Federal Appellate Court Addresses Assignment of Trademark Licenses in Bankruptcy

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A recent decision by the Seventh Circuit Court of Appeals contains two important lessons for anyone drafting documents which contain a trademark license. In In re XMH Corporation, the Seventh Circuit held that a licensee may not assign a trademark license in a bankruptcy case over the licensor’s objection unless there is an express provision in the agreement containing the license which authorizes an assignment. However, the Court also held that “service contracts” relating to the production of trademarked goods, but not expressly stated to be a license of the trademark, are fully assignable in bankruptcy.

In the wake of In re XMH Corporation, trademark owners, licensees, and their advisors must carefully consider whether to include a provision in a licensing agreement allowing the assignment of trademark license. Licensees will need to negotiate for the inclusion of such a provision for any critical trademark licenses that they would wish to convey in the event of a sale of their business. For trademark owners, however, such a provision would override default rules protecting trademark owners and allow debtor-licensees or their successor bankruptcy trustees to assign trademark license agreements to the highest bidder even over the trademark owner’s objections. Importantly, given the weight the Seventh Circuit accorded to the labels the parties used, parties must consider how to characterize their agreements:  agreements designated as “service contracts” are likely to remain fully assignable in bankruptcy notwithstanding any provisions in the agreement to the contrary, while agreements denominated as “trademark licenses” will likely not be assignable absent an express provision otherwise.

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