By Alan Resnick
In 1985, industries that relied heavily on intellectual property licenses were dealt a severe blow when the Court of Appeals for the Fourth Circuit held that a licensee of patent rights could be deprived of the continued use of patent technology by reason of the licensor rejecting the license in bankruptcy. In Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., the appellate court characterized a nonexclusive patent license as an executory contract within the meaning of the Bankruptcy Code and approved rejection of the license by the licensor because it was advantageous to the licensor’s Chapter 11 reorganization effort. The result, according to the Fourth Circuit, was that the licensee lost its right to use the intellectual property for which it had bargained, had no right to specific performance of the licensing agreement, and was left with nothing but a money-damages claim against the bankruptcy estate.
It did not take long for Congress to respond to Lubrizol by enacting the Intellectual Property Bankruptcy Protection Act of 1988, which added § 365(n) to the Bankruptcy Code. This section grants the licensee of intellectual property the option to treat a licensor’s rejection as a termination of the license or, alternatively, to continue to use the intellectual property for the remaining term of the rejected license, including any term extension to which the licensee is otherwise entitled, in exchange for continued payments of royalties in accordance with the license agreement. Congress, however, defined “intellectual property” in the Bankruptcy Code so as to exclude trademarks, deliberately depriving trademark licensees of the protections afforded by § 365(n). Though Congress intended to return to the subject of trademark licensees in bankruptcy at a later time, Congress took no further legislative action to protect such licensees. Therefore, trademark licensees remained vulnerable.
As shocking as Lubrizol was to all licensees of intellectual property, and as disappointing as the exclusion of trademarks from the protections of § 365(n) was to trademark licensees, a recent decision by the Court of Appeals for the Seventh Circuit in the Sunbeam case is an unexpected cause for celebration by trademark licensees. The Seventh Circuit, twenty-seven years after the decision in Lubrizol, directly rejected the holding and reasoning of the Fourth Circuit and held, based on its analysis of bankruptcy law, that a trademark licensee cannot be deprived of the right to use a trademark under a license agreement despite rejection of the agreement in the bankruptcy case of the licensor. The United States Supreme Court declined to review the Sunbeam decision, thereby leaving a circuit split and many unanswered questions regarding the effect of a licensor’s rejection of a trademark license agreement in bankruptcy
Alan Resnick, Sunbeam Offers A Ray of Sunshine for the Licensee when A Licensor Rejects A Trademark License Agreement in Bankruptcy, 66 SMU L. Rev. 817 (2013)