Seventh Circuit rules franchisees should keep rights to use the trademark they licensed when licensor rejects that license in bankruptcy

In a development that is at least gratifying to franchisees in the states of Wisconsin, Illinois and Indiana, the Seventh Circuit Court of Appeals recently overturned what had been prevailing law for some 27 years and now allows franchisees to use the trademarks they licensed even if the license agreement is rejected by the licensor-debtor in bankruptcy court.

It remains to be seen if other courts follow the reasoning in Sunbeam Products Inc. v. Chicago American Manufacturing, LLC., 686 F3rd 372 (7th Cir. 2012) or stay true to the 1985 decision in the Fourth Circuit, Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. 756 F 2nd 1043 (4th Cir. 1985), which held that the licensee would lose the right to use the trademark.

Analysts take note: If other courts get in line, one risk factor is removed, and valuation of franchisees changes. This development bears watching.