Sunbeam Products: Trademark Licensees Victorious in Seventh Circuit's Bankruptcy Ruling -- What's Next For Licensees and Debtor Licensors?

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Trademark licensees can continue using licensed trademarks after their licenses are rejected in bankruptcy, the U.S. Court of Appeals for the Seventh Circuit ruled on July 9, 2012, in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC. The court’s ruling repudiates a frequently criticized, but widely cited, 1985 decision of the U.S. Court of Appeals for the Fourth Circuit in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. Lubrizol addressed a nonexclusive patent license and, among other things, held that rejection of such a license “deprived the non-debtor party of all rights under that license,” effectively terminating the license.

Lubrizol later inspired the enactment of section 365(n) of the Bankruptcy Code, generally providing certain protections to a licensee when the debtor is a licensor of certain “intellectual property.” However, the Bankruptcy Code’s definition of “intellectual property” omitted trademarks (as well as, it has been argued, other rights generally considered IP). Therefore, many bankruptcy courts have inferred from the statute’s omission of trademarks that, because trademark licensees are not entitled to section 365(n) protection, Lubrizol still applied to trademarks.

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