– Chris Camardello, Bankruptcy Attorney
Those who license the right to use another’s brand need to pay more attention to the resulting risks when the brand owner files bankruptcy, given the uncertainty resulting from some recent legal developments. And those interested in purchasing brands in bankruptcy should sit up straight and pay special attention too.
The U.S. Supreme Court recently denied a request to review a case called Sunbeam Prods., Inc. v. Chicago Am. Mfg., LLC in which the Seventh Circuit Court of Appeals held that a trademark licensee may continue to use the licensed trademark, even though the trademark licensor rejected the license agreement in bankruptcy. The Seventh Circuit’s holding is diametrically opposed to the Fourth Circuit’s holding in Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc., a case decided more than twenty-five years ago. Because of this split in legal interpretations of the applicable law, Sunbeam, the International Trademark Association (INTA), and others hoped that the Supreme Court would hear Sunbeam’s appeal. But unfortunately, the Supreme Court passed on the opportunity.
In Sunbeam, Lakewood Engineering & Manufacturing Co. authorized Chicago American Manufacturing (“CAM”) to use Lakewood’s trademark’s on CAM’s fans. Later, several of Lakewood’s creditors forced Lakewood into bankruptcy. The bankruptcy trustee chose to sell Lakewood’s assets. Sunbeam Products (d/b/a Jarden Consumer Solutions) bought the assets from the trustee, but Sunbeam did not want the Lakewood-branded products that CAM had, nor did Sunbeam want CAM to sell those products, since Sunbeam was a competitor. Thus, Lakewood’s bankruptcy trustee rejected the trademark license between Lakewood (as licensor) and CAM (as licensee). When CAM continued to use the Lakewood brand, Sunbeam sued CAM. Relying on equitable grounds, the bankruptcy court concluded that CAM had the right to continue to use the Lakewood brand. Sunbeam directly appealed to the Seventh Circuit.
Writing for the Seventh Circuit, Chief Judge Easterbrook first examined the Lubrizol opinion. In 1985, the Fourth Circuit held that a patent licensee loses its ability to use the patent if the patent licensor rejects the license in bankruptcy. In response, Congress enacted Section 365(n) of the Bankruptcy Code. Section 365(n) protects a licensee’s right to continue to use intellectual property after a bankruptcy licensor rejects the licensing agreement. But the Bankruptcy Code’s definition of “intellectual property” does not include trademarks.
Judge Easterbrook noted that some bankruptcy judges consider Congress’s omission of trademarks from “intellectual property” a codification of Lubrizol. But Judge Easterbrook (along with Judges Williams and Tinder) disagreed. To the Seventh Circuit, “an omission is just an omission.” Rather, the limited definition of “intellectual property” merely means that trademarks are not affected either way.
But instead of relying on equitable grounds to hold that CAM may continue to use the Lakewood brand, the Seventh Circuit examined Section 365(g) of the Bankruptcy Code, which states that rejection of an executory contract constitutes a breach of that contract. The Court observed that, outside of bankruptcy, a licensor’s breach of a license agreement would not deprive the licensee of the right to use the licensed product. Instead, the licensee’s rights would remain in place. Therefore, because rejection constitutes a breach in bankruptcy, CAM’s rights under the license agreement remained in place.
Given the split in the circuits and the Supreme Court’s unwillingness to resolve it, what does this mean for licensees and bankruptcy licensors? At least in the Seventh and Fourth Circuits, licensors and licensees know where they stand. In the Seventh Circuit, if the licensor rejects a trademark license agreement, the licensee can feel confident that it will be able to continue to use the licensed mark. From the perspective of the licensor and any party interested in buying the licensor’s assets, they must consider that the licensee’s rights in licensed trademarks will continue after the sale.
In the Fourth Circuit, a potential licensee should conduct due diligence on the financial health of a potential licensor to analyze the risk of the licensor filing bankruptcy. As long as Lubrizol is good law, the licensor could reject the license, leaving the licensee with nothing more than a claim for money damages.
Outside of the Seventh and Fourth Circuits, the law is unsettled; a decision could go either way. And unfortunately, in the meantime, the Supreme Court is not going to resolve this issue, at least not this term.
By the way, given all the recent discussion of Hostess in bankruptcy, does anyone happen to know if any of the Hostess brands were licensed?