Eighth Circuit Rules That A 'Perpetual' Trademark Licensing Agreement Is An 'Executory' Contract Subject To Rejection Under Bankruptcy Code Section 365

The United States Court of Appeals for the Eighth Circuit recently ruled that a perpetual, royalty-free, and exclusive trademark licensing agreement qualified as an executory contract subject to assumption or rejection under section 365 of the Bankruptcy Code. The Eighth Circuit's ruling is seemingly at odds with a 2010 decision by the Third Circuit which found an extremely similar licensing agreement to be non-executory. These decisions may signal a circuit split on the issue, and in any event, create uncertainty for licensees who have acquired perpetual licenses in connection with an asset sale, and have otherwise been operating under the licensing agreement post-closing without incident. Lewis Bros. Bakeries Inc. v. Interstate Brands Corp. (In re Interstate Bakeries Corp.), 690 F.3d 1069 (8th Cir. 2012).

Background

In 1995, Interstate Bakeries Corporation announced its acquisition of Continental Baking Company, the owner of the Wonder Bread and Hostess brands. Following an anti-trust action by the United States Department of Justice, Interstate sold its Butternut Bread and Sunbeam Bread baking operations and assets to Lewis Brothers Bakeries. In connection with the sale, Interstate and Lewis entered into a licensing agreement granting Lewis a perpetual, royalty-free, assignable, transferable, exclusive license for the Butternut and Sunbeam trademarks within a delineated territory.

In 2004, Interstate and certain of its affiliates commenced chapter 11 proceedings in the Bankruptcy Court for the Western District of Missouri. These cases were the forerunner to Hostesses pending chapter 11 cases, which we have covered here. In 2008, Interstate sought to confirm a plan of reorganization in which it proposed to treat the licensing agreement with Lewis as an executory contract. Characterizing the licensing agreement as an executory contract meant that Interstate could assume or reject the agreement pursuant to section 365 of the Bankruptcy Code. Although Interstate initially indicated its intent to assume the licensing agreement, Lewis was concerned that Interstate might ultimately reject it. Rejection would have terminated Lewis' licensing rights and allowed Interstate to sell or re-license the trademarks.

To protect its rights as licensee, Lewis requested a declaratory judgment from the Bankruptcy Court that the licensing agreement was not an executory contract and, thus, not subject to assumption or rejection under section 365 of the...