In the Red – The Business Bankruptcy Blog

In the Red – The Business Bankruptcy Blog

The Business Bankrupty Blog

Trump Card: Delaware Bankruptcy Court Deals Trademark Owner The Winning Hand Over A Debtor Licensee

Posted in Business Bankruptcy Issues, Recent Developments

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Risky Business. When a debtor is a licensee under a trademark license agreement, does it risk losing those license rights when it files bankruptcy? The question had not been answered in a Delaware bankruptcy case until Judge Kevin Gross recently addressed it in the In re Trump Entertainment Resorts, Inc. Chapter 11 case. A lot was riding on the decision, not just for the parties involved but, given how many Chapter 11 cases are filed in Delaware, more generally for other trademark licensees and owners as well.

The Debtors were licensees of trademarks and other rights from Donald and Ivanka Trump, through an entity called Trump AC. Trump AC sought relief from the automatic stay to proceed with a state court action it had filed against the Debtors before the bankruptcy in New Jersey Superior Court, seeking to terminate the underlying trademark license agreement.

In a 21-page opinion issued on February 20, 2015, a copy of which is available by following the link, Judge Gross granted Trump AC’s motion for relief from stay. With the decision, Delaware joined the growing trend of courts giving “veto rights” to trademark owners, similar to those enjoyed by patent and copyright owners, over the assignment — and in some courts, even over the assumption — of trademark licenses.

The Key Bankruptcy Code Section. Judge Gross first examined whether the Debtors could assume the trademark license, which no one disputed was executory, in light of Bankruptcy Code Section 365(c)(1). That section provides:

(c) The trustee may not assume or assign any executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties, if—

(1)(A) applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties; and

(B) such party does not consent to such assumption or assignment.

The Hypothetical Test Applies In Delaware. Judge Gross noted that in In re West Elecs. Inc., 852 F.2d 79 (3d Cir. 1988), the Third Circuit interpreted Section 365(c)(1) to require a court to ask, hypothetically, whether a debtor could assign the executory contract at issue (even if the debtor didn’t seek to assign it). If the debtor couldn’t assign it under applicable non-bankruptcy law, then it couldn’t assume it either. This is the so-called “hypothetical test” interpretation. The Court also held that Section 365(f)(1), which generally overrides anti-assignment provisions in an executory contract or applicable law, is itself subject to Section 365(c)(1)’s carve-back when applicable law makes the identity of the contracting party crucial to the contract.

Does Applicable Law Prohibit Assignment? Having addressed these threshold issues, Judge Gross next considered whether applicable non-bankruptcy law, here federal trademark law, makes a trademark license agreement non-assignable without the trademark owner’s consent. Ultimately, the Court answered yes, and followed the Seventh Circuit’s 2011 decision in In re XMH Corp., 647 F.3d 690 (7th Cir. 2011):

Based on the Court’s research and cases cited by Trump AC, it appears that the substantial weight of authority holds that under federal trademark law, trademark licenses are not assignable in the absence of some express authorization from the licensor, such as a clause in the license agreement itself. See, e.g., XMH, 647 F.3d at 695 (“as far as we’ve been able to determine, the universal rule is that trademark licenses are not assignable in the absence of a clause expressly authorizing assignment”); Miller v. Glenn Miller Prods., Inc., 454 F.3d 975, 988, 992-93 (9th Cir. 2006); N.C.P. Mktg. Group, Inc. v. Billy Blanks (In re N.C.P. Mktg. Group, Inc.), 337 B.R. 230, 235-37 (D. Nev. 2005); 3 McCarthy on Trademarks § 18:43 (4th ed. 2010).

However, as recognized in the Ninth Circuit’s Catapult decision, it is not sufficient to simply recognize a general ban on contract assignment under the applicable nonbankruptcy law, the Court must understand why the applicable non-bankruptcy law bans assignment. As explained by the Seventh Circuit in XMH:

Often the owner of a trademark will find that the most efficient way to exploit it is to license the production of the trademarked good to another company, which may have lower costs of production or other advantages over the trademark’s owner. Normally the owner who does this will not want the licensee to be allowed to assign the license (that is, sublicense the trademark) without the owner’s consent, because while the owner will have picked his licensee because of confidence that he will not degrade the quality of the trademarked product he can have no similar assurance with respect to some unknown future sublicensee.

647 F.3d at 696. “The purpose of a trademark, after all, is to identify a good or service to the consumer, and identity implies consistency and a correlative duty to make sure that the good or service really is of consistent quality, i.e., really is the same good or service.” Id. at 695. Accord 4 McCarthy on Trademarks § 25:33 (4th ed. 2010) (“Since the licensor-trademark owner has the duty to control the quality of goods sold under its mark, it must have the right to pass upon the abilities of new potential licensees.”).

The Court determined that Trump AC had not waived this default rule against assignments in the trademark license agreement. The Court also clarified that a separate consent Trump AC had given for the benefit of the Debtors’ first lien lenders had not been triggered and did not apply to the Debtors. As a result, Trump AC had not consented to assignment or assumption of the trademark license.

What About Exclusive Trademark Licenses? The Debtors argued that the Court should hold the agreement to be an exclusive trademark license, apply patent and copyright license case law suggesting that exclusive licenses should be treated differently, and deny the stay relief motion. The Court’s short answer: no dice.

The distinction between exclusive and non-exclusive licenses is simply not relevant in the trademark context. The general prohibition against the assignment of trademark licenses absent the licensor’s consent is equally applicable to both exclusive and non-exclusive trademark licenses. A trademark licensor would have the same concerns with respect to the identity of the licensee and the quality of products bearing its trademark whether the trademark license is exclusive or non-exclusive. Thus, a rule distinguishing between exclusive and non-exclusive licenses for purposes of assignability makes little sense in the trademark context. Further, trademarks, copyrights, and patents are governed by different sets of laws and influenced by different policy concerns. “[W]hile the basic policies underlying copyright and patent protection are to encourage creative authorship and invention, the purposes of trademark protection are to protect the public’s expectation regarding the source and quality of goods.” Miller, 454 F.3d at 938. The Catapult and Golden Books decisions, while persuasive so far as they apply, simply address different circumstances than are before the Court here.

The Power To Consent. Although it prevailed on the relief from stay motion, Trump AC ultimately reached an agreement with the Debtors, allowing the continued use of the Trump trademarks at the Taj Mahal casino, in conjunction with confirmation of the Debtors’ plan of reorganization. That new agreement provided the “consent” required under Section 365(c)(1)(B) for the Debtors to assume the otherwise non-assignable, and therefore non-assumable, trademark license agreement.

The Stakes Are Raised. Debtors with in-bound trademark licensees better take note of this decision. First it was the Nevada District Court and later the Ninth Circuit in the N.C.P. Marketing case, followed a few years later by the Seventh Circuit in the XMH case. Now, with the Trump Entertainment decision, add Delaware to the list of courts holding that trademark licenses are not assignable without the trademark owner’s consent. In Delaware, California, and other hypothetical test jurisdictions, these licenses will also be non-assumable, giving trademark owners — not their debtor licensees — the winning hand.

Image Courtesy of Flickr by Poker Photos

You Say You Want A Dissolution: An Overview Of The Formal Corporate Wind Down

Posted in The Financially Troubled Company

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Winding Down. If a corporation’s board of directors decides that the business needs to be wound down, there are a number of legal paths to consider. Determining the best approach is fact-dependent, and the corporation and its board should get legal advice before making a decision. Sometimes a bankruptcy filing is needed, either a Chapter 11 reorganization (perhaps to complete a going-concern sale) or a Chapter 7 liquidation bankruptcy (in which a trustee will be appointed to liquidate the business). In other cases, an assignment for the benefit of creditors might be a good choice.

A Delaware Corporate Dissolution. This post takes a high-level look at another, often simpler option: the corporate dissolution.  It assumes that the business is a Delaware corporation, since many corporations incorporate there. The laws of the state of incorporation govern the dissolution process, so it’s important to remember that the process described below will differ if the business is incorporated in another state.

Why A Corporate Dissolution? Corporations typically choose to do a corporate dissolution when they don’t need bankruptcy protection (and prefer to avoid filing bankruptcy) but want to have the corporation formally wound down. The dissolution process can be less expensive than other alternatives, particularly when litigation or disputes over claims is unlikely.

  • When properly conducted, a dissolution can bar late claims against the corporation and provide directors with protection from personal liability to claimants.
  • Unlike a bankruptcy filing (but similar to an assignment for the benefit of creditors), a dissolution requires shareholder approval; that often makes it a better fit for privately held corporations.
  • A dissolution typically requires at least one director to supervise the process and at least one officer to manage the wind down and liquidation, although some professional firms will step into those roles.
  • Corporations often elect to dissolve at a point when they anticipate being able to pay creditors in full and return some funds to shareholders or, if they are insolvent, find their creditors generally to be cooperative. If the corporation has a bank or other secured creditor, it helps if they are willing to work with the corporation to liquidate the assets without a foreclosure.

A Corporation In Dissolution. Under Delaware law, once the dissolution commences the corporation is no longer permitted to operate as a normal business. Instead, as the Delaware statute provides, the corporation continues only “gradually to settle and close their business, to dispose of and convey their property, to discharge their liabilities and to distribute to their stockholders any remaining assets, but not for the purpose of continuing the business for which the corporation was organized.” The corporation is allowed up to three years to complete the dissolution process; if more time is required, a request has to be made to the Delaware Court of Chancery (although a corporation in dissolution remains in existence, without having to go to the Chancery Court, to complete lawsuits that are pending when the three year period expires).

Key Aspects Of A Dissolution. To give you a sense of the process involved, below is a list of some of the main steps in a dissolution. However, please note that important details go beyond the scope of this post. Examples include special voting procedures that may be required if preferred stock has been issued, possible alternatives to the claims process, establishing reserves for claims, payment of the costs of the liquidation, winding down subsidiaries, and the impact of foreign affiliates. It bears repeating: a corporation considering a dissolution should get legal advice on all aspects of the process.

With that caveat, a dissolution generally involves the following:

  • Board approval of a decision to dissolve and adoption of a plan of liquidation;
  • Shareholder approval of the dissolution and plan of liquidation in requisite majorities as provided under the corporation’s then-current Certificate of Incorporation;
  • Filing of a Delaware Annual Franchise Tax Report and payment of franchise taxes, including a partial-year final franchise tax report;
  • Filing a Certificate of Dissolution with the Delaware Secretary of State’s office;
  • Timely reporting to the Internal Revenue Service of the dissolution;
  • A formal claims process, with at least 60 days notice to potential claimants of the dissolution and deadline to file claims, together with publication of the notice in required newspapers;
  • Review of filed claims, with appropriate offers to claimants or rejections of claims;
  • Resolution of any lawsuits, including any timely-filed by claimants whose claims the corporation rejected;
  • Liquidation of remaining corporate assets in accordance with the plan of liquidation;
  • Preparation and filing of all final tax returns;
  • Withdrawals or surrender of qualifications to do business in other states; and
  • Final distributions to creditors and, if funds remain, to applicable shareholders.

Conclusion. In the right situation, a dissolution can be the best approach to formally wind down a corporation’s business and corporate existence. As with all corporate governance matters, however, the corporation’s board and management should get legal advice tailored to the corporation, its business, and creditors, and guidance throughout the dissolution process.

 

Image courtesy of Flickr by JBrazito

What Did The ABI Chapter 11 Commission Recommend On Intellectual Property Licenses And Bankruptcy Issues?

Posted in Business Bankruptcy Issues, Recent Developments

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The American Bankruptcy Institute‘s Commission to Study the Reform of Chapter 11 issued its report last week, capping more than two years of hearings, meetings, and hard work. Having had the honor of testifying before the Commission on intellectual property and bankruptcy issues at one of its hearings in New York in June 2013, I wanted to take a closer look at its intellectual property recommendations when a licensor or licensee files bankruptcy.

You can download the Commission’s entire report for all the details, but the Commission’s main IP recommendations address five key issues:

  1. Should rejection of an intellectual property license under Section 365(g) terminate an IP licensee’s rights to the IP (absent Section 365(n) protection);
  2. Should a bankrupt licensee or trustee be able to assume an in-bound IP license;
  3. Should a bankrupt licensee or trustee be able to assign an in-bound IP license;
  4. Should Section 365(n) expressly cover foreign IP when a licensor is in bankruptcy; and
  5. Should trademarks be covered by Section 365(n)’s protections when a licensor is in bankruptcy?

Let’s examine the Commission’s recommendations on each in turn.

The Consequences Of Rejection. A threshold issue addressed was the proper impact of rejection of an executory contract, including an intellectual property license, under Section 365(g). The Commission recommended that rejection end a non-debtor counterparty’s right to continued use of property of the estate, subject to specific protections such as Section 365(n). In doing so, it appeared to follow the long-standing Fourth Circuit decision in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985) and not the Seventh Circuit’s more recent decision in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC,  686 F.3d 372 (7th Cir. 2012). As a side note, the Commission also recommended that all IP licenses be deemed executory. In combination, these positions would make the scope of Section 365(n) even more important and, as we will see on the final two questions, the Commission had a series of specific recommendations on Section 365(n) protections.

Resolving The Hypothetical/Actual Test Issue. A key question that arises when a licensee files bankruptcy is whether the debtor licensee can assume an in-bound license of another party’s intellectual property. The circuits have split on this “hypothetical vs. actual test” reading of Section 365(c)(1) and the Commission sided squarely with the actual test when a debtor in possession, as licensee, proposes to assume but not assign an IP license. The Commission believed a licensor would be receiving the benefit of its bargain in that situation since the debtor in possession as licensee would be assuming, and therefore continuing to perform under, the license. This makes sense for a debtor in possession, but the Commission’s recommendation speaks of the right of a “trustee” to assume a license, which would introduce a new party (the trustee) in the role of licensee. Although a full discussion of this “hypothetical vs. actual test” split is beyond the scope of this post, you can read about it — and the Supreme Court’s interest in the issue a few years ago– in this earlier post discussing the issues, or of course in the Commission’s report.

Making IP Licenses Assignable To Non-Competitors. In addition to voting to codify the actual test when a debtor in possession or trustee proposes to assume an IP license, the Commission also recommended that debtor licensees and their trustees be permitted to assign those licenses to a single assignee under Section 365(f), notwithstanding applicable nonbankruptcy law such as federal patent, copyright, or trademark law, or any contrary provision in the license.

  • If the proposed assignee is a competitor of the licensor or an affiliate of such competitor, the Commission recommended that the bankruptcy court be permitted to deny the assignment if it determined, after notice and a hearing, that the harm to the nondebtor licensor resulting from the proposed assignment “significantly outweighs the benefit to the estate derived the assignment.”
  • The burden of proof would be on the nondebtor licensor in such a hearing.
  • If adopted, this would make in-bound IP licenses more assignable in bankruptcy than out, similar to non-residential real property leases, and licenses could potentially become a source of value for creditors.
  • However, even if owners of patents, copyrights, and trademarks could accept adoption of the actual test for assumption of IP licenses, they might have a harder time giving up control over whether and to whom licenses of their IP could be assigned.

The Foreign IP Issue. Section 101(35A) of the Bankruptcy Code defines “intellectual property” for purposes of the protections of Section 365(n), using either general terms or references to provisions of the United States Code. The Commission seemed to believe foreign IP was not covered by the current definitions (although several arguments suggest that it is), and to resolve any uncertainty the Commission recommended that foreign patents and copyrights expressly be included in Section 101(35A)’s definitions. It found no reasonable basis for treating foreign IP differently. In addition, the Commission recommended that foreign trademarks also be included in this definition subject to the same limitations and conditions, discussed below, as it proposed should apply to domestic trademarks.

Giving Trademark Licensees Protections Under Section 365(n). An important recent trend at the intersection of IP and bankruptcy law has been the efforts of courts to protect trademark licensees from the effects of rejection of their licenses by trademark licensors in bankruptcy. The Third, Seventh, and Eighth Circuits have sided with trademark licensees in recent cases, and a New Jersey bankruptcy court recently went so far as to extend Section 365(n) protections to trademark licensees on equitable grounds. In addition, the House of Representatives (but not the Senate) passed the Innovation Act, which would have added trademarks to Section 101(35A) and therefore grant them Section 365(n) protection. Addressing this issue, the Commission recommended the following:

  • Trademarks, service marks, and trade names as defined in Section 1127 of Title 15 of the U.S. Code should be added to the definition of Section 101(35A).
  • If the trustee or debtor in possession rejects a license of a trademark, service mark, or trade name, Section 365(n) would apply with certain modifications. First,  the nondebtor licensee would be required to comply with the license and related agreement, including with respect to (i) the products, materials, and processes the license permitted or required, and (ii) its obligations to maintain sourcing and quality of the licensed products or services. The trustee (or debtor in possession) should maintain the right to oversee and enforce quality control but without any continuing obligation to provide further products or services.
  • The concept of “royalty payments” would be expanded to include “other payments” contemplated by the license of the trademark, service mark, or trade name.

These trademark recommendations are similar to the Innovation Act’s provisions and, as such, might find support in Congress.

Conclusion. The ABI’s Chapter 11 Commission has presented a comprehensive set of recommendations on many fundamental aspects of Chapter 11. In its intellectual property recommendations, the Commission tackled some of the most common bankruptcy and IP issues being litigated today. If enacted by Congress, its recommendations would resolve circuit splits, clarify licensee and licensor’s rights in bankruptcy, and squarely extend protection to trademark licensees. Whether or not you agree with every recommendation, the Commission should be commended for its serious, thoughtful, and diligent effort to improve Chapter 11 for debtors, creditors, and the general public.

Image Courtesy of Flickr by O Palsson

Amendments To The Federal Rules Of Bankruptcy Procedure, Including One Shortening The Time For Serving A Summons, Take Effect December 1, 2014

Posted in Business Bankruptcy Issues, Recent Developments

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Almost every year, changes are made to the set of rules that govern how bankruptcy cases are managed — the Federal Rules of Bankruptcy Procedure. The changes address issues identified by an Advisory Committee made up of federal judges, bankruptcy attorneys, and others.

Rule Amendments. This year the rule amendments, which go into effect on December 1, 2014, mainly address bankruptcy appeals, as well as an important one on service of a summons (discussed below).

  • Follow this link for a copy of the amendments, in both clean and redline, together with the transmittal letters and helpful Advisory Committee comments.  
  • This year’s rule changes include revisions to the Federal Rules of Appellate Procedure governing bankruptcy appeals, including direct appeals from a district court exercising bankruptcy jurisdiction, rule and form revisions regarding elections to appeal to a bankruptcy appellate panel or a district court, rules favoring the use of electronic notice in bankruptcy appeals, the impact on a bankruptcy appeal of a post-judgment motion for a new trial or to amend a judgment, and technical amendments to implement these revisions. 

No Waiting On Service Of A Summons. Aside from the appeals-related amendments, one rule change will impact every bankruptcy lawyer that files an adversary proceeding, the bankruptcy term for a lawsuit filed within a bankruptcy case.

  • Federal Rule of Bankruptcy Procedure 7004(e) has been revised to require service of a summons in an adversary proceeding within seven days of its issuance, cutting in half the fourteen day time period that had previously been permitted.
  • Although nationwide service of process via U.S. mail is still allowed as before, the summons and complaint will need to be served promptly after issuance of the summons. Otherwise, the originally issued summons will become “stale” — meaning ineffective — and a new summons will have to be issued and promptly served.
  • Why the change? In adversary proceedings, Federal Rule of Bankruptcy Procedure 7012(a) provides that a defendant has 30 days from the date the summons is issued to respond, not from the date of service. The rule change will give defendants an extra week, give or take depending on the mail, to respond to a complaint.

Revised Bankruptcy Forms And Fees. To implement the rule amendments, several national bankruptcy forms will also be revised. Copies of the revised bankruptcy forms are available at the link in this sentence, and you should also check your local bankruptcy court’s website for local rule and form revisions. There are also fee changes, specifically, the fee for direct appeals from the bankruptcy court to the court of appeals goes up, and a new $25 fee kicks in for redacting documents previously filed in a bankruptcy case.

The Trend Of Protecting Trademark Licensees In Bankruptcy Continues: For The First Time A Court Extends Section 365(n) Protections To Trademark Licensees On Equitable Grounds

Posted in Business Bankruptcy Issues, Recent Developments

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If you doubted it before, you can stop now. The trend of courts finding ways to protect trademark licensees from the harsh effects of losing their trademark license rights in bankruptcy is in full swing.

The latest example comes in the Crumbs Bake Shop, Inc. Chapter 11 bankruptcy case in New Jersey. On October 31, 2014, Judge Michael B. Kaplan of the U.S. Bankruptcy Court for the District of New Jersey rejected a motion by the buyer of the assets of Crumbs to clarify, among other things, that it purchased the Crumbs trademarks free of trademark licenses previously entered into by Crumbs. In a 22-page revised decision dated November 3, 2014, Judge Kaplan identified three issues facing the court:

I. Whether trademark licensees to rejected intellectual property licenses fall under the protective scope of 11 U.S.C. § 365(n), notwithstanding that “trademarks” are not explicitly included in the Bankruptcy Code definition of “intellectual property”;

II. Whether a sale of Debtors’ assets pursuant to 11 U.S.C. § 363(b) and (f) trumps and extinguishes the rights of third party licensees under § 365(n); and

III. To the extent there are continuing obligations under the license agreements, which party is entitled to the collection of royalties generated as a result of third party licensees’ use of licensed intellectual property.

Let’s examine how the court addressed these three issues, one by one. As discussed below, the court’s Section 365(n) analysis raises the most questions.

Another Lubrizol Rejection. Before turning to the Section 365(n) question, the court first looked at the impact of rejection on an intellectual property license. The court examined the 1985 Fourth Circuit decision in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985), which held that, upon rejection of a license agreement by a debtor-licensor, the licensee loses its rights to the intellectual property. The Crumbs bankruptcy court stated that it “is not persuaded by the decision.” It cited the Seventh Circuit’s decision in the Sunbeam Products case (which disagreed with Lubrizol‘s interpretation of the effect of rejection under Section 365(g)), and noted that it is “not alone in finding that its reasoning has been discredited.” The Crumbs court decided not to follow Lubrizol but did not adopt the Seventh Circuit’s approach to the issue. Instead, it turned to Section 365(n) and equitable considerations.

Section 365(n) And Trademarks. The court reviewed the language and legislative history of Section 365(n) of the Bankruptcy Code and its companion definition of “intellectual property” in Bankruptcy Code Section 101(35A). Looking at Third Circuit precedent, it examined Judge Ambro’s concurrence in the Third Circuit’s 2010 decision in In re Exide Technologies. The Crumbs court then considered the consequences of the congressional decision not to include trademarks in Section 101(35A)’s definition of intellectual property.

  • Like Judge Ambro in Exide Technologies, the bankruptcy court pointed to the passage in the legislative history of Sections 365(n) and 101(35A) about postponing congressional action on trademark licenses “to allow the development of equitable treatment of this situation by bankruptcy courts.”
  • The Crumbs court stated that reasoning by negative inference — and thereby to hold that Congress’s omission of trademarks from Section 101(35A)’s definition of intellectual property means that Section 365(n)’s protections do not extend to trademarks and trademark licensees lose their rights — would be improper.
  • The court concluded that “Congress intended the bankruptcy courts to exercise their equitable powers to decide, on a case by case basis, whether trademark licensees may retain the rights listed under § 365(n)” and found “it would be inequitable to strip” the trademark licensees “of their rights in the event of a rejection, as those rights had been bargained away by Debtors.”
  • The Crumbs court also commented on the passage of the Innovation Act by the House of Representatives, which if enacted would add trademarks to Section 101(35A)’s definition of intellectual property. While not dispositive, the court noted that the legislation showed that Congress was aware of the prejudice to trademark licensees that would result from the position advanced by the buyer.
  • Without explicitly holding that Section 365(n) itself applies to all trademark licenses, the Crumbs court granted the trademark licensees Section 365(n)’s protections on equitable grounds.

A Closer Look At The Court’s Section 365(n) Analysis. The Crumbs decision appears to be the first holding that Section 365(n)’s protections can be extended to trademark licensees, despite Section 101(35A)’s intentional omission of trademarks. The other courts protecting trademark licensees, including the Third and Eighth Circuits, found the trademark licenses at issue no longer executory, while the Seventh Circuit in Sunbeam Products held that rejecting a trademark license does not terminate the licensee’s IP rights. Although the Crumbs court did not expressly hold that Section 365(n) applies to trademark licenses in all cases, the court held it could invoke the specific protections of Section 365(n) (and that section’s royalty requirements) for trademark licensees on equitable grounds.

Does “Means” Mean Anything? Although the Crumbs court’s result is consistent with the recent trend, its analysis is questionable. Extending Section 365(n) rights to trademark licenses, even on an equitable basis, appears to conflict with the statute’s language. Section 101(35A), the definition of intellectual property on which Section 365(n) is based, begins with “The term ‘intellectual property’ means” and then lists six specific categories of intellectual property. As we know, trademarks, service marks, and trade names are not among them. Section 101(35A)’s use of the word “means” is significant, notwithstanding the legislative history about the development of equitable treatment, a subject on which the statute itself is silent. The bankruptcy court’s decision in Crumbs did not discuss the use of the term “means” in Section 101(35A), but that term and its significance has been construed by the U.S. Supreme Court in another context.

  • In Burgess v. United States, 128 S.Ct. 1572 (2008), citing 2A N. Singer & J. Singer, Statutes and Statutory Construction § 47:7, pp. 298-299, and nn. 2-3 (7th ed. 2007), the Supreme Court held, in the context of a criminal statute: “‘As a rule, [a] definition which declares what a term `means’ … excludes any meaning that is not stated.’ Colautti v. Franklin, 439 U.S. 379, 392-393, n. 10, 99 S.Ct. 675, 58 L.Ed.2d 596 (1979) (some internal quotation marks omitted).”
  • In footnote 3 of the Burgess decision the Court actually examined several Bankruptcy Code definitions, two of which used the term “means,” in support of its statutory construction that “means” is exclusive.
  • Although the Crumbs decision did not hold that Sections 101(35A) and 365(n) apply to trademarks in all cases, it extended Section 365(n) rights, expressly by name, to trademark licensees on equitable grounds. Given Congress’s use of the restrictive term “means” in the statutory definition, and its intentional omission of trademarks, service marks, and trade names from Section 101(35A), extending Section 365(n)’s statutory protections to trademark licensees seems to create an unnecessary conflict with the language of the statute.
  • Instead of invoking Section 365(n), the Crumbs court could have used alternatives approaches to protect the trademark licensees and avoided a conflict with Section 101(35A)’s language. It could have ruled, as Judge Ambro suggested in his Exide Technologies concurrence, that on equitable grounds rejection of a trademark license does not deprive the licensee of its rights. Likewise, it could have held, as the Seventh Circuit did in Sunbeam Products, that rejection does not terminate a counterparty’s license rights at all.

Was The Sale Free And Clear Of The Trademark Licenses? Having concluded that the protections of Section 365(n) should apply to the trademark licensees in this case, the Crumbs court addressed whether the asset sale under Sections 363(b) and (f), which included the trademarks, was “free and clear” of the licensees’ interests. The buyer argued that the licensees were given notice of the proposed “free and clear” sale but failed to object, thereby impliedly consenting to the extinguishment of their Section 365(n) rights. However, after examining the notice given in the case, the Crumbs court concluded that the licensees were not provided with adequate notice that the sale put their rights at risk.

  • The court observed how a party had to “traverse a labyrinth of cross-referenced definitions and a complicated network of corresponding paragraphs with annexed schedules” to determine what was being sold. The court admitted that it had difficulty following the “definitional maze” and observed that “there is no clear discussion as to what rights were purported to be taken away as a result of the sale,” meaning that the trademark licensees had no apparent reason to believe that an objection was needed to retain their rights under Section 365(n).
  • The court acknowledged that a proposed order was part of the Debtors’ moving papers, and “addressed that the sale was to be clear of licensees’ rights.” However, the court noted that this reference was “a mere ten words, buried within a single twenty-nine page document, which itself was affixed to a CM/ECF filing totaling one hundred twenty-nine pages.”
  • Under these circumstances — with no other express reference to the licensees, Section 365(n) rights, or the stripping of those rights — the Crumbs court held it would be inequitable to find that the licensees consented to the termination of their rights.
  • The Crumbs court also held, as a matter of statutory construction, that Section 365(n), a more specific provision, is not overcome by the broad text of Section 363(f) and its free and clear language. “Nothing in § 363(f) trumps, supersedes, or otherwise overrides the rights granted to Licensees under § 365(n).” This ruling again raises the issue whether Section 365(n) can be applied to trademark licenses in the first place.

Which Party Is Entitled To Royalties Under The License Agreements? The court also addressed whether the buyer, as the new owner of the trademarks, or the debtor, as the party to the trademark licenses that were not assigned to the buyer, was entitled to payment of ongoing royalties under those agreements. The court cited the Third Circuit’s decision in In re CellNet Data Sys., Inc., 327 F.3d. 242 (3d Cir. 2003), and its ruling that Section 365(n) links royalties to the license agreement rather than the intellectual property. The Crumbs court concluded that because the license agreements had not been assigned, the buyer did not obtain royalty rights under the licenses going forward (although it did purchase any unpaid pre-closing royalties through its acquisition of accounts receivable). However, since the Debtors no longer owned the trademarks, the court questioned how anyone other than the buyer could perform under the trademark license agreements and, accordingly, concluded that rejection likely is necessary.

Conclusion. Over the past four years, one of the most significant developments at the intersection of IP and bankruptcy law has been how courts have used factual, legal, and equitable approaches to protect trademark licensees from the harsh effects of rejection. The Crumbs case, pending in New Jersey in the Third Circuit, built on Judge Ambro’s concurring opinion in Exide Technologies and extended, on an equitable basis, the protections of Section 365(n) to trademark licensees. However, the Crumbs court seems to have gone too far in applying Section 365(n) itself to trademark licenses — despite the fact that Section 101(35A)’s definition of intellectual property does not include trademarks. Given Section 101(35A)’s use of the restrictive term “means,” the Crumbs court’s statutory interpretation, and its reliance on legislative history, is questionable. Although the Crumbs decision is further evidence of the continuing trend of courts protecting trademark licensees in bankruptcy, courts would be on stronger ground if they did so without applying Section 365(n) itself to trademark licenses.

 

Image Courtesy of Flickr by Steve Snodgrass

U.S. Supreme Court Denies Review In Jaffe v. Samsung, Letting Stand The Fourth Circuit’s Decision Applying Section 365(n) To Protect Licensees In A Chapter 15 Bankruptcy Case

Posted in Business Bankruptcy Issues, Recent Developments

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On Monday, October 6, 2014, the U.S. Supreme Court issued an order denying the petition for a writ of certiorari in the Jaffe v. Samsung case, also known as the Qimonda case. The Supreme Court let stand the Fourth Circuit’s December 2013 decision that affirmed the bankruptcy court’s order applying Bankruptcy Code Section 365(n) in a Chapter 15 cross-border bankruptcy case.

For a full discussion of the Fourth Circuit’s decision, follow the link to this prior post discussing the case and its implications for intellectual property licensees, Chapter 15 cases, and more. For a quick refresher, here’s the conclusion from that earlier post:

The Fourth Circuit’s Qimonda decision is important for licensees of intellectual property owned by a foreign entity. It signals that U.S. courts will incline to protect licensees by applying Section 365(n) when an insolvent foreign entity’s administrator or other representative asks for assistance from the U.S. bankruptcy courts. However, the Fourth Circuit did not go as far as some licensees would have liked, stopping short of declaring that an attempt to reject licenses without applying Section 365(n) would be “manifestly contrary” to U.S. public policy. That makes the Qimonda decision a helpful, but perhaps not decisive, tool for IP licensees. It of course remains to be seen whether other courts will follow the Qimonda decision or chart a different path.

Image Courtesy of Flickr by Phil Roeder

A Closer Look At Recent Trends At The Intersection Of Intellectual Property And Bankruptcy Law

Posted in Business Bankruptcy Issues, Recent Developments

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I had the honor of being a panelist at the American Bankruptcy Institute‘s 22nd Annual Southwest Bankruptcy Conference last Friday, speaking on current developments in business bankruptcy. My part of the discussion focused on recent intellectual property and bankruptcy law trends. Among the topics I covered were:

  • the direction U.S. Courts of Appeals have been taking over the last few years in protecting trademark licensees from the harsh effects of rejection of their trademark licenses by a licensor in bankruptcy,
  • whether Section 365(n) of the Bankruptcy Code protecting (non-trademark) IP licensees applies in cross-border cases under Chapter 15 of the Bankruptcy Code, and
  • recent Congressional efforts to reform how IP is treated in bankruptcy cases.

For those who couldn’t attend the conference, you can follow the link in this sentence for a copy of the article I prepared on these topics. I hope you find it of interest.

Image Courtesy of Flickr by BusinessSarah

Cooley GO: A Great New Resource For Entrepreneurs And Their Companies

Posted in Business Bankruptcy Issues

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Cooley GO

Earlier this month, Cooley LLP launched Cooley GO, a terrific new resource center for entrepreneurs with businesses at all stages of the growth cycle. Cooley GO is a mobile-friendly microsite that provides a wide range of free legal and business content covering formation, financing, building a team, working with directors and advisors, intellectual property, M&A, IPOs and more.

I have the pleasure of being a contributor to Cooley GO. A new post I wrote called “A Key Customer Filed for Bankruptcy: Should You Keep Doing Business With Them?” is now on the Cooley GO site. To read the article just follow the link in the prior sentence.

Be sure to explore the full Cooley GO site. Among other tools, Cooley GO provides entrepreneurs with the ability to:

I hope you find Cooley GO to be a helpful resource for your business.

Why Creditors Can’t Afford To Ignore Objections To Bankruptcy Claims

Posted in Business Bankruptcy Issues

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It’s been several years since I last posted about objections to bankruptcy claims, and the topic is so important to creditors that it’s time to revisit it.

File And Forget? When a customer or other party with which you do business files bankruptcy, it’s important to file a proof of claim on time by the deadline (also known as a “bar date”) set in the case. Once you do, however, months or even years can go by before you hear anything more about your claim from the debtor, bankruptcy trustee, or other party responsible for reviewing claims and ultimately distributing money to creditors. In fact, the only thing you may hear about your claim for quite some time is an offer to purchase it made by one or more claims buyers.

No News Is Not Necessarily Good News About Your Claim. Unfortunately, the passage of time may lull you into thinking that no objection will ever be filed to your claim. However, the urgency of reorganizing a debtor’s business or liquidating its assets means that the claim objection process is typically left until near the end of the bankruptcy case, often after a plan of reorganization has been confirmed in a Chapter 11 case. Likewise, a Chapter 7 trustee may put off filing claim objections until it’s clear there will be money to distribute to unsecured creditors. As a result, an objection to your claim may be brought long after you filed it, often years later.

Is That An Objection To My Claim? When an objection is filed, it may not always be obvious at first that it applies to your claim. In smaller cases the title of a claim objection may list your name as the target of the objection, but don’t count on that in larger cases. In cases with hundreds or thousands of claims, the debtor or other estate representative will almost certainly combine an objection to your claim with others. Instead of a pleading specifically mentioning your name in its title or text, the objection will likely have the word “omnibus” in it and may have a name such asNotice of Debtors’ One Hundred Fifteenth Omnibus Objection To Claims (No Liability)” or some similarly titled document.

  • Be careful: the format of these objections can be a trap for the unwary. Buried within the objection’s many pages of text and attached exhibits may be just a few lines, often only in a list or chart, identifying your claim as one of dozens to which an objection has been filed.
  • Given the passage of time, the debtor may have sold — and changed — its name, so the name of the debtor listed on the objection may not even be familiar to you (although the old name should appear near the new one).
  • When filed, the objection may assert (1) your claim should be zero, (2) the amount doesn’t square with the debtor’s books and records and should be less, or (3) your claim should be reclassified as some lower priority claim (for example, from a priority claim to a general unsecured claim).
  • Whatever the objection’s name or format, the point is the same: ignore it at your peril. If you don’t file a formal response with the bankruptcy court by the deadline set in the objection (and there’s always a deadline) your claim could be disallowed in its entirety. If that happens, you will recover absolutely nothing from the bankruptcy estate.

Stay Vigilant To Protect Your Rights. Protecting your rights in a bankruptcy case requires diligence and timely action — often no easy task. In mega bankruptcy cases, literally thousands of pleadings can be filed during the course of a case. Many will be served, whether in paper or electronic form, and yet only a few may be directly relevant to you or your claim. For this reason, it’s critical that you or your attorney keep track of the pleadings served in a bankruptcy case. The bottom line is, if you see anything that looks like a claim objection, review all of the pages carefully, including the exhibits. If an objection to your claim is filed, you have to respond on time and defend your claim. Otherwise, despite your efforts earlier in the case to file a timely proof of claim, you may well find yourself with a disallowed, and worthless, claim.

Image Courtesy of Flickr by Sam Howzit

A New Way Of Looking At Termination On Bankruptcy Contract Clauses

Posted in Business Bankruptcy Issues, The Financially Troubled Company

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Image Courtesy of NobMouse

Ken Adams, Professor Adrian Walters, and I recently collaborated on an article about the ubiquitous “termination on bankruptcy” or ipso facto clauses in contracts. The article was just published by the American Bar Association’s Business Law Section in its online publication, Business Law Today. It’s titled “Termination-On-Bankruptcy Provisions: Some Proposed Language” and is available by following the link. You can also download a PDF of the article.

The article offers proposed language for agreements governed by U.S. law and also by foreign law. I have posted on termination on bankruptcy provisions in the past, discussing how U.S. bankruptcy law usually — but not always — renders those clauses unenforceable. This new article recognizes those limitations but suggests proposed model language to address settings in which the provision is enforceable, together with an analysis of the specific language proposed.

I hope you find the article of interest.