Seventh Circuit attempts to right the ship with respect to trademark licenses and bankruptcy

As reported in the Brian Cave Alert, despite a long history of bankruptcy stripping legal authority from existing trademark licenses, no matter how much businesses depended upon those licenses for their very existence, earlier this month the Seventh Circuit, in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC., held that “the rights of a trademark licensee do not automatically terminate when its license agreement is rejected by a trademark owner in bankruptcy.”

In the 1985 Lubrizol case (Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985)), the Fourth Circuit held that because section 365(g) of the Bankruptcy Code provides "only a damages remedy for the non-bankrupt party," and not specific performance, a licensee loses all rights to use a patent once the license is rejected.

Congress reacted, including section 365(n) in the bankruptcy code in 1988, which allowed licensees to retain their rights to use licensed “intellectual property” when and if that licensing agreement is rejected in bankruptcy. The legislation also endeavored to define intellectual property, omitting trademarks in the definition, and courts have construed that omission to be intentional.

Cave cautions, “… the significance of that victory [in Sunbeam] will only become clarified if and when other courts, including possibly the Supreme Court, and Congress address the issues raised in Sunbeam.” Valuators who need to assess the risks inherent in existing trademark licenses should monitor this development closely, jurisdiction by jurisdiction, until and unless the Supreme Court or Congress addresses the issue.