Retaining the Hope That Rejection Promises: Why Sunbeam Is a Light That Should Not Be Followed

• Jurisdiction: United States,Federal
• Publication year: 2014
• Citation: Vol. 30 No. 2

Retaining the Hope That Rejection Promises: Why Sunbeam is a Light That Should Not Be Followed

Benjamin H. Roth

RETAINING THE HOPE THAT REJECTION PROMISES: WHY SUNBEAM IS A LIGHT THAT SHOULD NOT BE FOLLOWED

Abstract

Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC incorrectly altered the remedies available to a trademark licensee after a debtor licensor has rejected the license. Decided in July 2012, this decision by the U.S. Court of Appeals for the Seventh Circuit conflicts with decisions going back more than twenty-five years, when the U.S. Court of Appeals for the Fourth Circuit decided Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. During that span of time, licensees had a single remedy upon rejection of the license: damages in the way of an unsecured prepetition claim. Licensees were not granted specific performance, and were not permitted to continue using the trademark or retain any other rights under the license, save for the claim for damages. Congress had granted guaranteed specific performance to the licensee of a patent, copyright, or trade secret through 11 U.S.C. § 365(n). However, when Congress enacted § 365(n) in 1989, Congress explicitly and unequivocally excluded trademark licenses from the protection of that provision.

In July 2012, the Seventh Circuit held in Sunbeam that because trademark licensees are not protected by § 365(n), the Bankruptcy Code is silent as to the rejection of a trademark license. A licensee was granted the right to continued use of the trademark, just as that remedy would be available outside of bankruptcy. Ideal as this holding maybe, this Comment argues it is contradictory to a careful examination and interpretation of the law as it applies, and historically has been applied. Fundamentally, allowing a trademark licensee to retain its rights is a de facto order of specific performance on a trademark owner, but when that owner is a debtor in bankruptcy, specific performance should not be available against it. In short, Sunbeam should not be given any weight going forward. A licensee should be limited to a prepetition claim for damages, only.

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INTRODUCTION

Rejection. The overwhelming majority of the time, rejection is not a concept that fills a person with hope.¹ Most of the time, it conjures up the exact opposite, a sense of despair. The exception is a debtor in bankruptcy. Within that realm, rejection can mean new life, the essence of hope. For a trademark licensor, however, that hope seems to have been quashed by Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC.² Sunbeam has already garnered significant attention, and some bankruptcy experts are lauding this decision as a welcome step forward in the evolution of bankruptcy. Sunbeam first held the Bankruptcy Code (Code) was silent as to trademarks in particular, and Congress's failure to address trademarks was not to be interpreted as a codification of an earlier case, Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc.³ It then held that because the Code was silent as to trademarks, under nonbankruptcy law a breach by the licensor did not cut off the licensee's rights to continue using the trademark.⁴

Sunbeam's holding flies in the face of established bankruptcy jurisprudence and precedent. Prior to Sunbeam, the generally accepted rule had been that when a trademark licensor enters bankruptcy and rejects the license as an executory contract, the only remedy available to the non-debtor licensee was an unsecured prepetition claim against the debtor, as set forth in Lubrizol.⁵ The licensee was not entitled to seek specific performance in the way of retaining its rights under the license to continue using the trademark.⁶ For over twenty-five years, this was the accepted practice, until Sunbeam.

Although the holding in Sunbeam is arguably more equitable, especially for the licensee, the Sunbeam court itself noted that "[w]hat the [] Code provides, a judge cannot override by declaring that enforcement would be inequitable."⁷ That was not what the Seventh Circuit claimed it did, of course. Instead, it held that Congress failed to address trademarks within the Code.⁸ Thus, because the Code is silent, nonbankruptcy law will control.⁹ Even if the court's first

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premise that Congress's omission means silence and nothing more is correct, the Code is anything but silent on executory contracts.¹⁰ Sections 365(a) and (g) specifically provide that a debtor can reject executory contracts and that rejection is treated as a breach of the contract.¹¹ In almost all instances, the sole remedy that has actually been granted to the non-rejecting party is an unsecured, prepetition claim against the debtor, except where the Code provides specific carve-outs to guarantee specific performance for a very limited scope of executory contracts.¹² Because there is no carve-out for trademark licenses,¹³ even if Sunbeam does not directly contradict the Code, it should not be followed by the other circuits, and should be limited to a very narrow reading.

This Comment concedes that the seventh Circuit sees a significant number of chapter 11 cases, and judge Easterbrook has played a key part in developing other areas of bankruptcy law.¹⁴ Further, this is not just Judge Easterbrook's opinion, but was decided by a three-judge panel of Seventh Circuit judges.¹⁵ Even further, this opinion was circulated to the entire circuit, and no judges favored a hearing en banc, including other well-respected jurists such as Richard Posner and Diane Wood.¹⁶ This is to point out that this decision is not easily dismissed or disregarded, and this Comment does not lightly challenge the Seventh Circuit's reasoning. Nonetheless, this Comment argues that it should not be followed.

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In Part I, this Comment provides the framework for understanding the rejection of a trademark license in bankruptcy. That includes an examination of the different kinds of intellectual property, especially what makes trademarks unique. It also examines the elements and treatment of executory contracts. Part II begins with the decision in Lubrizol. Then, it explores the official intersection of intellectual property law and the Code, and the trend of cases following Lubrizol. In Part III, this Comment begins its analysis of Sunbeam and its supporters. Finally, Part IV finishes the analysis of Sunbeam, namely, that the Code does not support Sunbeam and that Sunbeam does not even support itself. This Comment explains how the difference in trademarks from other forms of intellectual property, and the fundamental policies of bankruptcy also do not support Sunbeam. This Comment concludes that Sunbeam should not be followed going forward. Trademark licensees should be limited to a prepetition claim for damages and should not be allowed to obtain specific performance post-rejection.

I. Intellectual Property and Executory Contracts

Before beginning substantive analysis of trademark licenses within bankruptcy, this Comment lays out the basic principles of two types of legal concepts. First, it will provide a basic background on the types of intellectual property and explain how trademarks are different. Following that will be a brief definition of executory contracts, and finally, the general treatment of executory contracts within bankruptcy will be explained.

A. Intellectual Property Background

"Intellectual property" is a term often used as a simplistic substitute for a complicated body of laws and rights. But, like many things, it is more complicated than it seems. Intellectual property encompasses patents, copyrights, trademarks,¹⁷ and trade secrets.¹⁸ In many respects, patents and copyrights are fundamentally different from trademarks. The most fundamental differences in this context are: (1) the foundation from which these rights arise and their societal purpose, (2) the lifetime of those rights, (3) the nature of

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what those rights are embodied in, and (4) the quality-control aspects of trademarks.

1. Foundational Support and Purpose

Federal patent and copyright law is grounded in more direct, explicit constitutional support whereas the legal basis for federal trademark is inferred from the Commerce Clause, but never explicitly mentioned anywhere in the Constitution.¹⁹

Patent and copyright rights have their basis in the Patent and Copyright Clause of the Constitution, for the purpose of "promot[ing] the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries."²⁰ Thus, their collective purpose is to encourage scientific and artistic development, for the benefit of society.²¹ To that end, the Constitution grants Congress the power to give inventors a limited monopoly of rights as an incentive to create,²² which Congress has done through Titles 35 and 17, respectively.²³

Alternatively, trademark rights began in the common law, primarily arising out of unfair competition and trade practices law. Rights in trademarks were not intended to provide an incentive for progress and development.²⁴ Their main purposes are to identify the source of goods²⁵ and to protect consumers

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by reducing their search costs.²⁶ Currently, trademark protection stems from a combination of common law, state statutes, and a federal statute, the Lanham Act.²⁷ The Lanham Act draws its Constitutional support from the Commerce Clause, not from the Patent and Copyright Clause.²⁸

2. The Lifetime of IP Rights

A second essential difference is in the duration of rights and protections. Because the protection and monopoly given to patent and copyright owners is just a necessary evil to promote progress and culture, those monopolies are limited in duration. Patents receive up to twenty years of protection,²⁹ and copyrights can range from the life of the author plus 70 years to 120 total years.³⁰ Also, at the natural end of patent or...