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
Similar Articles
Relevancy Powered by MondaqAI
Stites & Harbison PLLC
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Stites & Harbison PLLC
Related Articles
 
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions