Bankruptcy and Trademark Licenses — Are Yours Safe?

October 2, 2018

Are a licensee’s rights to use a trademark safe if the licensor files for bankruptcy and rejects the trademark license? This is a question the U.S. Supreme Court may resolve later this year.

In January 2018, the 1st U.S. Circuit Court of Appeals held in Mission Products Holdings v. Tempnology n/k/a Old Cold that a debtor’s rejection of a trademark license extinguished the licensee’s rights to continue to use the trademark. Prior to this decision, the 7th Circuit was the only circuit to have directly addressed the issue. In Sunbeam Products v. Chicago American Manufacturing, the 7th Circuit reached the opposite conclusion and held the licensee did not lose its right to use the trademark despite the license agreement’s rejection. Mission Products, the rejected licensee in the 1st Circuit case, filed a petition for writ of certiorari in June.

In furtherance of the Bankruptcy Code’s goal of providing debtors with a “fresh start,” Section 365(a) of the Bankruptcy Code permits a debtor or trustee to reject burdensome contracts under which some performance is still due. Upon rejection, the debtor no longer has to perform, and the rejected counterparty is entitled to a claim for monetary damages. Frequently, monetary damages are insufficient to make a rejected intellectual property (IP) licensee whole — the right to use the IP could be critical to the licensee’s business.

Over 30 years ago, the 4th Circuit held in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., that an intellectual property licensee loses the right to use IP when a debtor rejects the applicable license agreement. A few years after Lubrizol, Congress added Section 365(n) to the Bankruptcy Code, which permits a rejected IP licensee to continue to use the IP despite rejection of the license. Patents are included in the Bankruptcy Code’s definition of “intellectual property,” but trademarks notably are not. This omission led to a split among courts as to whether a licensee’s rights under a rejected trademark license agreement are protected.

In Sunbeam, the 7th Circuit took the view that “an omission is just an omission” and, in fact, Section 365(n) does not affect trademarks one way or the other. Instead, the Sunbeam court held that because breach of a license agreement outside of bankruptcy does not eliminate the licensee’s rights, rejection (treated as a breach) in bankruptcy does not wipe out a licensee’s rights either.

Conversely, in Mission Products, the 1st Circuit held that the omission of trademarks from the definition of intellectual property was intentional and, therefore, Section 365(n) did not protect the trademark licensee’s use rights. The 1st Circuit undercut Sunbeam’s holding by finding that allowing a licensee to continue to use a trademark would contravene the policy behind executory contract rejections. If a licensee is allowed to continue to use the trademark, the court reasoned, the debtor would need to continue to monitor and control that use because it is a representation of the debtor. Such monitoring and control by a debtor constitute performance obligations that the Bankruptcy Code relieves through rejection.

Without a unified approach to the treatment of trademark use rights upon rejection of the license agreement, trademark licensees’ rights and business could hinge on where the licensor filed for bankruptcy. See In re Exide Techs., 607 F.3d 957, 966 (3d Cir. 2010) (Ambro, J., concurring), which disagreed with the Bankruptcy Court’s finding that Congress intentionally omitted trademarks from the scope of Section 365(n); In re SIMA Int’l, 2018 WL 2293705, at *9 (Bankr. D. Conn. May 17, 2018), which followed the 7th Circuit’s approach in Sunbeam and found that rejection did not extinguish a trademark licensee’s right to use the trademark; In re Crumbs Bake Shop, Inc., 522 B.R. 766, 771 (Bankr. D.N.J. 2014), which held that licensees’ rights to use trademarks are preserved despite rejection of the license; and In re Old Carco LLC, 406 B.R. 180, 211 (Bankr. S.D.N.Y. 2009), which found that Section 365(n) does not apply to trademarks because trademarks are not included in the definition of intellectual property. 

By the end of October, the Supreme Court likely will announce whether it will hear the appeal this winter.