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Court’s Bankruptcy Ruling on Trademark Licensees Raises New Questions

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While a 2012 Seventh Circuit ruling seems to have settled the issue of trademark license protection in bankruptcy, it may have in fact raised more questions than it answered about executory contracts and rejection, which we can expect to see evolving and impacting future decisions.

The unanimous “Sunbeam” opinion of July 2012 held that even when a licensor rejects a license in bankruptcy, a licensee can continue to use a trademark. In the Sunbeam case, this meant that the licensee, which had invested heavily in manufacturing facilities, was still able to sell its large stock of previously manufactured fans which bore the debtor’s mark even after the licensor had entered bankruptcy and rejected the agreement. The decision directly addressed a significant gap in a previously enacted section of the Bankruptcy Code – Section 365(n) – which detailed a licensee’s intellectual property rights after rejection in bankruptcy, but failed to include trademarks in its definition of intellectual property.

Interestingly, the Seventh Circuit based its “Sunbeam” decision not on a consideration of equitable principles, but rather on a specific definition of “rejection.” According to the Seventh Circuit, a rejection is not a rescission, and therefore cannot undo something that has already been concluded under a contract. In other words, once a licensing fee has been paid, a licensee’s rights to use the trademark cannot be terminated by the rejection of the license.

It is important to note that this argument rests on the understanding of a license as a completed transfer or transaction rather than as an ongoing relationship based on a “continued tolerance”: two different models for license functioning which are both valid, but conflicting. Furthermore, this particular definition adhered to by the Seventh Circuit does have the implication that the entire enactment of Section 365(n), designed specifically to address license rejection matters, was perhaps unnecessary. For these reasons, it is likely that questions surrounding rejection and executory contracts are by no means definitively settled, but will continue to develop in future cases.

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