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On July 9, 2012, the United States Court of Appeals for the
Seventh Circuit issued a decision in Sunbeam Products, Inc. v.
Chicago American Mfg., LLC (No. 11-3920), a case that
addresses the effect of a bankruptcy trustee's rejection of
trademark licenses. For years, the Bankruptcy Code's definition
of "intellectual property" has excluded trademarks. But
the Code provides very specific guidelines on the treatment of
other intellectual property licenses in section 365(n), which was
added by Congress in 1988 following the Fourth Circuit's
decision in Lubrizol Enterprises, Inc. v. Richmond Metal
Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985).
In section 365(n), Congress provided, contrary to
Lubrizol, that a licensee may continue to use the
intellectual property after rejection, as long as certain
conditions are met. (Lubrizol had held that after
rejection, the licensee loses the ability to use the licensed
property.) The Seventh Circuit concluded that the omission of
"trademarks" in the definition of "intellectual
property" was "just an omission"; all it means is
that 365(n) does not affect trademarks one way or the other. This
put the Lubrizol decision squarely before the Seventh
Circuit.
The Seventh Circuit disagreed with Lubrizol, setting up
a clear circuit conflict on the issue. As a matter of statutory
interpretation, the Court held that rejection of a trademark
license, like the rejection of any other executory contract or
unexpired lease, merely constitutes a breach of the contract and
does not terminate the licensee's rights. So the licensee in
this instance, Chicago American Mfg., could continue using the
trademarked property following rejection. Chief Judge Easterbrook
authored the opinion.
Though the decision is specific to intellectual property rights,
Judge Easterbrook's reasoning has broader implications for
bankruptcy practitioners. In the Seventh Circuit, at least, it
resolves any doubts about the effect of contract rejection. Some
courts, as in Lubrizol, have interpreted rejection as the
equivalent of contract termination or rescission; more than a
breach. Those decisions have been criticized over the years (one
commentator calls Lubrizol "the king of all bad
executory contract cases"), but until now no other appellate
court had directly addressed Lubrizol.1 Judge
Easterbrook put the issue to rest: "nothing about this process
[of rejection] implies that any rights of the other contracting
party have been vaporized."
The decision also serves as a cautionary sign for bankruptcy
practitioners and judges who argue for and justify results in the
name of "equity" or good public policy. The bankruptcy
judge (Judge Pamela Hollis, N.D. Ill.) had held that Chicago
American Mfg. could continue using the marks "on equitable
grounds," citing the licensee's substantial investments in
manufacturing the trademarked products. Judge Easterbrook took her
to task for that, saying, "What the Bankruptcy Code provides,
a judge cannot override by declaring that enforcement would be
'inequitable.'" That statement will surely be cited in
future bankruptcy pleadings and decisions, regardless of the
subject matter.
Footnote
1. Charles Jordan Tabb, The Law of Bankruptcy
822 (2d ed. 2009).
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