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Give Me Liberty, or Give Me Death? Supreme Court May Resolve Circuit Split on Effect of Rejection of Trademark Licenses in Bankruptcy



It might sound odd to the ears of an intellectual property lawyer, but trademarks are not intellectual property—as defined in Section 101(35A) of the Bankruptcy Code, anyway. The significance of the omission of trademarks from this definition is that it is unclear what happens to the rights of a licensee of a trademark when a debtor in possession or trustee in bankruptcy, in the position of the licensor, rejects the license under Section 365(a) of the Bankruptcy Code. Is the license terminated, leaving the licensee with only an unsecured claim for damages, or is it up to the courts to fashion a remedy for the licensee? Federal circuit courts of appeal are split, as described in further detail in my article for the ABA’s Landslide magazine.

The Fourth Circuit held in 1985 in a case called Lubrizol that rejection of a license to use a technology (not a trademark) resulted in termination of that license. This was a problem for technology licensees. So in 1988, Congress enacted Section 365(n) of the Bankruptcy Code in order to give licensees of intellectual property the choice of whether to retain their rights under certain circumstances or to treat the license as terminated when the licensor rejects it. The key to whether the licensee gets that choice is whether the subject of the license is "intellectual property." Congress included patents, copyrights, and other forms of intellectual property in the definition, but intentionally left out trademarks, leaving open to interpretation the effect of rejection of a trademark license by the licensor (or its bankruptcy trustee) after the licensor enters bankruptcy.

In 2012, the Seventh Circuit held in the Sunbeam case that rejection of a trademark license, a type of executory contract, is just a breach of that contract, as provided in Section 365(g) of the Bankruptcy Code. Because trademarks are left out of the intellectual property definition and thus from the specified treatment of Section 365(n), it is up to the court to decide the effect of the breach. Outside of bankruptcy, a breach by one party would not terminate or "vaporize" the other party's rights. Hence, the licensee should get to continue to use the trademark even after rejection of the license.

This January, in Tempnology, the First Circuit went the direction of the Fourth Circuit and away from the Seventh. Rejection in that panel's eyes meant that the trademark licensee's rights were simply "converted" into an unsecured damages claim. The purpose of rejection is to free the debtor of ongoing obligations and to maximize the value of a debtor's assets. Since Congress left trademarks out of the definition of intellectual property, it intended that trademark licensees should not be entitled to the same protections given to licensees of patents, copyrights, and such. The licensee in Tempnology filed a petition for certiorari on June 11. Two amicus briefs have been filed in support of the petition, and the licensor submitted a brief in opposition to the petition on September 7. If the petition is granted, we may have a definitive resolution within the next year. The Supreme Court’s docket for the matter is available here.

In the meantime, the circuit split is relevant to licensor-debtors in deciding where to file for bankruptcy. If they want to use rejection to terminate a licensee's rights, they will file their bankruptcy petitions in the First Circuit or possibly the Fourth Circuit, if they are eligible to do so. But licensees would likely prefer a licensor's bankruptcy filing in the Seventh Circuit, where they would be entitled to continue using the trademark after rejection. Take your bets on other circuits, and whether any bankruptcy court is willing to wade into the dispute with the petition for certiorari still pending. For right now, where the licensor’s bankruptcy is filed may have an important impact on a trademark licensee’s rights.

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