A Call To Arms - 365(n) And Trademark Licensees

Reprinted with permission from Portfolio Media, Inc.

Law360, New York (May 09, 2012, 2:33 PM ET) -- On April 11, 2012, briefing before the Seventh Circuit concluded on the direct appeal of the Bankruptcy Court's decision in Szilagyi v. Chicago Am. Mfg. LLC (In re Lakewood Engineering & Manufacturing Co. Inc.), 459 B.R. 306 (Bankr. N.D. Ill. 2011). In Lakewood, the Bankruptcy Court found support in legislative history to confer on a trademark licensee protections expressly not made available to such licensee by statute.

The debtor in Lakewood was a major manufacturer of box fans. Faced with continuing losses, Lakewood decided to outsource the manufacture of certain of its products including box fans sold under the Lakewood trademark. Lakewood entered into a supply agreement with Chicago American Manufacturing LLC (CAM) for the manufacture of the fans.

The supply agreement included a license to CAM of the Lakewood trademark in the event that Lakewood failed to purchase the amount of fans required under the supply agreement. The purpose of such provisions was to allow CAM to sell the fans under the Lakewood trademark which CAM had built under the supply agreement in the event that Lakewood ailed to by fans.

Despite its efforts, Lakewood was unable to operate profitability and an involuntary bankruptcy petition was filed against Lakewood. An order for relief under Chapter 7 was entered shortly thereafter and a trustee appointed. The trustee rejected the supply agreement which contained the "springing" trademark license. Subsequently, a dispute arose between the trustee and CAM regarding whether the trademark license to CAM survived rejection of the supply agreement. The bankruptcy court concluded that the license was not terminated when the supply agreement was rejected and that using its equitable powers it would ensure that CAM not be stripped of its "fairly procured trademark rights."

One would have expected that the trademark licensee would have been deprived of the ability to use the trademark under Lubrizol Enters. Inc. v. Richmond Metal Finishers Inc., 765 F.2d 1043 (4th Cir. 1985) and applicable nonbankruptcy law. Lubrizol is the well-known decision that held that rejection of a nonexclusive patent license deprived the licensee of further ability to use its patent and enabled the debtor licensee to enter into a new license post-petition.

The logic of Lubrizol (based on the Bankruptcy Code as it existed at that time) is compelling...