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On July 9, 2012, the United States Court of Appeals for the
Seventh Circuit significantly strengthened the potential ability of
licensees to trademarks, international intellectual property, and
other rights to continue to enjoy the benefits of their licenses
despite a licensor's bankruptcy. In Sunbeam Products, Inc.
v. Chicago American Manufacturing, LLC, a trademark licensee
sought to continue to use licensed trademarks despite the
bankruptcy trustee's rejection of the license. Relying on the
basic consequences of contract rejection rather than on any special
provisions of the Bankruptcy Code, the Seventh Circuit said the
licensee could continue to use the licensed trademarks.
In Sunbeam, the debtor had entered into an agreement
with Chicago American Manufacturing that allowed the company to
make and sell fans under the debtor's patents and to brand them
with the debtor's trademarks. The debtor was placed into
involuntary bankruptcy and the bankruptcy trustee sold the
debtor's business to Sunbeam Products, rejecting Chicago
American's agreement under 11 U.S.C. § 365(a). Chicago
American continued to make fans bearing debtor's trademarks,
and Sunbeam brought an adversary proceeding to stop it.
Section 365(n) of the Bankruptcy Code allows a licensee to
continue to exercise rights in "intellectual property"
provided the licensee meets certain conditions. Congress enacted
§ 365(n) in response to a decision from the Fourth Circuit,
Lubrizol Enterprises, Inc. v. Richmond Metal Finishers,
Inc., 756 F.2d 1043 (4th Cir. 1985), which held that, were a
license to patents, copyrights or trademarks rejected in
bankruptcy, the licensee would lose the right to use the licensed
intellectual property. However, when enacting § 365(n),
Congress omitted trademarks from the definition of
"intellectual property" in the Bankruptcy Code.
See 11 U.S.C. § 101(35A). Therefore, both the
bankruptcy court and the Seventh Circuit found the protections of
§ 365(n) did not apply to Chicago American's use of the
debtor's trademarks.
The bankruptcy court nonetheless allowed Chicago American to
continue to make the fans using debtor's trademarks. The
bankruptcy court's logic was that, because Chicago American had
invested substantial resources to make the fans, the company could
continue to use the debtor's trademarks "'on equitable
grounds.'" The Seventh Circuit disapproved the bankruptcy
court's reliance on equity, but not the result.
The Seventh Circuit instead examined the nature and consequences
of contract rejection as set forth in § 365(g) of the
Bankruptcy Code and decided that Chicago American could continue to
use the debtor's trademarks. And for purposes of its analysis,
"all that matter[ed] is the opening proposition [of §
365(g)]: that rejection 'constitutes a breach of such
contract.'" Looking at what happens when licensors breach
outside of bankruptcy, the court found that a licensor's breach
does not terminate the licensee's right to use intellectual
property. That is, by classifying rejection as breach, §
365(g) establishes that in bankruptcy, as outside of bankruptcy,
the non-breaching party's rights remain in place.
Neither the Fourth Circuit's Lubrizol opinion nor
the adoption of § 365(n) led the Seventh Circuit to a
different result. The Seventh Circuit rejected
Lubrizol's holding and logic, and joined scholars in
criticizing Lubrizol for confusing rejection, which is a
breach, with avoidance, which is a nullification. As for the
omission of trademarks from the definition of "intellectual
property" and the protection § 365(n) provides, the
Seventh Circuit noted that the "omission is just an
omission" and that the limited definition of
"intellectual property" "does not affect trademarks
one way or the other." To support that conclusion, the Court
cited the legislative history of § 365(n), which noted the
omission was designed to allow more time for study, and not to
approve Lubrizol.
The Seventh Circuit's Sunbeam Products opinion is
an important development that has the potential to significantly
strengthen the rights of licensees to intellectual property
licenses. The immediate benefit will be in areas where §
365(n) may be read as providing little or no protection for
licensees, such as in trademark licenses, U.S. law governed
licenses where the licensor has filed bankruptcy in a foreign
jurisdiction, and licenses of non-U.S. patents and copyrights.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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