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 decision creates new uncertainty for licensees under similar agreements, who may suddenly find that intellectual property rights they had taken for granted are at risk of termination in the event of a bankruptcy filing by the licensor.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 and trademarks.Following an anti-trust action by the United States Department of Justice requiring Interstate to divest itself of certain rights and assets, 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 license agreement pursuant to which Interstate granted 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 filed voluntary petitions for chapter 11 relief in the Bankruptcy Court for the Western District of Missouri.Four years later, in 2008, Interstate filed an amended plan of reorganization in which it proposed to treat the license agreement with Lewis as an executory contract, meaning that Interstate would have the power to assume or reject the agreement pursuant to section 365 of the Bankruptcy Code.Although Interstate initially indicated its intent to assume the license agreement, Lewis was concerned that Interstate might ultimately reject it.Such a rejection would have terminated Lewis' licensing rights and allowed Interstate to sell or re-license the trademarks.

Accordingly, to protect its rights as licensee, Lewis filed an adversary proceeding seeking a declaratory judgment by the Bankruptcy Court that the license agreement was not an executory contract and, thus, not subject to assumption or rejection under section 365 of the Bankruptcy Code.A majority of courts, including those in the Eighth Circuit, assess whether a contract is executory under the so-called "Countryman" test, which provides that a...