Questioning The Executoriness Of Trademark Licenses In Integrated Agreements

Protections added to the Bankruptcy Code in 1988 that give some intellectual property ("IP") licensees the right to continued use of licensed property notwithstanding rejection of the underlying license agreement do not expressly apply to trademark licenses. As a consequence, a trademark licensee faces a great deal of uncertainty concerning its ability to continue using a licensed trademark if the licensor files for bankruptcy. This uncertainty has been compounded by inconsistent court rulings addressing the ramifications of rejection of an executory trademark license by a chapter 11 debtor-in-possession ("DIP") or a bankruptcy trustee. Another layer of confusion has been added by recent court decisions suggesting that certain pre-bankruptcy trademark licenses may not be either assumed or rejected by a DIP or trustee because they are no longer executory at the time the debtor files for bankruptcy protection. This was the issue recently confronted by the Eighth Circuit Court of Appeals in Lewis Bros. Bakeries, Inc. v. Interstate Brands Corp. (In re Interstate Bakeries Corp.), 751 F.3d 955 (8th Cir. 2014). The court held that a license agreement was not executory and thus could not be assumed or rejected because the license was part of a larger, integrated agreement which had been substantially performed by the debtor prior to filing for bankruptcy.

Assumption and Rejection of

Executory Contracts and Unexpired Leases

Section 365 of the Bankruptcy Code authorizes a DIP or trustee to assume or reject most kinds of executory contracts and unexpired leases. When a contract or lease is assumed, the debtor must cure existing defaults (with certain exceptions), compensate the other party to the agreement for actual pecuniary loss resulting from any default, and provide adequate assurance of future performance under the agreement. Therefore, when a contract or lease is assumed, the parties' ongoing obligations under the assumed contract or lease are effectively reinstated. When a contract or lease is rejected, however, the rejection is treated as a court-authorized breach of the agreement arising immediately prior to the bankruptcy filing date, and any damages suffered by the creditor will typically be treated as a general unsecured claim against the debtor's estate. In general terms, an "executory" contract is defined as a contract with material obligations remaining on both sides as of the bankruptcy petition date. Most courts rely on the late Harvard Law School professor Vern Countryman's well-known definition of an executory contract: "a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that a failure of either to complete...