Supreme Court of the United States

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1 Docket No In The Supreme Court of the United States January Term, 2014 IN RE FOODSTAR, INC., Debtor, FOODSTAR, INC., Petitioner, v. RAVI VOHRA, Respondent. On Writ of Certiorari to the United States Court of Appeals for the Thirteenth Circuit BRIEF FOR RESPONDENT Team R10 Counsel for Respondent Oral Argument Requested

2 QUESTIONS PRESENTED I. Whether rejection of a trademark licensing agreement under 11 U.S.C. 365 terminates the licensee s right to continue using the trademark. II. Whether the presumption against extraterritorial application of statutes prevents the application of 11 U.S.C. 365 to a foreign licensing agreement. i

3 TABLE OF CONTENTS Questions Presented... i Table of Authorities... iv Opinions Below... vii Statement of Jurisdiction... vii Statement of Statutory Provisions... vii Statement of Facts...1 Summary of the Argument...3 Arguments and Authorities...4 I. This Court should affirm the Thirteenth Circuit Court s decision, holding that Foodstar s rejection of the Vohra licensing agreement should not terminate Vohra s contractual right to use the Burger Bites trademark....4 A. The Thirteenth Circuit correctly held that the plain text of 11 U.S.C. 365 clearly demonstrates that a debtor-licensor s decision to reject an executory contract establishes a contractual breach, and does not grant the debtor-licensor the benefits of avoidance The plain meaning of 365 indicates that rejection of an executory licensing agreement functions as a contractual breach, and not as an avoidance power....5 a. Principles of statutory interpretation compel the conclusion that 365 functions as a breach of contract....5 b. Well-established contract law indicates that rescission is an inappropriate result of a debtor-licensor s decision to reject an executory contract Congress omission of trademarks from 365(n) s protections for licensees of intellectual property should not be read as implying that rejection terminates the contractual rights of trademark licensees B. This Court should not construe rejection as terminating the rights of a trademark licensee because such an interpretation is against principles of equity and public policy ii

4 1. Allowing Foodstar to unilaterally terminate Vohra s contractual rights would result in disproportionate forfeiture, and would grant Foodstar undeserved profits at Vohra s expense A decision treating rejection under 365 as terminating a trademark license will have a chilling effect on future trademark license negotiations, and will encourage bankruptcy filings, especially where the debtor is the holder of valuable trademark licenses II. This Court should affirm the Thirteenth Circuit Court s decision, holding that 11 U.S.C. 365(g) cannot be applied extraterritorially to a foreign licensing agreement A. The language of relevant Bankruptcy Code provisions does not rebut this Court s strong presumption against extraterritoriality The express language of the provisions of the Bankruptcy Code does not rebut the presumption against extraterritoriality Alternatively, the language of 28 U.S.C. 1334(e) and 11 U.S.C. 541(a) does not rebut the presumption against extraterritoriality with respect to 11 U.S.C. 365 because the presumption applies to each individual provision of a statute B. The presumption is not rebutted because the Vohra licensing agreement does not touch and concern the United States with sufficient force to displace the presumption against extraterritoriality C. Principles of choice of law, international comity, and public policy all weigh against the extraterritorial application of 11 U.S.C Established choice of law rules indicate that this Court should apply Eastlandian law to the Vohra licensing agreement The doctrine of international comity bars the extraterritorial application of this statute because Congress did not intend the statute to apply outside of U.S. territory This Court should decline to impose 11 U.S.C. 365 extraterritorially as such an exercise would be contrary to U.S. public policy Conclusion...35 Appendix A: Selected Sections from Title 11 of the U.S. Code... A Appendix B: Selected Sections from Title 28 of the U.S. Code... B iii

5 TABLE OF AUTHORITIES STATUTES & RULES 11 U.S.C. 304 (1978) U.S.C. 365(g) (2013) U.S.C. 365(h)-(i) (2013) U.S.C. 365(n) (2013) U.S.C. 541(a) (2013)...19, 22, U.S.C. 544 (2013)...9, U.S.C. 548 (2013) U.S.C. 549 (2013) U.S.C (2013)...24, 29, U.S.C (2013)...29, 30, 32, U.S.C (2013)...29, U.S.C (2013)...29, 30, U.S.C (2013) U.S.C. 1334(e) (2013)...19, 21, 22, U.S.C (2013)...20 U.S. SUPREME COURT CASES RadLAX 4 Hotel, LLC v. Amalgamated Bank, 132 S.Ct (2012)...4 United States v. Ron Pair Enter. s, Inc., 489 U.S. 235 (1989)...4, 5 Landreth Timber Co. v. Landreth, 471 U.S. 681 (1985)...4 Caminetti v. United States, 242 U.S. 470 (1917)...5 Conroy v. Askinoff, 507 U.S. 511 (1993)...5 N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513 (1984)...13, 25 iv

6 Kiobel v. Royal Dutch Petroleum Co., 133 S.Ct (2013)...18, 19, 20, 21, 23, 24 EEOC v. Arabian American Oil Co., 499 U.S. 244 (1991)...18 Morrison v. Nat l Australian Bank Ltd., 130 S. Ct (2010)...18, 19, 21, 22, 23, 24, 25 Hartford Fire Ins. Co. v. California, 509 U.S. 764 (1993)...26 Société Nationale Industrielle Aerospatiale v. U.S. Dist. Court for S. Dist. of Iowa, 482 U.S. 522 (1987)...31 U.S. CIRCUIT COURT CASES ASM Capital LP v. Ames Dep t Stores, Inc. (In re Ames Dep t Stores, Inc.), 582 F.3d 422 (2d Cir. 2009)...4 Sunbeam Products, Inc. v. Chicago Mfg., 686 F.3d 372 (7th Cir. 2012)...6, 7 In re Exide Technologies, 607 F.3d 957 (3d Cir. 2010)...6, 7 Lubrizol Enter. s, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985)...7 Thompkins v. Lil' Joe Records, Inc., 476 F.3d 1294 (11th Cir. 2007)...10 Robertson v. Pierce (In re Huang), 23 B.R. 798 (B.A.P. 9th Cir. 1982)...13, 26 In re French, 440 F.3d 145 (4th Cir. 2006)...26 In re Maxwell Corp., 93 F.3d 1036 (2d Cir. 1996)...25, 27, 28, 31 Jaffé v. Samsung Elec. Co., 737 F.3d 14 (4th Cir. 2013)...25, 31, 33 v

7 U.S. BANKRUPTCY COURT CASES In re Bachinski, 393 B.R. 522 (Bankr. S.D. Ohio, Eastern Division 2008)...10 In re Matusalem, 158 B.R. 514 (Bankr. S.D. Fla. 1993)...11, 13, 14 In re Centura Software Corp., 281 B.R. 660 (Bankr. N.D. Cal. 2002)...11 OTHER AUTHORITIES S. REP (1988)...11, 14, 16 S. REP. NO (1978)...6, 28 H.R. 3309, 113th Cong. 6(d)(2)...12, 30 WEBSTER S THIRD NEW INTERNATIONAL DICTIONARY, (Philip Babcock Gove & The Merriam-Webster Editorial Staff eds., 1986)...5 Peter S. Menell, Bankruptcy Treatment of Intellectual Property Assets: An Economic Analysis, BERKELEY TECH. L.J. 733, 770, Spring RESTATEMENT (SECOND) OF CONTRACTS, 345 (1981)...8 RESTATEMENT (THIRD) OF RESTITUTION AND UNJUST ENRICHMENT 37 (2011)...8 RESTATEMENT (THIRD) OF RESTITUTION AND UNJUST ENRICHMENT 54 (2011)...9 E. ALLAN FARNSWORTH, CONTRACTS (3d ed. 1999)...8 Robert S. Eisenbach, III, Innovation Act Passed By the House Would Make Major Changes to Section 365(n) s IP Licensee Protections...12 vi

8 OPINIONS BELOW The decisions and orders of the Bankruptcy Court and U.S. District Court for the District of Moot are unreported and therefore are unavailable. The United States Bankruptcy Court for the District of Moot entered an order authorizing the rejection of the Vohra licensing agreement. (R. at 5.) After Foodstar s adversary motion in that court seeking a declaration that rejection terminated Vohra s rights in the trademark and an injunction against further use, the bankruptcy court entered an order granting summary judgment, declaring Vohra s rights terminated and enjoining Vohra from using the Burger Bites trademark. (R. at 6.) The bankruptcy court stayed its injunction pending the outcome of appellate review. (R. at 6.) The district court affirmed both orders without opinion. (R. at 6.) The Thirteenth Circuit reversed the judgment of the district court. (R. at 7.) This opinion is also unreported, but is set forth in the Decision of the U.S. Court of Appeals for the Thirteenth Circuit in Case No , dated October 14, 2013, and is incorporated in the record on appeal. (R. at 2.) This Court granted certiorari on December 6, (R. at 1.) STATEMENT OF JURISDICTION The formal statement of jurisdiction is waived pursuant to Competition Rule VIII. STATEMENT OF STATUTORY PROVISIONS The statutory provisions listed below are relevant to determine the present case, and selected statutes are reproduced in Appendices A and B. 11 U.S.C. 101(35A), 304, 365, 541(a), 544, 548, 549, 1501, 1506, 1521, 1522 (2013); 28 U.S.C. 1334(e) (2013); vii

9 Docket No In The Supreme Court of the United States January Term, 2014 IN RE FOODSTAR, INC., Debtor, FOODSTAR, INC., v. Petitioner, RAVI VOHRA, Respondent. On Writ of Certiorari to the United States Court of Appeals for the Thirteenth Circuit BRIEF FOR RESPONDENT TO THE SUPREME COURT OF THE UNITED STATES: Respondent, Ravi Vohra, appellant in Docket No before the U.S. Court of Appeals for the Thirteenth Circuit, respectfully submits this brief on the merits and asks this Court to affirm the decision of the Thirteenth Circuit Court of Appeals. viii

10 STATEMENT OF FACTS Background. This case involves an Eastlandian entrepreneur s attempt to protect the contractual rights for which he has fairly bargained. Ravi Vohra, an Eastlandian citizen, obtained a twentyyear exclusive license to use the Burger Bites trademark from the trademark s original owner, Viraj Deshmukh, a fellow Eastlandian. (R. at 4.) Vohra s license was executed in Eastlandia, under Eastlandian law, and contains contractual provisions standard in franchise licensing agreements. (R. at 4.) Vohra now operates thirty-two Burger Bites restaurants, all located in Eastlandian territory. (R. at 4.) After entering the Vohra licensing agreement, Deshmukh sold the worldwide trademark rights to Foodstar, Inc. (Foodstar), which then developed the Burger Bites franchise in the United States and other nations, except Eastlandia. (R. at 4-5.) Foodstar is now attempting to use U.S. bankruptcy law to terminate Vohra s rights under the licensing agreement, hoping to resell the trademark in an effort to liquidate its assets. (R. at 3, 5.) The Bankruptcy Filing. Hoping to boost revenues before its planned initial public offering, Foodstar acquired a miniature cupcake chain, and attempted to combine this new product line with its existing franchise business model. (R. at 3.) The misguided effort soon failed, and left Foodstar deeply in debt. (R. at 3.) Lacking sufficient operating capital to continue existing franchise operations, Foodstar commenced Chapter 11 bankruptcy proceedings hoping to acquire financing for reorganization. (R. at 3.) Foodstar was unable to obtain funding and now plans to liquidate in Chapter 11 by selling the Burger Bites trademark and assigning its existing franchise agreements to the buyer. (R. at 3-4.) In preparation for a future sale, Foodstar filed a motion, opposed by Vohra, in the bankruptcy court to reject the Vohra licensing agreement. (R. at 5.) The parties stipulated all pertinent facts, including that the license was an executory contract, and that the Burger Bites trademark was worth ten to fifteen percent more if Vohra s contractual rights 1

11 were terminated. (R. at 5.) Additionally, the parties agreed that under Eastlandian insolvency law rejection does not terminate a licensee s rights in the trademark, and that Eastlandia has adopted the UNCITRAL Model Law on Cross Border Insolvency. (R. at 5.) The United States Bankruptcy Court for the District of Moot entered an order authorizing the rejection of the Vohra licensing agreement because rejection would result in a higher sales price for the Burger Bites trademark, and was thus in the best interest of the estate. (R. at 5.) Vohra timely appealed the order authorizing rejection to the district court. (R. at 5.) The Dispute. Vohra refused to relinquish his contractual right to continue using the Burger Bites trademark, as such a right was supported by Eastlandian law. (R. at 6.) Vohra explained his position in letters to Foodstar, and asserted that he would continue to exercise and enforce his rights in Eastlandia. (R. at 6.) Foodstar then filed an adversary proceeding in the bankruptcy court, seeking declaratory relief and an injunction against Vohra s continued use of the trademark. (R. at 6.) After Foodstar s motion in the bankruptcy court, the court entered an order granting summary judgment, declaring Vohra s rights terminated and enjoining Vohra from using the Burger Bites trademark. (R. at 6.) The bankruptcy court stayed its injunction pending the outcome of appellate review. (R. at 6.) The Subsequent Appeals. The district court affirmed both orders without opinion. (R. at 6.) The Thirteenth Circuit reversed the judgment of the district court, holding that rejection of an executory trademark licensing agreement in bankruptcy does not terminate the licensee s right to exercise his trademark rights pursuant to the contract; alternatively, the Thirteenth Circuit held that 11 U.S.C. 365 does not apply extraterritorially to a foreign licensing agreement where the contract has no United States connection other than the fact that the debtor is located in the United States. (R. at 7.) This appeal followed. (R. at 1.) 2

12 SUMMARY OF THE ARGUMENT This Court should affirm the decision of the Thirteenth Circuit Court of Appeals, holding that when a debtor-licensor rejects an executory trademark licensing agreement pursuant to 11 U.S.C. 365, the licensee s contractual rights in the mark are not terminated. Additionally, the Court should affirm the Thirteenth Circuit s rationale stating that 365 cannot be applied to a foreign licensing agreement with minimal connection to the United States. Foodstar, a transnational corporation operating out of the United States, commenced Chapter 11 proceedings as a result of poor business judgment. The corporation subsequently rejected the Vohra licensing agreement, attempting to terminate the contractual rights for which Vohra had previously bargained. While the bankruptcy and district courts accepted Foodstar s interpretations of the statute, the Thirteenth Circuit did not, correctly noting that rejection should not result in termination of the licensee s usage rights because the plain meaning, legislative context, and history behind the statute all support an interpretation of rejection as establishing a breach of contract, not an avoidance power. In addition, as termination of Vohra s rights would result in the destruction of his business, and could have a chilling effect on the licensing system, equitable and public policy considerations support the Thirteenth Circuit s conclusion. In the alternative, Foodstar s decision to reject the licensing agreement should not result in the termination of Vohra s rights because 365 should not be applied extraterritorially. The relevant provisions of the Bankruptcy Code do not contain the type of affirmative evidence of congressional intent necessary to overcome the strong presumption against extraterritoriality established by this Court. In a similar manner, doctrines of international comity, choice of law rules, and public policy concerns all support the confinement of 365 to bankruptcy proceedings with much stronger connections to the United States than the instant case. For these reasons, this Court should affirm the decision of the Thirteenth Circuit. 3

13 ARGUMENTS AND AUTHORITIES The Thirteenth Circuit correctly interpreted 11 U.S.C. 365 as defining rejection as a contractual breach. As with any other breach, Foodstar s rejection of Vohra s trademark licensing agreement allowed Vohra to claim available contractual remedies, likely monetary damages. What such a breach did not do, however, is enable Foodstar to terminate Vohra s ongoing contractual rights to use the Burger Bites trademark. Equitable and public policy concerns support this conclusion, as termination of Vohra s rights would destroy his business, result in disproportionate forfeiture, grant profits Foodstar has done nothing to deserve, and could potentially negatively impact the trademark licensing system. The court of appeals also correctly noted that 365 should not be applied extraterritorially because the statute contains no indication of a congressional intent of such application. This conclusion is supported by the doctrine of international comity, choice of law approaches, and additional equitable and policy considerations. This Court should apply a de novo standard of review to the legal conclusions of the lower courts. ASM Capital LP v. Ames Dep t Stores, Inc. (In re Ames Dep t Stores, Inc.), 582 F.3d 422, 426 (2d Cir. 2009). The parties have stipulated the facts of the case, so the Court need not review the factual findings of the bankruptcy court. I. This Court should affirm the Thirteenth Circuit Court s decision, holding that Foodstar s rejection of the Vohra licensing agreement should not terminate Vohra s contractual right to use the Burger Bites trademark. A. The Thirteenth Circuit correctly held that the plain text of 11 U.S.C. 365 clearly demonstrates that a debtor-licensor s decision to reject an executory contract establishes a contractual breach, and does not grant the debtor-licensor the benefits of avoidance. In the Thirteenth Circuit opinion, the court correctly concluded that Foodstar s rejection of the Vohra licensing agreement under 365(g) does not alter Vohra s right to continued use of 4

14 the Burger Bites trademark, because this question is answered by the plain language of the statute. (R. at 7.) In interpreting provisions of the Bankruptcy Code, the Supreme Court has noted that courts should follow well-established principles of statutory construction, while taking note of some canons of construction specific to the bankruptcy field. RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S.Ct. 2065, 2073 (2012). Such an approach results in predictable court decisions, aiding in the Bankruptcy Code s attempt to standardize an unruly area of law. Id. Here, the primary rule of construction is applicable: courts should look to legislative history and alternative methods of interpretation only where the statutory language presents ambiguity. 1. The plain meaning of 365 indicates that rejection of an executory licensing agreement functions as a contractual breach, and not as an avoidance power. a. Principles of statutory interpretation compel the conclusion that 365 functions as a breach of contract. In resolving disputes over the meaning of statutory provisions, this Court has repeatedly stressed the primary importance of the plain language of the statute. See United States v. Ron Pair Enter. s, Inc., 489 U.S. 235, (1989); See also Landreth Timber Co. v. Landreth, 471 U.S. 681, 685 (1985). Where the statute s language is unambiguous, the sole function of the courts is to enforce it according to its terms. Caminetti v. United States, 242 U.S. 470, 485 (1917); See also Conroy v. Askinoff, 507 U.S. 511, 518 (1993) (terming inquiry into legislative history a waste of research time and ink ) (Scalia, J., concurring). In United States v. Ron Pair Enterprises, Inc., the Supreme Court was tasked with determining the meaning of 11 U.S.C. 506(b), which granted the holder of a claim a right to recover both interest and fees, costs, and charges provided for under contractual agreement. Ron Pair Enter. s, Inc., 489 U.S. at The Court held that recovery of interest was unqualified, 5

15 while fees must be reasonable, as the plain language of the statute and grammatical structure of the provision suggested such an interpretation. Id. at 242. Here, the relevant language of 365 reads: (g) Except as provided in subsections (h)(2) and (i)(2) of this section, the rejection of an executory contract or unexpired lease of the debtor constitutes a breach of such contract or lease U.S.C. 365(g) (2013). As neither (h)(2) nor (i)(2) applies, the meaning of the statute thus hinges on the term constitutes. Merriam-Webster defines the verb to constitute as to make up or form something; to be the same as something; to be equivalent to something; [or] to establish or create (an organization, a government, etc.). WEBSTER S THIRD NEW INTERNATIONAL DICTIONARY, constitute (Philip Babcock Gove & The Merriam-Webster Editorial Staff eds., 1986). From this, it is clear that Congress statement in 365(g) that rejection of an executory contract constitutes a breach means simply that a rejection is equivalent to a breach. Any alternative construction, wherein the constitution of a breach implies not only the recognition of a contractual breach, but also some additional avoidance powers not discussed elsewhere, is not supported by the wording of the statute. While proper application of the canons of statutory interpretation thus indicates that this Court need not look to the legislative history surrounding 365(g), such an inquiry, if conducted, does not support the petitioner s assertion that 365(g) should function solely as a timing provision. This position is untenable because the legislative history itself is unclear, indicating only that Subsection (g) defines the time as of which a rejection of an executory contract or unexpired lease constitutes a breach of the contract or lease. S. REP. NO , at 60 (1978). The history makes no statement regarding the effect of rejection on continued usage rights, and should not be interpreted as providing a substantive definition of rejection. 6

16 This conclusion, that the plain meaning of 365(g) indicates that rejection does not terminate a licensee s contractual rights to continue using a trademark, is in line with opinions issued by several appellate courts that have considered the issue. Of particular note is the Seventh Circuit s definitive statement that 365(g), in classifying rejection as a breach, establish[es] that in bankruptcy, as outside of it, the other party s rights remain in place nothing about this process implies that any rights of the other contracting party have been vaporized. Sunbeam Products, Inc. v. Chicago Mfg., 686 F.3d 372, 377 (7th Cir. 2012). In Sunbeam, the court concluded that proper application of 365(g) did not terminate a licensee s continued usage rights. Id. at The licensee, a fan manufacturer, had obtained a trademark licensing agreement allowing it to exercise the licensor s trademark and patents. Id. at 374. After the licensor liquidated, its successor in interest, Sunbeam, attempted to terminate the licensee s trademark rights. Id. The Sunbeam court relied heavily on a concurrence from a Third Circuit case, In re Exide Technologies. Id. at 376. There, the court avoided the issue of the effect of rejection, instead holding that the contract in question was not executory and thus could not be rejected. In re Exide Technologies, 607 F.3d 957, 964 (3d Cir. 2010). However, Justice Ambro s concurrence stated that a trademark licensor s rejection of a trademark does not terminate the licensee s rights, primarily because the mere absence of trademarks from the list of properties given protection by 365(n) does not support the notion that licensors should be given back trademark rights for which they have already been compensated. Id. at 966 (Ambro, J., concurring). While the Fourth Circuit, in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., held that a debtor-licensor s decision to reject an executory agreement terminated the licensee s rights to continued use, this ruling has been criticized both by other circuit courts, and by a 7

17 number of scholarly works. Lubrizol Enter. s, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043, 1048 (4th Cir. 1985). Contra Sunbeam, 686 F.3d at ; Peter S. Menell, Bankruptcy Treatment of Intellectual Property Assets: An Economic Analysis, BERKELEY TECH. L.J. 733, 770, Spring 2007 (describing strong opposition to the Lubrizol decision). In Lubrizol, after a discussion of applicable standards for determining whether a contract is executory, and whether rejection will benefit the bankruptcy estate, the Fourth Circuit summarily concluded that 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 and thus that Lubrizol could not seek to retain its contract rights by specific performance. Lubrizol, 756 F.2d at The court did not elucidate either its rationale for looking to the statute s legislative history, or the actual evidence that indicated such an interpretation was proper. Id. While this Court has not yet ruled definitively on the issue, recent circuit court rulings, indicate support for the Sunbeam position that rejection does not terminate a trademark licensee s rights to continued use of the mark. Interpretation based on the plain meaning of the statute, public policy, and equitable concerns all support a decision that a trademark licensee who has fairly bargained for the right to use a trademark should not have its rights terminated by the debtor-licensor s decision to reject the ongoing agreement. b. Well-established contract law indicates that rescission is an inappropriate result of a debtor-licensor s decision to reject an executory contract. In seeking to terminate Vohra s contractual rights post-rejection, Foodstar is essentially asking this Court to ignore the common law of contracts by allowing a voluntary breach to result in rescission in favor of the breaching party. The Restatement of Contracts states that, upon breach of contract, judicial remedies available to injured parties include, (a) awarding a sum of money due under the contract or as damages, 8

18 (b) requiring specific performance of a contract or enjoining its nonperformance, (c) requiring restoration of a specific thing to prevent unjust enrichment, (d) awarding a sum of money to prevent unjust enrichment, (e) declaring the rights of the parties, and (f) enforcing an arbitration award. RESTATEMENT (SECOND) OF CONTRACTS, 345 (1981). These remedies, compensating the injured party for expectation, reliance, or restitution interests, are markedly distinct from a judicial decree of rescission. E. ALLAN FARNSWORTH, CONTRACTS (3d ed. 1999). In the case of rescission, the court attempts to put both the injured and the breaching party back into their respective pre-contractual positions. RESTATEMENT (THIRD) OF RESTITUTION AND UNJUST ENRICHMENT 37 (2011). Such a decree is most common in cases involving contracts subject to avoidance due to fraud, mistake, or other invalidity. Id. While a minority of cases involves rescission as a remedy for breach, such a remedy is available to the plaintiff only in extremely limited circumstances. Id. The party seeking rescission must first establish a substantive right to avoidance.... then show that, the unwinding of performance... is both feasible and equitable on the facts of the case. Id. at 54. Additionally, the claimant must meet certain requirements indicating that typical remedies are inappropriate, including a requirement of heightened judicial discretion. Id. at 37. The stringent requirements for rescission at common law indicate that rescission is wholly inappropriate as a judicially-imposed effect of rejection both in general, and in the instant case, as debtor-licensors have no inherent substantive right to avoidance, and a blanket rule concerning rejection would prevent courts from properly analyzing the feasibility and equitability of rescission in a given case. Here, Foodstar does not have a substantive right to avoidance. While Congress enacted specific provisions within the Bankruptcy Code expressly allowing the debtor-in-possession or trustee of the bankruptcy estate to avoid transactions in 9

19 limited circumstances, the text of 365 indicates that Congress intended rejection to function as a breach, not an additional avoidance power. See 11 U.S.C. 544, (2013). In addition, rescission here would be improper because it is infeasible to restore Vohra and Foodstar to their pre-contractual positions. Before Foodstar acquired the rights to the Burger Bites trademark, and thus became party to the Vohra agreement, Vohra possessed trademark rights under his agreement with Viraj Deshmukh. (R. at 4.) Any attempt to rescind the contract as it currently exists would require some degree of monetary compensation to Vohra for his loss of time and effort, and to Foodstar to restore its initial purchase price. The rescission would perhaps require involvement by Deshmukh, who is not a party to this dispute. The calculation of the monetary value of the Burger Bites trademark at specific points in the past, and of the value of Vohra s time and efforts, would undoubtedly suffer from extreme inaccuracy. In effect, a court s attempt at unwinding this series of transactions would be difficult to the point of infeasibility. Finally, rescission in this case would be inappropriate because it would work severe inequity on Vohra. While Vohra has expended time, effort, and money building a thriving series of Burger Bites franchises within Eastlandia, Foodstar has made poor business decisions resulting in bankruptcy. (R. at 3-4.) Rewarding Foodstar by terminating Vohra s rights and allowing Foodstar to resell them to another purchaser would punish Vohra for achieving success, and grant Foodstar profit at his expense. This conclusion, that rescission is not an appropriate effect of rejection, is supported by existing bankruptcy case law. In reference to rejection under 365, courts consistently have held that rejection... does not unwind transactions that already have been consummated or void property rights that already have been obtained under the contract prior to rejection. In re Bachinski, 393 B.R. 522, 544 (Bankr. S.D. Ohio, Eastern Division 2008); See Thompkins v. Lil' Joe Records, 10

20 Inc., 476 F.3d 1294, 1308 (11th Cir. 2007). Should Congress have intended the bankruptcy courts to allow the total cancellation of executory contracts post-rejection, it would have defined rejection as constituting avoidance, a term with which Congress is familiar. See 11 U.S.C. 544, By terming rejection a breach, however, Congress manifested a clear intent that the debtor-licensor not gain the benefits of outright cancellation without the injured party s assent. 2. Congress omission of trademarks from 365(n) s protections for licensees of intellectual property should not be read as implying that rejection terminates the contractual rights of trademark licensees. In 1987, responding to concerns that the recent Lubrizol decision would permit licensors of intellectual property to strip licensees of their usage rights, Congress enacted 365(n). S. REP , at 4 (1988). This subsection reads in part: If the trustee rejects an executory contract under 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... ; or (B) to retain its rights... under such contract. 11 U.S.C. 365(n) (2013). Thus, where the licensing agreement concerns intellectual property, the licensee can elect to retain the rights to the property post-rejection. This amendment is similar in function to the existing provisions found in 365(h) and (i), allowing possessors of real property to retain their contractual rights. 11 U.S.C. 365(h)-(i) (2013). While courts initially struggled to determine whether 365(n) should be applied to trademark licenses, recent decisions indicate that the statutory definition of intellectual property, omitting trademarks, does not allow courts to extend 365(n) to trademark licensing agreements. See In re Matusalem, 158 B.R. 514, 521 (Bankr. S.D. Fla. 1993); In re Centura Software Corp., 281 B.R. 660, 674 (Bankr. N.D. Cal. 2002). Such an extension, however, is unnecessary, as the legislative history behind 11

21 365(n) indicates that Congress did not intend 365(n) to establish any negative inference regarding trademarks. S. REP , at 5 (1988). In fact, the legislative history states, the bill corrects the perception that Section 365 was ever intended to be a mechanism for stripping innocent licensees of rights. Id. at 4. It goes on to indicate that the bill does not address the rejection of executory trademark, trade name, or service mark licenses by debtor-licensors. Id. at 6. As Congress intended 365(n) to have no effect at all on trademark licensing agreements, the dissent s argument that 365(n) s mere existence should persuade courts to apply 365(g) to trademarks in a certain manner is problematic. In addition to the legislative history surrounding 365(n), a recent bill passed by the House of Representatives seeks to amend 11 U.S.C. 101(35A) to include trademarks within the definition of intellectual property. H.R. 3309, 113th Cong. 6(d)(2) (as passed the House of Representatives, December 5, 2013). Such a proposal would place trademarks squarely within the scope of 365(n), and would prevent a bankrupt licensor from unilaterally terminating an executory trademark licensing agreement. Robert S. Eisenbach, III, Innovation Act Passed By the House Would Make Major Changes to Section 365(n) s IP Licensee Protections, IN THE RED: THE BUSINESS BANKRUPTCY BLOG (Dec. 17, 2013), While the bill has not yet been considered by the Senate, the proposal evinces a clear congressional intent to prevent trademark licensees from losing their rights as a result of the licensor s rejection decision. 12

22 In his dissent to the Thirteenth Circuit opinion, Justice Lutfy concluded that, in expressly stating that licensees of intellectual property, owners of timeshare interests, and possessors of real property could elect to retain their rights following the debtor-licensor s decision to reject, Congress intended to codify the Lubrizol holding for all other property types. (R. at 17.) From this perspective, 365(g) is viewed as setting out the general rule that rejection terminates the licensee s right to continued usage of licensed property, while 365(h),(i), and (n) establish exceptions to this rule. (R. at ) In Justice Lutfy s view, the fact that Congress chose not to enact a specific statutory provision regarding trademarks creates a negative inference that trademark licensees should retain their usage rights post-rejection. (R. at 18.) This logic is fatally flawed, however, in that it fails to account for the realities of legislative-judicial interaction, and imposes the will of the courts despite repeated expressions of a contrary congressional intent. As the language of 365, the legislative history attached to 365(n), and legislative history in other areas all support the treatment of a debtor-licensor s rejection of a trademark licensing agreement as a contractual breach, this Court should apply longstanding principles of contract law to such a breach. These principles indicate that while contractual breach by a debtor-licensor can result in remedies including monetary damages or specific performance accruing to the injured party, rescission should only be available in limited circumstances. B. This Court should not construe rejection as terminating the rights of a trademark licensee because such an interpretation is against principles of equity and public policy. 1. Allowing Foodstar to unilaterally terminate Vohra s contractual rights would result in disproportionate forfeiture, and would grant Foodstar undeserved profits at Vohra s expense. While debtor relief is one of several principles underlying the provisions of the Bankruptcy Code, courts have never allowed such relief where it unfairly affects those engaged in dealings with the debtor. See, e.g., NLRB v. Bildisco & Bildisco, 465 U.S. 513, 525 (1984) 13

23 (highlighting the policies of flexibility and equity built into Chapter 11 ); In re Matusalem, 158 B.R. 514, (Bankr. S.D. Fla. 1993) (denying motion to reject in part because rejection would destroy the licensee s business). Indeed, courts may go so far as to refuse to authorize rejection if it will result in damage to the licensee disproportionate to the benefits to other creditors derived from rejection. Robertson v. Pierce (In re Huang), 23 B.R. 798, 800 (B.A.P. 9th Cir. 1982). This concern for equitable treatment of involved parties is illustrated by the legislative history to 365(n), which states that because the complexity of trademark licensing agreements places them beyond the scope of that particular provision, Congress intended to postpone legislative action to allow the bankruptcy courts to develop equitable treatment doctrine concerning trademark licenses. S. REP. NO , at 6 (1988). In In re Matusalem, the bankruptcy court held that the debtor-licensor could not reject a licensing agreement because of rejection s potential effects on both the debtor and the licensee. In re Matusalem, 158 B.R. at The debtor licensed its name to the licensee to sell rum and related products within an exclusive territory. Id. at 516. The debtor commenced bankruptcy proceedings and attempted to reject the licensing contract, but the court refused, because the proposed rejection would destroy the business of [the licensee], and with it the livelihood of [licensee s] principals and employees, without the realistic prospect of success by the debtor. Id. at 522. The potential benefit to the debtor was especially suspect as it would be subject to a damages claim for breach of contract effected by rejecting the licensing agreement. Id. In the instant case, much as in Matusalem, an interpretation of 365(g) allowing Foodstar to unilaterally terminate Vohra s contractual rights would be clearly inequitable. Under such an interpretation, Foodstar s rejection of the licensing agreement would result in it capturing a valuable asset which it has done little to deserve, while also totally destroying 14

24 Vohra s established Burger Bites franchises. Vohra initially purchased a twenty-year exclusive license to use the Burger Bites trademark in the territory of Eastlandia from the trademark s original owner, Viraj Deshmukh. (R. at 4.) Vohra now operates thirty-two restaurants in Eastlandia under franchise agreements. (R. at 4.) Following the Vohra agreement, Deshmukh sold the worldwide rights to the Burger Bites trademark to the current owner, Foodstar. (R. at 4-5.) After a series of poor business decisions, however, Foodstar, seeks to terminate Vohra s rights to exercise the trademark license because it wishes to resell the license, and can gain a higher price if the trademark is not subject to the Vohra agreement. (R. at 3, 5.) A decision here allowing Foodstar to terminate Vohra s rights under the licensing agreement would result in disproportionate damage to Vohra s established business, as it would destroy much of the franchises value, while only resulting in a ten to fifteen percent price increase for the Burger Bites trademark. As in Matusalem, any funds obtained by Foodstar will be subject to Vohra s damages claim. Such a claim will likely include Vohra s anticipated loss of profits and goodwill, legal expenses, and the like, in addition to the cost of cover; obtaining franchise rights to a successful restaurant chain for thirty-two locations will be incredibly expensive. This claim, when combined with the costs of the protracted litigation necessary to not only gain a favorable judgment, but also to enforce it in Eastlandia, will undoubtedly outweigh the marginal increase of ten to fifteen percent of the Burger Bites brand value Foodstar may gain by terminating Vohra s rights. In this way, pursuing a termination of Vohra s trademark rights will result in a net deficit to the Foodstar bankruptcy estate, and will ultimately prevent Foodstar s creditors from having some portion of their claims paid. In addition to the unsavory effect of disproportionate forfeiture, a termination of Vohra s rights would effectively reward Foodstar with an asset value that Foodstar did nothing to earn. 15

25 When it purchased the Burger Bites trademark from Deshmukh, the price Foodstar paid reflected the fact that the trademark was subject to Vohra s licensing agreement. Foodstar now argues that, simply because it has struggled financially, it should be rewarded with the full value of the trademark absent Vohra s license. The provisions of 365 were intended to allow debtors some relief in the form of escape from burdensome affirmative contractual obligations, not an ability to capture asset value which the debtor never previously held. This Court maintains the ability to treat rejection of trademark licenses with an eye towards fairness for all involved. As the legislative history to 365(n) suggests, Congress postponed congressional action in this area and to allow the development of equitable treatment by bankruptcy courts. S. REP. NO , at 6 (1988). In this way, the Court can impose a rejection doctrine which will allow Foodstar to escape its affirmative obligations while still protecting the rights Vohra obtained in the licensing agreement. By allowing Vohra to retain his rights, the Court would ensure that Foodstar s rejection does not destroy a thriving business, while still allowing Foodstar to resell the Burger Bites trademark and thus gain capital to satisfy creditors or otherwise pursue reorganization under the provisions of the Bankruptcy Code. 2. A decision treating rejection under 365 as terminating a trademark license will have a chilling effect on future trademark license negotiations, and will encourage bankruptcy filings, especially where the debtor is the holder of valuable trademark licenses. In the legislative history to 365(n), Congress indicated concern for licensees of both intellectual property and trademarks, as the Fourth Circuit s decision in Lubrizol threatened to stifle the licensing process, and thus posed a significant threat to important U.S. interests in innovation and entrepreneurial activity. Id. at 3, 6. Congress, noting that licensing plays a substantial role in the process of technological development and innovation, chose to enact 365(n), expressly protecting intellectual property licensees from the post-lubrizol effects of 16

26 rejection under 365. Id. at 3. While Congress did not enact legislation specifically applicable to trademark licenses, preferring to leave this matter to the bankruptcy courts, the underlying concern remains the same. Id. at 6. This concern revolves around the fact that entrepreneurs and business owners, fearing a Lubrizol-type decision, will engage in fewer licensing transactions, and thus reduce the funding available to trademark creators. Id. at 3-4. An interpretation of 11 U.S.C. 365(g) as allowing a debtor-licensor to unilaterally terminate the contractual rights of the licensee will undoubtedly have a chilling effect on trademark licensing agreements, and will eventually result in decreased innovation and business creation. In much the same way, such an interpretation creates a moral hazard, as it will encourage bankruptcy filings by licensors holding valuable trademark property rights, and will encourage licensors to incur far more risk in the marketplace than they would otherwise. Trademark licensors who encounter financial difficulty as a result of poor business judgment could simply enter Chapter 11, reject any executory licensing agreements, then resell the trademark licenses and exit Chapter 11 with a fresh start. As the United States has a strong interest in promoting entrepreneurial activity, while also discouraging bankruptcy filings aimed solely at reaping the financial rewards of reselling trademark licenses, this Court should adopt the Thirteenth Circuit s interpretation of 365(g), allowing the licensee to retain bargained-for contractual rights post-rejection. II. This Court should affirm the Thirteenth Circuit Court s decision, holding that 11 U.S.C. 365(g) should not be applied extraterritorially to a foreign licensing agreement. Issues of extraterritorial application of U.S. law are inextricably linked to a discussion of choice of law rules, international comity, and U.S. public policy. While the doctrines remain distinct in application, the presumption against extraterritoriality, the doctrine of international comity, and choice of law rules are all intended to protect against the risk of conflict with foreign 17

27 laws, and the problems that arise when such conflict goes unaddressed. See, e.g., Kiobel v. Royal Dutch Petroleum Co., 133 S.Ct. 1659, 1664 (2013).The addition of U.S. public policy, related to both foreign affairs and domestic concerns, seems to further complicate the matter, however both the substantive provisions and context of the Bankruptcy Code indicate congressional support for judicial decisions supporting international cooperation and harmony, as these results are of the utmost importance to the United States. As the presumption against extraterritoriality, choice of law analysis, international comity, and policy interests all support the confinement of 11 U.S.C. 365 to U.S. territory, this Court should affirm the decision of the Thirteenth Circuit Court barring extraterritorial application of 365. While Congress maintains the ability to enact legislation applying outside the territories of the United States, a longstanding principle of American law states that legislation, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States. EEOC v. Arabian American Oil Co., 499 U.S. 244, 248 (1991) (internal citations omitted). Such a principle protects against international discord which would otherwise result from clashes between U.S. and foreign laws. Kiobel, 133 S.Ct. at This presumption against extraterritoriality applies in all cases, thus preserving a stable background against which Congress can legislate with predictable effects. Morrison v. Nat l Australian Bank Ltd., 130 S. Ct. 2869, 2881 (2010). The presumption against extraterritoriality is not a clear statement rule, requiring Congress to expressly state that a statute applies extraterritorially, as context and other sources of statutory meaning can be consulted to give the most faithful reading of the law. Id. at The presumption is not, however, toothless, as absent an affirmative showing of congressional intent, courts give a statute no extraterritorial effect. Id. at This presumption can be rebutted in 18

28 one of two ways. Congress can enact legislation which it clearly intends to apply outside the United States, or alternatively, the presumption can be rebutted if a foreign transaction or incident ostensibly governed by a statute touches and concerns the United States with sufficient impact to displace the presumption. Id. at A. The language of relevant Bankruptcy Code provisions does not rebut this court s strong presumption against extraterritoriality. 28 U.S.C. 1334, governing bankruptcy proceedings, grants the district courts exclusive jurisdiction over all cases commenced under title U.S.C (2013). Subsection (e) states: (e) The district court in which a case under title 11 is commenced or is pending shall have exclusive jurisdiction-- (1) of all the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate; and (2) over all claims or causes of action that involve construction of section 327 of title 11, United States Code, or rules relating to disclosure requirements under section U.S.C. 1334(e) (2013). 11 U.S.C. 541 defines the bankruptcy estate created by the commencement of a case as being comprised of all the following property, wherever located and by whomever held U.S.C. 541(a) (2013). The combination of the jurisdictional grant in 1334(e) and the creation of the bankruptcy estate enables the district court in which the case was commenced, and thus the bankruptcy court attached to that district, to grant relief to the debtor or satisfaction of creditors pursuant to the rest of the Bankruptcy Code. Without such provisions, debtors would potentially be forced to file insolvency proceedings in multiple districts where the debtor s assets were located. In example, an individual living in the Southern District of New York but holding real property in New Jersey and elsewhere can file a voluntary Chapter 11 proceeding in the local district court pursuant to 11 U.S.C The operation of 541 will create a single bankruptcy estate, including the debtor s properties in New York, New 19

29 Jersey, and elsewhere, over which the district court will maintain exclusive jurisdiction. This court can then apply the substantive provisions of the Bankruptcy Code, if properly applicable, in order to satisfy the Code s aims of satisfying creditors and permitting the debtor to gain a fresh start. The text and function of these provisions in no way indicate that Congress intended U.S. courts to apply the U.S. Bankruptcy Code to contracts executed in foreign countries, and governed by foreign law. 1. The express language of the provisions of the Bankruptcy Code does not rebut the presumption against extraterritoriality. In order to rebut the strong presumption against extraterritoriality, a statute must contain evidence of clear congressional intent that the statute apply outside of the United States. Generic, boilerplate language, like any or every do not rebut the presumption against extraterritoriality. Kiobel, 133 S.Ct. at While Congress can indicate that it intends to give U.S. law extraterritorial effect via a jurisdictional provision, such a provision must satisfy the general requirement of a clear indication of extraterritoriality to rebut the presumption. Id. In this Court s most recent discussion of the presumption against extraterritoriality, Kiobel v. Royal Dutch Petroleum Co., the Court concluded that the Alien Tort Statute did not apply extraterritorially, as nothing in the statute rebutted the presumption against extraterritoriality. Id. at The statute at issue in Kiobel provided that, the district courts shall have original jurisdiction of any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States. 28 U.S.C (2013). As the Court noted, the true issue was not whether a federal court had jurisdiction to hear a cause of action predicated on foreign law, but whether that same court could recognize a cause of action existing under U.S. law, but not international law, to enforce a norm of behavior. Kiobel, 133 S.Ct. at While allowing that a jurisdictional provision can sometimes indicate the 20