of
`rehabilitating debtors. In re FBI Distrib. Corp., 330
`F.3d at 41. In lieu of the rejected obligation, a debtor is
`left with a liability for what the Code deems to be a
`pre-petition breach of the contract. 11 U.S.C. § 365(g)
`(“[T]he rejection of an executory contract or unexpired
`lease of the debtor constitutes a breach of such contract
`
`
`
`
`
`10a
`
`or lease ... immediately before the date of the filing of
`the petition....”).
`In 1985, the Fourth Circuit was tasked with apply-
`ing this framework to an intellectual property license
`granted by a debtor. See Lubrizol Enters., Inc. v.
`Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th
`Cir. 1985). The Fourth Circuit held that the term “ex-
`ecutory contract” in section 365(a) encompassed intel-
`lectual property licenses, id. at 1045, and that under
`section 365(g) the effect of rejection was to terminate
`an intellectual property license, id. at 1048. The court
`based its reasoning on what it saw as the animating
`principles behind section 365(g), thus distinguishing
`“statutory breach” from common law breach:
`Even though § 365(g) treats rejection as
`breach, the legislative history of § 365(g) makes
`clear that the purpose of the provision is to
`provide only a damages remedy for the non-
`bankrupt party.... [T]he statutory “breach”
`contemplated by § 365(g) controls, and provides
`only a money damages remedy for the non-
`bankrupt party. ... Allowing specific perfor-
`mance would obviously undercut the core pur-
`pose of rejection under § 365(a).
`
`Id.
`
`Three years later, Congress responded. Rather
`than amending either section 365(a) or section 365(g),
`Congress enacted a brand new section 365(n). See S.
`Rep. No. 100-505, at 8 (1988). Section 365(n)(l) gives to
`a licensee of intellectual property rights a choice be-
`tween treating the license as terminated and asserting
`a claim for pre-petition damages—a remedy the licen-
`see held already under section 365(g)—or retaining its
`
`
`
`
`
`11a
`
`intellectual property rights under the license. It states,
`in full:
`If the trustee rejects an executory contract un-
`der which the debtor is a licensor of a right to
`intellectual property, the licensee under such
`contract may elect—
`(A) to treat such contract as terminated by
`such rejection if such rejection by the trus-
`tee amounts to such a breach as would enti-
`tle the licensee to treat such contract as
`terminated by virtue of its own terms, ap-
`plicable nonbankruptcy law, or an agree-
`ment made by the licensee with another
`entity; or
`(B) to retain its rights (including a right to
`enforce any exclusivity provision of such
`contract, but excluding any other right un-
`der applicable nonbankruptcy law to specif-
`ic performance of such contract) under such
`contract and under any agreement supple-
`mentary to such contract, to such intellec-
`tual property (including any embodiment of
`such intellectual property to the extent
`protected by applicable nonbankruptcy
`law), as such rights existed immediately
`before the case commenced, for—
`(i) the duration of such contract; and
`(ii) any period for which such contract
`may be extended by the licensee as of
`right under applicable nonbankruptcy
`law.
`11 U.S.C. § 365(n)(1).
`
`
`
`
`
`12a
`
`Congress also amended the definition of intellectual
`property, thus defining the scope of the new section
`365(n)(1). Under 11 U.S.C. § 101(35A),
`The term “intellectual property” means—
`(A) trade secret;
`(B) invention, process, design, or plant pro-
`tected under title 35;
`(C) patent application;
`(D) plant variety;
`(E) work of authorship protected under ti-
`tle 17; or
`(F) mask work protected under chapter 9
`of title 17;
`to the extent protected by applicable nonbank-
`ruptcy law.
`
`
`With the foregoing framework in mind, we turn
`now to Mission’s arguments on appeal. We consider
`first its contention that its exclusive distribution rights
`remained unaffected by Debtor’s rejection of the
`Agreement. We then address Mission’s contention that
`its trademark license also remained in effect during the
`two-year Wind-Down Period. What is at issue for
`these parties, practically speaking, is whether to classi-
`fy as prepetition or post-petition liability any damages
`caused by Debtor’s failure to honor its executory obli-
`gations during the two-year Wind-Down Period.
`
`A.
`Section 365(n)(1)(B) allows Mission “to retain its
`rights (including a right to enforce any exclusivity pro-
`
`
`
`
`
`13a
`
`vision of such contract ...) under such contract and un-
`der any agreement supplementary to such contract, to
`such intellectual property (including any embodiment
`of such intellectual property to the extent protected by
`applicable nonbankruptcy law).” Mission would have us
`read the words “any exclusivity provision of such con-
`tract” in the foregoing parenthetical as meaning any
`“exclusivity provision” in the entire contract (or any
`supplementary agreement), whether or not the provi-
`sion grants exclusive use of a pertinent intellectual
`property right.
`We disagree. We start in section 365(a) with the
`universe of all executory contracts that a debtor may
`seek to reject; section 365(n)(1) then focuses on a subset
`of that universe (“executory contract[s] under which
`the debtor is a licensor of a right to intellectual proper-
`ty”); subsection (n)(1)(B) then says what happens to in-
`tellectual property rights granted under such contracts
`(the licensee may “retain its rights”); and the parenthe-
`tical merely makes clear that those rights “to such in-
`tellectual property” include any exclusivity attributes
`of those rights. In this manner, subsection (n)(1)(B)
`protects, for example, an exclusive license to use a pa-
`tent, but does not protect an exclusive right to sell a
`product merely because that right appears in a contract
`that also contains a license to use intellectual property.
`Our reading aligns with the legislative record. In
`enacting section 365(n), Congress made clear that it
`was responding to a “particular problem arising out of
`recent court decisions.” S. Rep. No. 100-505, at 5. The
`limited “purpose of the bill is to amend Section 365 of
`the Bankruptcy Code to make clear that the rights of
`an intellectual property licensee to use the licensed
`property cannot be unilaterally cut off.” Id. at 1. The
`amendment is “not in any way intended to address
`
`
`
`
`
`14a
`
`broader matters under Section 365.” Id. at 5. Congress,
`it seems, was focused on a narrow issue, and only in-
`tended its amendment to address that issue. It did not
`intend the scope of its amendment to extend beyond
`the licensee’s bargained-for intellectual property rights
`post-rejection, as Mission’s position would necessarily
`require. Further supporting our reading of the statu-
`tory text, Congress’s description of the protected ex-
`clusivity rights in both relevant congressional reports
`is limited to license rights, and does not mention or im-
`ply the protection of exclusive rights other than those
`to intellectual property. The House Report, describing
`the House’s version of the bill,4 states that, “[u]nder the
`legislation, any right in the license agreement giving
`the licensee an exclusive license will still be enforceable
`by the licensee, but other rights of the licensee cannot
`be specifically enforced.” H.R. Rep. No. 100-1012, at 6
`(1988). Similarly, the Senate Report says that “if the
`contract granted exclusive use to the licensee, such ex-
`clusivity would be preserved to the license.” S. Rep.
`No. 100-505, at 9.
`Mission’s fallback position is to argue that, in this
`instance, its exclusive distribution right is, de facto, a
`provision that renders its right to use Debtor’s intellec-
`tual property exclusive. The unstated premise is that
`because Mission has an exclusive right to sell certain of
`Debtor’s products made using Debtor’s intellectual
`property, no one else can use the intellectual property.
`Hence, Mission reasons, the exclusive distribution right
`is an “exclusivity provision” of the intellectual property
`right.
`
`
`4 Congress ultimately adopted the Senate version, although
`the language of this section of the House bill is identical to its Sen-
`ate counterpart.
`
`
`
`
`
`15a
`
`The most obvious defect in this argument is its
`premise. The Agreement and record are clear that
`Debtor can use its intellectual property to make and
`sell products other than those for which the Agreement
`grants Mission exclusive distribution rights. The only
`thing that is exclusive is the right to sell certain prod-
`ucts, not the right to practice, for example, the patent
`that is used to make those products. An exclusive right
`to sell a product is not equivalent to an exclusive right
`to exploit the product’s underlying intellectual proper-
`ty.
`
`But, argues Mission, because of its exclusive distri-
`bution rights, no one can use the Debtor’s patent to
`make at least some products if those products are to be
`sold in Mission’s territory. Perhaps. But this is simply
`a restriction on the right to sell certain products that,
`like many products, happen to be made using a patent.
`And the exclusivity Mission seeks to maintain would
`apply fully even if there were no patent license at all.
`Given that the right to sell a product is clearly not in-
`cluded within the statute’s definition of intellectual
`property, we are not going to treat it as such merely
`because of a coincidental practical effect it may have in
`limiting the scope of the manner in which a patent
`might be exploited, especially where the Agreement
`itself expressly makes clear that any patent license is
`nonexclusive. To hold otherwise would be to find bur-
`ied in a parenthetical to a statutory subsection an im-
`plied exception to rejection that would, in practical
`terms, likely cover as much commercial territory as do
`some of the rights expressly defined as protected. See
`Whitman v. Am. Trucking Ass’n, 531 U.S. 457, 468, 121
`S.Ct. 903, 149 L.Ed.2d 1 (2001) (“Congress ... does not,
`one might say, hide elephants in mouseholes.”). The
`fact that Mission can cite no circuit court precedent for
`
`
`
`
`
`16a
`
`its effort to paint its exclusive distribution right as a de
`facto exclusive intellectual property right further but-
`tresses our conclusion.5
`Mission also argues that its nonexclusive license of
`intellectual property “lacks meaningful value” unless it
`retains an exclusive right to sell certain of Debtor’s
`products. Why this is so is not apparent given that sec-
`tion 365(n) protects the nonexclusive license, hence
`Mission retained the right to use the intellectual prop-
`erty. The Agreement itself spells out myriad ways that
`Mission could exploit its nonexclusive intellectual prop-
`erty rights that were presumably unaffected by rejec-
`tion of its exclusive distribution right: Mission could
`still “sublicense (through multiple tiers), use, repro-
`duce, modify, and create derivative work based on”
`Debtor’s intellectual property. And if those rights
`lacked meaningful value, that hardly becomes a reason
`for turning rights that are not intellectual property
`rights into intellectual property rights. Rather, it
`simply suggests that most of the contract’s value was
`apparently in the exclusive distribution agreement.
`Nor does the reference in section 365(n)(1)(B) to
`“any embodiment of such intellectual property” help
`Mission. Embodiment is a term of art associated with
`intellectual property. The Senate Report includes a
`letter informing the Judiciary Committee of the De-
`partment of Commerce’s view of the bill, which states
`that “[a]lthough ‘embodiment’ is not defined, we as-
`sume the term arises from the copyright law.” S. Rep.
`
`5 Mission cites Encino Bus. Mgmt., Inc. v. Prize Frize, Inc.
`(In re Prize Frize, Inc.), 32 F.3d 426 (9th Cir. 1994), but the con-
`tract in that case granted an “exclusive license to utilize the pro-
`prietary rights.” Id. at 427. This case is clearly distinguishable, as
`Mission was granted no such right.
`
`
`
`
`
`17a
`
`No. 100-505, at 12. Black’s Law Dictionary tags the
`term as belonging to patent law, and offers three alter-
`nate definitions: (1) “[t]he tangible manifestation of an
`invention”; (2) “[t]he method for using this tangible
`form”; or (3) “[t]he part of a patent application or pa-
`tent that describes a concrete manifestation of the in-
`vention.” Embodiment, Black’s Law Dictionary (10th
`ed. 2014). Black’s Law Dictionary further notes that
`while intellectual property “is a mental construct”
`without “physical structure,” an embodiment “is a spe-
`cific physical form of the invention” and thus “[e]ach
`embodiment exists in the real world.” Id. (quoting
`Morgan D. Rosenberg, The Essentials of Patent Claim
`Drafting xvii (2012)).
`Where the statutory language includes a term of
`art, resort to sources beyond the text is particularly
`appropriate to make clear the intended meaning of that
`term. See Molzof v. United States, 502 U.S. 301, 307,
`112 S.Ct. 711, 116 L.Ed.2d 731 (1992). Both the Senate
`Report and the Department of Commerce letter offer
`additional insight into the meaning of “embodiment”
`and its application to a licensee’s rights. The Senate
`Report provides three examples of protected rights,
`and concludes with two traits that all protected rights
`must contain:
`[T]he parties might have agreed that the licen-
`sor would prepare a prototype incorporating
`the licensed intellectual property. If such a
`prototype was prepared prior to the filing of
`the petition for relief, but had not been deliv-
`ered to the licensee at that time, then the licen-
`see can compel the delivery of the prototype in
`accordance with the terms of the rejected li-
`cense. Other examples of embodiments include
`genetic material needed to produce certain bio-
`
`
`
`
`
`18a
`
`technological products and computer program
`source codes. There are many other possible
`examples of embodiments, but critical to any
`right of the licensee to obtain such embodi-
`ments under this bill is the prepetition agree-
`ment of the parties that the licensee have access
`to such material and the physical existence of
`such material on the day of the bankruptcy fil-
`ing.
`S. Rep. No. 100-505, at 9-10 (emphasis added). The De-
`partment of Commerce letter states:
`Where the licensed intellectual property is not
`a work of authorship, we assume the term
`“embodiment” would be interpreted in a simi-
`lar sense of enablement in a manner reasonable
`in the circumstances and would not necessarily
`include all physical manifestations of the intel-
`lectual property. For example, an embodiment
`of a licensed process might be interpreted to
`include technical data sufficient to enable the
`licensee to operate the process, but not a manu-
`facturing facility using (or embodying) the pro-
`cess; and an embodiment of a licensed inven-
`tion might be interpreted to include a sample of
`the invention, but not all inventory.
`S. Rep. No. 100-505, at 12 (emphasis added).
`A few common themes appear in these explana-
`tions. First, the pre-petition agreement must give the
`licensee access to the embodiment of intellectual prop-
`erty. Second, an embodiment of intellectual property is
`a tangible or physical object that exists pre-petition.
`Third, an embodiment of intellectual property is some-
`thing inherently limited in number—it is a prototype or
`example of a product, but does not include all products
`
`
`
`
`
`19a
`
`produced using the intellectual property. Finally, we
`can infer that the purpose of this provision is to allow
`the licensee to exploit its right to the underlying intel-
`lectual property.
`Here, we have no object to which Mission requires
`access in order to exploit an intellectual property right.
`Rather, we have a prosaic, nonexclusive right to use a
`patented process, and an unremarkable and entirely
`independent right to be the exclusive distributor of
`some but not all goods made with that process. There
`is simply no “embodiment” at issue in the relevant
`statutory sense.
`Nor does this case, as Mission contends, bear on the
`enforceability of all negative covenants independent of
`an intellectual property license. If a party possesses an
`intellectual property license, perhaps the Code may
`protect from rejection certain negative covenants—
`such as confidentiality—that do not materially restrict
`the debtor’s reorganization, are tied closely to the intel-
`lectual property license, and are necessary to imple-
`ment its terms. See Biosafe Int’l, Inc. v. Controlled
`Shredders, Inc. (In re Szombathy), Nos. 94 B 15536, 95
`A 01035, 1996 WL 417121, at *11 (Bankr. N.D. Ill. July
`9, 1996) rev’d in part sub nom. Szombathy v. Controlled
`Shredders, Inc., Nos. 94 B 15536, 95 A 01035, 1997 WL
`189314 (N.D. Ill. Apr. 14, 1997). But we are not pre-
`sented with that situation here.
`Finally, we observe that Mission salts its brief with
`several undeveloped suggestions that rejection under
`section 365(a), even if allowed, might not extinguish a
`right to demand specific performance of the negative
`covenant implicit in the exclusive distribution rights.
`Mission attempts to support these suggestions by citing
`In re Szombathy, 1996 WL 417121, and by emphasizing
`
`
`
`
`
`20a
`
`that case’s reliance on a quote from the Depart
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