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Business Bankruptcy Issues Recent Developments

Trademark Licensees In Bankruptcy: A Leg Up For Trademark Owners?

Apparently, until last November, no court had been called upon to resolve whether a trademark licensee in bankruptcy can assume, or assume and assign, a non-exclusive trademark license without the trademark owner’s consent.  

The decision. We got the first answer to that question in a case called In re: N.C.P. Marketing Group, Inc., 337 B.R. 230 (D.Nev. 2005), when the U.S. District Court in Nevada held that trademark licenses are personal and nonassignable, absent a provision in the trademark license to the contrary. Click here for a copy of the N.C.P Marketing Group decision. In reaching its conclusion, the court held that under the Lanham Act, the federal trademark statute, a trademark owner has a right and duty to control the quality of goods sold under the mark:

Because the owner of the trademark has an interest in the party to whom the trademark is assigned so that it can maintain the good will, quality, and value of its products and thereby its trademark, trademark rights are personal to the assignee and not freely assignable to a third party.  

The U.S. Court of Appeals for the Ninth Circuit (which includes Nevada, California, and other western states) had previously interpreted the key Bankruptcy Code provision involved, Section 365(c)(1), to prevent a debtor from assuming an agreement when it does not have the right to assign it. (For a discussion about how bankruptcy can affect intellectual property licenses, including the impact of this earlier Ninth Circuit case, you may want to read my earlier post on the topic.) 

Building on this Ninth Circuit law, the trademark owner in the N.C.P. Marketing Group case argued that under trademark law the debtor could neither assume nor assign the non-exclusive trademark license at issue. The district court agreed, holding that the bankruptcy court correctly granted the trademark owner’s motion to compel the debtor to reject the trademark license, forcing the debtor to give up its license rights. 

Good news for trademark owners.  The decision is good news for trademark owners. Many have have long worried that if a licensee files bankruptcy it might be able to use the Bankruptcy Code’s general power to assume and assign executory contracts to assign trademark licenses to third parties over the trademark owner’s objection. The N.C.P. Marketing Group decision extends to trademark owners protections already recognized by many courts for patent and copyright holders. The case does not address whether the same rule would apply to exclusive trademark licenses, but given the trademark owner’s similar rights and duties to control the quality of goods sold under a licensed mark, the result could be the same. 

Bad news for debtor licensees. The decision, of course, is bad news for trademark licensees that file bankruptcy.  If the decision is followed by other courts, trademark licensees in bankruptcy will be unable to assign their rights to third parties or even to keep those rights for themselves without the trademark owner’s consent.  The value of these debtors, and their ability to repay creditors, could suffer as well.

On appeal. The district court’s decision may not be the last word. The debtor has appealed to the Ninth Circuit, although a ruling could be a number of months away.  I will report on the Ninth Circuit’s decision when it comes down.  In the meantime, this is only one district court decision, applying Ninth Circuit law, so its full impact has yet to be determined.

Just for kicks. Finally, for those interested, the trademarks involve the Billy Blanks® Tae Bo® fitness program.  At least until the Ninth Circuit rules on appeal, the district court’s decision will give trademark owners like Billy Blanks a "leg up" in their efforts to control their marks. 

Business Bankruptcy Issues

Intellectual Property Licenses: What Happens In Bankruptcy?

The major role intellectual property, or "IP," plays in our economy makes intellectual property licenses an especially significant type of executory contract.  Whether you are a licensor or licensee, it’s important to know what can happen to IP licenses when a bankruptcy is filed.

Licensor in bankruptcy.  A licensor in bankruptcy (or its bankruptcy trustee) has the option of assuming or rejecting a license. Generally, a debtor licensor can assume a license if it meets the same tests (cures defaults and provides adequate assurance of future performance) required to assume other executory contracts.  Many licensees will not have a problem with assumption of their license as long as the debtor can actually continue to perform. Instead, the real concern for licensees is the fear of losing their rights to the licensed IP, which often can be mission critical technology, if the license is rejected.

  • Special protections. Recognizing this concern, the Bankruptcy Code, in Section 365(n), provides licensees with special protections.  If the debtor or trustee rejects a license, under Section 365(n) a licensee can elect to retain its rights to the licensed intellectual property, including even a right to enforce an exclusivity provision. In return, the licensee must continue to make any required royalty payments. The licensee also can retain rights under any agreement supplementary to the license, which includes source code or other forms of technology escrow agreements.  Taken together, these provisions protect a licensee from being stripped of its rights to continue to use the licensed intellectual property.
  • Watch out for trademarks. While many people would expect intellectual property to include trademarks, the Bankruptcy Code has its own limited definition of "intellectual property." The bankruptcy definition includes trade secrets, patents and patent applications, copyrights, and mask works.  Importantly, however, it does not include trademarks. This distinction means that trademark licensees enjoy none of Section 365(n)’s special protections and those licensees are at risk of losing their trademark rights in a bankruptcy.

Licensee in bankruptcy.  The law is different when an IP licensee files bankruptcy.  The Bankruptcy Code, in Section 365(c)(1), contains an exception to the general rule that executory contracts can be assumed and assigned to third parties if defaults are cured and adequate assurance of future performance is demonstrated. The exception kicks in when "applicable law" precludes such an assignment absent consent of the nondebtor party. 

  • Restrictions on assignment. Case law from several United States Courts of Appeals holds that "applicable law" — here patent and copyright law (and perhaps trademark law) — in fact precludes an assignment of rights under an intellectual property license unless the IP owner has consented.  These courts have ruled that non-exclusive patent and copyright licenses are personal and nonassignable. As a result, a patent or copyright holder can prevent a debtor licensee from assuming and assigning a non-exclusive license to a third party without the licensor’s consent. 
  • License at risk. In the Ninth Circuit, which includes California, a licensor not only can stop a debtor from assigning the license to a third party, it can even prevent a debtor from keeping the license for itself.  Although the reason is technical, stemming from how the Ninth Circuit has interpreted Section 365(c)(1) of the Bankruptcy Code, the impact can be very real. For those interested, the landmark Ninth Circuit decision on this point is In re Catapult Entertainment, Inc.,165 F.3d 747 (9th Cir. 1999). 

Get advice. The interplay between bankruptcy and intellectual property law is complex.  Whether you are a licensor or licensee, you should get legal advice about your specific license agreement and the ways you may be able to protect your rights if a bankruptcy is filed.  Likewise, companies that anticipate having to file bankruptcy should pay careful attention to their IP licenses before they file.