Image courtesy of  Kazuhisa Otsubo

Trademark Licenses At Risk. I have written a number of times on the blog about the impact of bankruptcy on trademark licenses, with a special focus on the risk that trademark licensees face if their licensors file bankruptcy. Trademark licensees have no protection under Section 365(n) of the Bankruptcy Code, and legislative efforts to give that protection have stalled. As a result, if a trademark license is determined to be executory and it’s rejected by the licensor or bankruptcy trustee, the licensee could find itself without any further rights to the trademark.

Some Rays Of Hope For Licensees In Third And Seventh Circuits. A series of decisions over the past few years from various U.S. Courts of Appeals has given some hope to trademark licensees. First, in In re Exide Techs., 607 F.3d 957 (3d Cir. 2010), the Third Circuit held a trademark license that was part of a long-completed sale of assets was not executory and could not be rejected. Then in Sunbeam Prods., Inc. v. Chicago Am. Manuf., LLC, 686 F.3d 372 (7th Cir. 2012), the Seventh Circuit went much farther and held that rejection does not terminate the licensee’s rights to continue to use the trademark, refusing to follow the 1985 Fourth Circuit decision in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985). Follow the links in the prior sentences for more details.

At First, A Setback For Licensees In Interstate Bakeries Case. Just when the Third Circuit decision was starting to give hope to trademark licensees in asset sales, the Eighth Circuit went the other way and held that a trademark license entered into as part of an asset sale was executory and could be rejected. In In re Interstate Bakeries Corp., 690 F.3d 1069 (8th Cir. 2012), a case with facts very similar to Exide, a three-judge panel of the U.S. Court of Appeals for the Eighth Circuit examined whether an exclusive license to use brands and trademarks belonging to Interstate Brands Corporation (“IBC”), which subsequently filed for bankruptcy, was an executory contract.

  • Prior to bankruptcy, IBC entered into a $20 million asset purchase agreement and license agreement with Lewis Brothers Bakeries (“LBB”), and certain baking and business operations in the Chicago area to LBB. Following IBC’s bankruptcy, LBB sought a declaratory judgment that the license agreement was not an executory contract. The bankruptcy court and district court both found the agreement executory, with unperformed obligations on both sides.
  • Although the relevant aspects of the license agreement appeared at first blush to be nearly identical to those in Exide, the Eighth Circuit panel found the license agreement in Interstate Bakeries to be materially different. Specifically, the Eighth Circuit panel found LBB’s obligation to maintain quality standards, and IBC’s obligations of notice and forbearance with regard to the trademarks, material and unperformed. As such, it held the license agreement was executory and could be rejected.
  • The Eighth Circuit panel distinguished Exide because there, “the parties had not even contemplated or discussed any quality standards. . . . Here, it cannot be argued the parties did not contemplate any quality standards, as it is an explicit provision of the License Agreement. Moreover, the plain language of the agreement provides a breach of the quality provision would be material.”

A Rehearing And A Reversal. But the story did not end there. The panel decision was split 2 to 1, and the Eighth Circuit ultimately granted a rehearing en banc. That meant all eleven of the Eighth Circuit judges would consider the case, not just the three judges on the original panel. On June 6, 2014, the full Eighth Circuit issued an 8-3 decision holding that the license agreement was no longer executory. After concluding that intervening events had not rendered the appeal moot, the Eighth Circuit held the proper focus to be on the entire transaction, not just on the license agreement:

The essence of the agreement here was the sale of IBC’s Butternut bread and Sunbeam bread business operations in specific territories, not merely the licensing of IBC’s trademark. The agreement called for LBB to pay $20 million for IBC’s assets. The parties allocated $11.88 million for tangible assets, such as real property,machinery and equipment, computers and licensed computer software, vehicles, office equipment, and inventory. They allocated another $8.12 million toward intangible assets, including the license. IBC has transferred all of the tangible assets and inventory to LBB, executed the License Agreement, and received the full $20 million purchase price from LBB.

IBC’s remaining obligations concern only one of the assets included in the sale—the license. They involve such matters as obligations of notice and forbearance with regard to the trademarks, obligations relating to maintenance and defense of the marks, and other infringement-related obligations. When considered in the context of the entire agreement, these remaining obligations are relatively minor and do not relate to the central purpose of the agreement to sell the Butternut and Sunbeam bread operations and assets to LBB in certain territories.

Unlike the three-judge panel, the full Eighth Circuit commented on the similarity of the facts to the Exide case and found the Third Circuit’s decision persuasive:

We find useful guidance on analogous facts in the Third Circuit’s decision in In re Exide. At issue there was the $135 million sale of Exide’s industrial battery business to EnerSys, which included a trademark license agreement. 607 F.3d at 960. Along with the license, Exide sold to EnerSys physical manufacturing plants, equipment, inventory, and certain items of intellectual property. Id. The Third Circuit held that Exide’s remaining obligations, which included duties to maintain quality standards, to refrain from use of the trademark outside the industrial battery business, and to indemnify EnerSys, did not “outweigh the substantial performance rendered and benefits received by EnerSys.” Id. at 963–64. The court observed that the remaining contractual obligations did not relate to the purpose of the agreement—the sale of Exide’s industrial battery business—and that the trademark license agreement was therefore not executory. Id. at 964. For similar reasons, we conclude that the License Agreement between IBC and LBB is not executory.

In a footnote, the Eighth Circuit noted the circuit split between the Fourth Circuit’s Lubrizol decision and the Seventh Circuit’s Sunbeam decision on whether rejection of a trademark license terminates the licensee’s rights to use the trademark. However, given its holding that the license agreement was not executory, the Eighth Circuit did not need to reach the rejection issue.

The Trend Continues. The full Eighth Circuit’s decision in Interstate Bakeries is yet another ray of hope for trademark licensees. It continues the recent trend of Courts of Appeals finding ways to protect trademark licensees from the harsh result of losing all rights to use a trademark via rejection. Still, unless the Sunbeam decision is adopted broadly or Congress passes one of the bills proposing to include trademarks within Section 365(n)’s protections, trademark licensees whose licensors file bankruptcy — and especially those whose licenses were granted outside of an asset sale context — are by no means out of the woods.