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Licensees of intellectual property, especially trademarks, may
breathe easier thanks to a Circuit-splitting decision authored by
the Seventh Circuit Court of Appeals earlier this month. In Sunbeam
Products, Inc. v. Chicago American Mfg., LLC, --- F.3d ----, 2012
WL 2687939 (7th Cir. 2012), the Seventh Circuit has bolstered a
nondebtor party's post-contract-rejection rights in
intellectual property.
Section 365(n) of the Bankruptcy Code was promulgated by
Congress in response to the Fourth Circuit Court of Appeal's
decision in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers,
Inc., 756 F.2d 1043 (4th Cir. 1985). In Lubrizol, the Court held
that when a debtor rejects an intellectual property license, the
nondebtor party retains no rights in the intellectual property, but
rather it is merely entitled to a money damages remedy. In 1988,
three years after Lubrizol, Congress amended the Bankruptcy Code by
adding Section 365(n), which allows licensees to continue using
intellectual property under certain circumstances after the debtor
rejects the license. The amendment was not a perfect fix as the
Code's definition of intellectual property (and thus the scope
of those property rights protected by Section 365(n)) includes
patents, copyrights and trade secrets, but excludes trademarks.
This omission has been interpreted many different ways, but no
court of appeals has picked up the gauntlet and ruled on the topic
– until now.
In Sunbeam Products, the Court explicitly and vehemently
disagreed with the Lubrizol decision. Explaining that "nothing
about [the contract rejection] process implies that any rights of
the other contracting party have been vaporized," id. at *3,
the Court held that the nondebtor party retained its rights to use
the trademarks included in the rejected contract. The Court also
reasoned that Section 365(n) is not implicated when trademarks are
involved. Rather, the Court found that because a non-breaching
party retains its rights under a breached contract pursuant to
applicable non-bankruptcy law, so too would a non-breaching
counterparty to a rejected contract retain its rights under the
rejected contract.
With two Circuit Courts disagreeing on this important question,
it remains to be seen how courts in other jurisdictions will
respond. Licensees of intellectual property, especially trademarks,
should consult with knowledgeable bankruptcy counsel about the many
issues arising from the Sunbeam Products decision and how their
rights might be impacted.
If you have any questions about this decision or its
implications, please call your principal Mintz Levin attorney or
one of the attorneys noted on this advisory
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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