It’s been a long wait, but we finally have a published decision from a U.S. Court of Appeals answering whether a trademark license is assignable in bankruptcy without the licensor’s consent. On July 26, 2011, the U.S. Court of Appeals for the Seventh Circuit issued an opinion in In re: XMH Corp., written by Circuit Judge Richard A. Posner, and a copy of the opinion is available by following the link in this sentence. Until now, the closest we had come to a Court of Appeals decision on this issue was an unpublished affirmance by the U.S. Court of Appeals for the Ninth Circuit of the district court’s decision in In re N.C.P. Marketing Group, Inc., 337 B.R. 230 (D. Nev. 2005). For more on the Ninth Circuit case  including the Supreme Court’s interest in one of the issues in the case, take a look at these earlier posts on the blog, here, here, and here.

The Context. The dispute that led to the Seventh Circuit’s decision arose in the Chapter 11 bankruptcy case of Hartmarx Corporation (which later changed its name to "XMH"). One of its subsidiaries, Simply Blue ("Blue"), which was also in bankruptcy, sold its assets in a Section 363 sale to two buyers (the "purchasers").

  • Among Blue’s assets was an executory contract with Western Glove Works ("Western"), which Blue sought to assign to the purchasers. Western objected, arguing that the contract could not be assigned because it was a sublicense to Blue of a trademark licensed by Western. The bankruptcy court agreed with Western and XMH appealed. 
  • That’s when things got a little complicated. While XMH’s appeal was pending, Blue and the purchasers amended the contract. Under the amendment, title to the contract was left with Blue but the purchasers assumed all of Blue’s contractual duties, together with the right to receive all fees to which Blue was otherwise entitled. The bankruptcy court approved the amendment and Western appealed from that decision.
  • In the meantime, the district court reversed the bankruptcy court’s original decision holding that the contract could not be assigned, effectively allowing the original contract to be assigned. Western appealed the district court’s decision and that brought the case to the Seventh Circuit. 

The Court’s Decision. After disposing of a few jurisdictional issues springing from the complicated way the case had played out, the Seventh Circuit reached the merits. The Court first looked to Section 365(c)(1) of the Bankruptcy Code, which limits assignment of an executory contract if "applicable law" permits the non-debtor party to the contract to refuse to accept performance from an assignee, regardless of whether the contract prohibits or restricts assignment. In the XMH Corp. case, the contract did not prohibit or restrict assignment (but neither did it permit it). Western argued that "applicable law" was trademark law because the contract stated that Western was a licensee of a trademark for "Jag Jeans." The Court noted that "Jag" is a federally registered trademark, although "Jag Jeans" is not.

The Court held that if the contract included a trademark sublicense when XMH attempted to assign the contract, it was not assignable. This was true regardless of whether federal trademark law applied, any particular state’s trademark law applied, and also, apparently, even if Canadian law applied (Western is a Canadian company). The Seventh Circuit put it this way:

None of this matters, though, because 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 Productions, Inc., 454 F.3d 975, 988 (9th Cir. 2006)(per curiam); In re N.C.P. Marketing Group, Inc., 337 B.R. 230, 235-36 (D. Nev. 2005); 3 McCarthy on Trademarks § 18:43, pp. 18-92 to 18-93 (4th ed. 2010).

After describing how consumers rely on a trademark as an indicator of a good’s quality, the Court explained that if a trademark owner (or licensee sublicensing the mark) allows another company to produce the trademarked goods, it

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.

Because this is the normal reaction of a trademark owner, it makes sense to make the rule that a trademark license is not assignable without the owner’s express permission a rule of contract law–what is called a ‘default’ rule because it is the rule if the parties do not provide otherwise (as they are allowed to do).

Ultimately, the Seventh Circuit held that although the contract included a trademark sublicense, the sublicense had expired and the parties had not designated the contract, post-expiration, as a trademark sublicense. Further, the Court held that the balance of the contract was only a service agreement and not an implied trademark license. The Court also refused to go down the "dark path" of whether a contract could be a trademark license for some purposes but not others. As such, with no actual trademark sublicense in existence at the time of assignment, the default rule discussed above did not apply and the executory contract could be assigned. The Seventh Circuit affirmed the lower courts’ decisions approving the assignment of the contract as amended.

An IP Attorney’s Observations. For the perspective of an in-house intellectual property attorney on the Seventh Circuit’s decision, including helpful links to the trademark and the parties’ underlying agreements, you may find Pamela Chestek’s discussion of the case on her "Property, intangible" blog, interesting reading.

Good News For Trademark Owners. With the Seventh Circuit’s XMH Corp. decision, we now have two Courts of Appeals (the Seventh and Ninth Circuits) on record holding that trademark licenses are not assignable in bankruptcy absent the consent of the trademark owner or sublicensor. While the full force of a decision depends on whether other courts follow its holding, trademark owners will likely find the guidance provided by this decision meaningful, especially given the Seventh Circuit’s observation that the non-assignability of trademark licenses is "the universal rule." That said, how the decision is viewed in other circuits, particularly in Delaware and New York where many large Chapter 11 cases are filed, remains to be seen, so stay tuned.