United States: New Jersey Bankruptcy Court Extends Unusual Protection To Trademark Licensees Under Section 365(n)

Last Updated: December 2 2014
Article by Andrew Baum

A recent Bankruptcy Court decision in New Jersey took an unusual approach in determining the rights of the debtors' trademark licensees following the debtors' rejection of the licenses as executory contracts. In In re Crumbs Bake Shop, Inc., Case No. 14-24287 (10/31/14), Judge Michael Kaplan held that the debtors' licensees were protected by Section 365(n) of the Bankruptcy Code and could continue to use the licensed marks notwithstanding the rejection, even though that section – which expressly protects licensees of other types of intellectual property – makes no mention of trademarks. The decision has been appealed to the Third Circuit. If affirmed, the holding would diverge from the Fourth and Seventh Circuit's approaches to the same issue and could lead to either a Supreme Court review or legislative action by Congress.

Debtors sold baked goods through a chain of retail shops. Through a licensing agent, the debtors licensed certain of their trademarks and trade secrets to six different licensees. Debtors filed bankruptcy in July 2014. In August, the Court approved the sale of substantially all of the debtors' assets to Lemonis Fischer Acquisition Company LLC (the "Buyer"), free and clear of liens and other encumbrances, pursuant to Section 363(f) of the Bankruptcy Code. Following the sale, the Buyer moved to reject the trademark license agreements. In response, the licensing agent asserted that the licensees could elect to retain their rights under Section 365(n).

This subsection was added to the Bankruptcy Code in 1988 with the express purpose of overruling Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985). Lubrizol had held that when any intellectual property license is rejected in bankruptcy, the license is terminated and the licensee loses the ability to exercise the right granted by the license. Section 365(n) permits a licensee of "intellectual property" to continue exercising its rights notwithstanding the rejection of the license contract by the trustee for a debtor licensor.

The subsection's definition of "intellectual property" includes patents, copyrights and trade secrets, but does not include trademarks. This was intentional. As noted in the legislative history, trademark licensing relationships – unlike licenses for patents or copyrights — "depend to a large extent on control of the quality of the products or services sold by the licensee."1 There were concerns about whether debtor-licensors would have the means or incentive to exercise this function, as well as a reluctance to impose any additional obligations on trustees. "Since these matters could not be addressed without more extensive study," said the Senate Report, "it was determined to postpone congressional action in this area and to allow the development of equitable treatment of this situation by bankruptcy courts."

Since then, courts have treated debtors' rejections of trademark licenses in a variety of ways. In most cases, the licensee's rights are simply extinguished. See, e.g., In re Global Holdings, Inc., 290 B.R. 507, 513 (Bankr. Del. 2003). In some exceptional cases, licensees were able to obtain relief by showing that their businesses would be virtually destroyed and/or that rejection would be of little benefit to the state and the creditors.

The Seventh Circuit took an entirely different approach in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC 686 F.3d 372 (7th Cir. 2012). Sunbeam held that that because Section 365(g) characterizes the rejection of an executory contract as a breach — not a rescission voiding the contract — "nothing about this process implies that any rights of the other contracting party have been vaporized." The rejection "merely frees the estate from the obligation to perform" but has no effect on the contract's continued existence. Therefore, the Seventh Circuit's position is that, even without the protection afforded by Section 365(n), a trademark licensee retains its rights to use the licensed mark notwithstanding the rejection of the license by the debtor licensor.

In Crumbs, Judge Levine followed the reasoning previously articulated by Judge Ambro's concurrence in In re Exide Technologies, 607 F.3d 957 (3d Cir. 2010). He agrees with Judge Ambro (as well as the Seventh Circuit) that the mere absence of "trademarks" from the list of intellectual property in Section 365(n) does not prohibit a judge from granting "equitable treatment" to trademark licensees, as envisioned by the legislative history. Judge Levine went on to hold that "it would be inequitable to strip the within Licensees of their rights in the event of a rejection, as those rights had been bargained away by Debtors."

The Buyer argued that these equitable considerations are irrelevant where, as here, the debtors sold their assets, to a bona fide purchaser, under Section 363(f). Judge Levine disagreed. He saw no reason to augment the already considerable benefit of allowing bankruptcy estates to assume or reject executory contracts at the expense of third parties. Noting that monetary recoveries in Chapter 11 cases primarily benefit pre- and post-petition lenders and administrative claimants rather than unsecured creditors, he held that "[i]t is questionable that Congress intended to sacrifice the rights of licensees for the benefit of the lending community."

The Court also rejected Buyer's argument that, because the licensees failed to object to the sale, the asset sale under Section 363(f) was a free and clear conveyance of the trademark rights, unencumbered by the licenses. It held that, in the absence of consent, a Section 363(f) sale does not trump the Section 365(n) rights owned by the licensees. The failure to object in this case was not an implicit consent in this case, said the Court, because the sale of IP rights in the Asset Purchase Agreement was so convoluted and impenetrable that the licensees had no reasonable notice. The court posited "that the content of the Sale Motion was a calculated effort to camouflage the intent to treat the License Agreements as vitiated without raising the specter of §365(n) rights. Thus, it would be inequitable for this Court to find that the Licensees consented to termination of their rights."

Judge Levine glossed over the Buyer's concerns that it would have little ability to control the quality of products or services sold by licensees, as the law of trademark licensing demands. It cited only to a law review article which discussed the licensees' incentive to maintain quality, and to a pending bill in the House of Representatives which would add "trademarks" to Section 365(n) and also provide that bankruptcy trustees must not be relieved of any contractual obligation to monitor and control quality.

The shotgun marriage of the Buyer and the licensees is made even more awkward by the Court's holding that, since the license agreements were excluded from the asset sale, post-closing royalties generated by the licensees are owed to the Debtors, not the Buyer. In support of this holding, the Court cited In re Cellnet Data Sys., Inc., 327 F.3d 242 (3d Cir. 2003), which reached the same result. But CellNet involved patent licenses, which require no ongoing business relationship between licensor and licensee. It is anomalous, to say the least, to have one party be responsible for quality control while another party collects the royalties. That said, the Buyer will have a motive to undertake this obligation, since its failure to do so would threaten the validity of the trademarks themselves – assets the Buyer paid for and presumable wishes to preserve.

The Buyer has filed a notice of appeal to the Third Circuit. If the decision is affirmed, the Third Circuit would join the Seventh in holding that the exclusion of "trademarks" from the definition of intellectual property in Section 365(n) does not, by "negative inference," preclude a court from granting protection to licensees under that subsection. A reversal, however, would put the circuits in conflict. While this decision should give some comfort to trademark licensees of debtor companies, their status will remain highly uncertain so long as the statute is silent. Ideally, Congress will finally clarify the statute and finish the job it "postponed" 25 years ago.

Footnote

1. Senate Report No. 100-505, 100th Cong., 2d Sess. (Sept. 14, 1988)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.