First Circuit BAP Protects Trademark Licensees In Bankruptcy Despite Section 365(n)

by Akerman LLP - Marks, Works & Secrets
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The First Circuit recently issued an important interpretation of bankruptcy law that directly impacts trademark licensing rights. In In re Tempnology LLC, 559 B.R. 809 (1st Cir. BAP 2016), the First Circuit Bankruptcy Appellate Panel held that a debtor-licensor’s rejection of a trademark licensing agreement “did not vaporize” the licensee’s contractual right to use the debtor’s mark and logo.  The court found that, while trademarks are “not encompassed in the categories of intellectual property entitled to special protections under § 365(n)” of the Bankruptcy Code, the licensee could still retain trademark rights under the terms of the parties’ co-marketing and distribution agreement (which contained the trademark licensing agreement) and applicable non-bankruptcy law.

In so ruling, the First Circuit concluded that the Bankruptcy Court for the District of New Hampshire did not err in finding that the licensee’s § 365(n) election failed to protect its rights as licensee of the debtor’s trademark and logo. Despite that, the First Circuit found that the bankruptcy court erred in ruling that the licensee’s rights in the debtor’s trademark and logo terminated upon the debtor’s rejection of the parties’ licensing agreement.  To reach that result, the First Circuit followed the analysis of Sunbeam Products, Inc. v. Chicago American Manufacturing, 686 F.3d 372 (7th Cir. 2012), a case to which the First Circuit noted that the bankruptcy court did not refer or cite.

In Sunbeam, the Seventh Circuit held that a debtor’s rejection of a trademark license, which was part of a supply agreement that related to the manufacturing and sale of electronic fans by a third party, did not automatically extinguish the licensee’s right to use the debtor’s trademarks.  Applying § 365(g) of the Bankruptcy Code, the Seventh Circuit reasoned that the debtor’s rejection of an executory contract constitutes a breach of the contract – not a rescission of the contract – and results in the non-rejecting party’s rights remaining in place. The debtor’s unfulfilled obligations are converted to damages, which are treated as a pre-petition obligation, and which may be compromised with other debts of the same class.  But, as the Seventh Circuit explained, “nothing about this process implies that any rights of the other contracting party have been vaporized.”

The First Circuit BAP’s adoption of Sunbeam is significant because it widens the judicial split on the issue of whether §365 of the Bankruptcy Code protects trademark licenses.  While the purpose of §365(n) is to protect licensees of intellectual property, the section does not define the term “intellectual property,” and trademarks are conspicuously absent from the § 101(35A) definition of intellectual property, which provides that:

The term “intellectual property” means—

(A) trade secret;

(B) invention, process, design, or plant protected under title 35 [relating to patents];

(C) patent application;

(D) plant variety;

(E) work of authorship protected under title 17 [relating to copyrights]; or

(F) mask work protected under chapter 9 of title 17 [relating to microchips];

to the extent protected by applicable nonbankruptcy law.

As the First Circuit BAP recognized, “[s]ome courts [have] reasoned by negative inference that the omission of trademarks from § 101(35A) means that trademark licenses are not afforded any protection under § 365(n) and therefore electing licensees have no rights to use trademarks post-rejection.” Yet “[o]ther courts have expressed the view that reasoning by negative inference is inappropriate” and that “Congress intended the bankruptcy courts to exercise their equitable powers to decide, on a case-by-case basis, which trademark licensees may retain the rights under § 365(n).”  Balancing those views, the Seventh Circuit and First Circuit BAP have concluded that termination of a trademark  license by rejection under §365 does not terminate the licensee’s trademark rights.

With the courts divided on this critical issue affecting both bankruptcy and trademark rights, it remains to be seen if other circuits follow the Tempnology/Sunbeam approach, if this issue makes its way up to the Supreme Court, or if Congress clarifies §365(n) of the Bankruptcy Code.  In the meantime, attorneys advising trademark licensees in bankruptcy proceedings should be aware that trademark rights are, at least, at risk if the debtor-licensor rejects the license agreement.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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