In re Interstate Bakeries Corporation: Eighth Circuit Affirms Invalidation of Prepaid, Exclusive Trademark License in Bankruptcy

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Acquirors of branded businesses often acquire prepaid, perpetual, exclusive trademark licenses to use the business’s trademarks. On August 30, 2012, the U.S. Court of Appeals for the Eighth Circuit ruled that a bankrupt licensor that had granted this type of license may reject the license and cut off the acquiror’s right to use the marks.

The case, In re Interstate Bakeries Corporation, involved a common fact pattern in merger and acquisition transactions where the buyer acquires a business under an asset purchase agreement and licenses related trademarks under a separate license agreement. One possible implication of the ruling is that buyers of assets may lose their rights to use trademarks related to businesses they acquire if the seller, even many years later, encounters financial distress and becomes a debtor in bankruptcy.

In 1995, Interstate Bakeries Corporation (“IBC”) sought to acquire Continental Baking Company, the owner of the Wonder Bread and Hostess brands and trademarks. In an antitrust challenge to the transaction brought by the U.S. Department of Justice, IBC was forced to divest itself of certain business lines as a condition for approval of the transaction. To comply with this requirement, IBC sold its Butternut Bread and Sunbeam Bread business in the Chicago and Central Illinois areas to Lewis Brothers Bakeries (“LBB”). The transaction was documented as an asset purchase agreement with a prepaid, perpetual, exclusive license agreement for the Butternut Bread and Sunbeam Bread trademarks in the Chicago and Central Illinois markets.

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