You're asking the wrong question - the effect of a licensor's rejection on the trademark license.

Author:Keough, Timothy J.
 
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"One of the most valuable and important protections afforded by the Lanham Act is the right to control the quality of the goods manufactured and sold under the holder's trademark. For this purpose the actual quality of the goods is irrelevant; it is the control of quality that a trademark holder is entitled to maintain." (1)

  1. INTRODUCTION

    A trademark is a symbol that allows a consumer to distinguish a good from similar goods sold by others. (2) As such, a trademark is a legally recognized form of intellectual property that exists solely as a manifestation of the goodwill engendered by a company or product. (3) One of the most important properties of modern trademark law is the ability of the trademark owner to allow another party to use the trademark through a licensing agreement. (4) This conveyance helps maximize the overall economic efficiency of the trademark. (5) Since the adoption of the Lanham Act, the economy has experienced an expansive growth in trademark licensing agreements, raising revenues for both the licensor and licensee. (6)

    Despite the importance of trademarks to the economy, neither licensors nor licensees are immune to the forces of the unforgiving market. (7) When a licensor enters bankruptcy, an important issue that arises is whether the licensee can retain its right to use the licensed trademark. (8) When this occurs, two bodies of law--trademark and bankruptcy--come crashing together, resulting in a wave of uncertainty for licensees. (9)

    Recently, in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, the Court of Appeals for the Seventh Circuit held that a trademark licensee could continue to use a trademark, notwithstanding the bankruptcy trustee's rejection of a licensing contract. (10) While providing some comfort to licensees, Sunbeam has turned the tables on the long-standing view that trademark licensees are in peril in bankruptcy proceedings involving the licensor of the trademark. (11) Furthermore, the decision raises many questions about the proper application of rejection to trademark licenses. (12) The issue is now ripe for review by Congress or the Supreme Court. (13)

    This Note discusses the effect of rejection on a trademark licensee's right to continue using a licensed trademark and the need for Congress to clarify these rights in order to minimize economic inefficiency. (14) It begins by providing an overview of rejection under the Bankruptcy Code and the case law interpreting the effect of rejection on a trademark licensee. (15) Next, this Note explains that both courts and scholars are asking the wrong questions; instead, this Note argues that the courts should be asking whether a trademark license grants the licensee a property right to use the trademark or if it is simply an obligation of the licensor to not sue the licensee for trademark infringement. (16) This Note then analyzes the respective answers to this question and its result in the rejection analysis. (17) This Note then turns to the need for this analysis, explaining that trademark licensees cannot obtain the added protection that other intellectual property licensees receive pursuant to [section] 365(n). (18) Finally, this Note proposes a possible solution, providing a suggested amendment that would codify the effect of rejection of a trademark license. (19)

  2. HISTORY

    Congress enacted the modern Bankruptcy Code through the Bankruptcy Reform Act of 1978. (20) While providing for various forms of bankruptcy, the Code specifically allows a business to reorganize in order to recover from economic hardship. (21) The goals of such a proceeding are to allow the debtor to reduce its obligations and focus on becoming a viable enterprise, while allowing for the company's creditors to obtain maximum recovery. (22) Subject to various restrictions, the Code allows a debtor-in-possession or bankruptcy trustee to reject executory contracts in order to reach economic viability. (23) A valid rejection results in a breach of contract. (24)

    1. Rejection, Generally

      As previously mentioned, the Code allows a debtor-in-possession or bankruptcy trustee to reject executory contracts. (25) The main purpose of rejection is to allow the debtor-in-possession or trustee to rid itself of burdensome obligations so that it can focus its efforts on becoming a viable enterprise. (26) As a threshold limitation, the debtor-in-possession or trustee must first show that the contract is executory. (27) The Code does not define what constitutes an executory contract. (28) Nevertheless, courts have determined that for rejection purposes, contracts are executory when substantial performance remains due on both sides; failure of which would amount to a material breach, excusing the other party's performance. (29)

      Once the debtor or trustee shows that a contract is executory it must then obtain the court's permission to reject the contract. (30) Courts employ the business judgment test to determine whether to grant a motion to reject. (31) So long as the rejecting party can show that it made an informed decision to reject the contract because it would benefit the estate, the court will defer to the debtor's or trustee's business judgment and approve the rejection. (32)

      Once a court approves a motion to reject, the rejection is treated as a breach of contract. (33) The contract does not disappear as a result of the rejection. (34) Rather, the debtor is relieved of its obligations under the contract and relinquishes the future benefits of the other party's performance. (35) Thus, the other party is left with a claim for damages as a result of the debtor's rejection of the contract. (36) These damages are treated as a pre-petition claim. (37)

    2. Lubrizol

      In 1982, Richmond Metal Finishers (RMF) contracted with Lubrizol Enterprises, Inc. (Lubrizol), allowing Lubrizol to use a metal coating process technology that RMF owned. (38) Under the agreement, each party owed the other several ongoing duties. (39) In 1983, RMF filed for Chapter 11 bankruptcy and sought to reject the contract. (40)

      The bankruptcy court approved RMF's motion to reject the contract and noted that its decision left Lubrizol with a claim for breach of contract. (41) Lubrizol appealed the bankruptcy court's decision permitting rejection to the district court. (42) The district court reversed the bankruptcy court's decision, holding that the contract was nonexecutory and rejection was not beneficial to the estate. (43)

      Subsequently, RMF appealed the district court's reversal. (44) The Court of Appeals for the Fourth Circuit reversed the district court's ruling and remanded the case for entry of judgment in accordance with the original decision of the bankruptcy court. (45) The court concluded that the licensing agreement was executory and rejection was a sound business decision, thus satisfying the requirements of [section] 365(a). (46) More importantly, the court held that as a result of the rejection, Lubrizol was entitled to money damages, yet lost its right to use the licensed intellectual property. (47) The court reasoned that despite the resulting adverse effects, [section] 365(g) specifically provides damages as the proper remedy for rejection, and allowing specific performance as a remedy would undermine the express provisions of the statute. (48)

    3. The Reaction

      As a result of Lubrizol, licensees of intellectual property were left in an untenable and vulnerable position. (49) Critics of the decision argued that Lubrizol adversely impacted intellectual property licensees and potentially threatened technological development in the United States. (50) In response to this perceived threat, Congress enacted the Intellectual Property Licenses in Bankruptcy Act (IPLBA). (51) The central purpose of the IPLBA was to protect licensees' rights to use intellectual property in the event that the licensor of the intellectual property rejected the license in a bankruptcy proceeding. (52)

      The IPLBA changed two key sections of the Bankruptcy Code. (53) First, it amended the definitional section, adding the term "intellectual property" and defining it for purposes of the Bankruptcy Code. (54) Secondly, it amended the executory contracts section, allowing an intellectual property licensee to retain its rights under the license agreement and, if necessary, compel specific performance of those rights. (55) Nevertheless, the IPLBA did not include several types of intellectual property--most importantly trademarks--in the definitional section. (56) Notwithstanding this omission, the legislative history appears to confer upon the bankruptcy courts the ability to develop an equitable solution to the effect of rejection on trademark licensees. (57)

    4. Post-IPLBA Cases

      Despite the enactment of the IPLBA, courts continued to recognize that once a trademark owner properly rejected a license in bankruptcy, a trademark licensee's right to use the trademark was terminated. (58) In Blackstone Potato Chip Co. v. Mr. Popper, Inc. (In re Blackstone Potato Chip Co.), (59) Blackstone Potato Chip Co. (Blackstone) entered into a licensing agreement with Mr. Popper, Inc. (Mr. Popper) whereby Blackstone allowed Mr. Popper to use the Blackstone trademark for four years. (60) Nearly two months later, Blackstone filed for Chapter 11 bankruptcy due to its poor financial condition. (61) As part of its Chapter 11 plan, Blackstone filed a motion to reject the licensing agreement with Mr. Popper. (62) In granting Blackstone's motion, the court ordered the termination of the license. (63) The court explained that by allowing the rejection, Blackstone would be able to negotiate a new licensing agreement for its trademark that would be more beneficial than the one with Mr. Popper. (64)

      In Raima UK Ltd. v. Centura Software Corp. (In re Centura Software Corp.), (65) Raima Corp. (Raima US) granted its wholly owned English subsidiary, Raima UK, an exclusive license for its trademark and software in exchange...

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