Who Needs Section 365(N)? New Seventh Circuit Decision Provides Licensees Of Bankrupt Trademark Licensors Alternate Grounds For Protecting Their Rights

On July 9, 2012, the U.S. Court of Appeals for the Seventh Circuit issued a decision that could have far-reaching implications for licensees of trademarks, and more generally for all licensees of intellectual property, who find their licensors in bankruptcy. In Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC,1the Seventh Circuit affirmed the decision of the U.S. Bankruptcy Court for the Northern District of Illinois (the "Bankruptcy Court") that a trademark licensee whose licensor rejected the license agreement in bankruptcy could nevertheless continue to use the licensed trademark. In the proceedings below, the Bankruptcy Court based its holding on "equitable grounds," effectively extending the protections for intellectual property licensees under section 365(n) of the Bankruptcy Code to trademarks, while recognizing that the statute (which protects patent and copyright licenses) does not include trademarks within those protections. The Seventh Circuit affirmed the Bankruptcy Court's judgment, but based its decision on a different analysis. Like the Bankruptcy Court, the Seventh Circuit reexamined the Fourth Circuit's landmark decision in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc.,2 in which the Fourth Circuit, prior to the enactment of section 365(n), found that a patent licensee loses its license rights when the licensor rejects the patent license in bankruptcy. But, rather than relying on "equitable grounds" to part company with Lubrizol, the Seventh Circuit concluded that the Fourth Circuit in Lubrizol reached the wrong result in interpreting the effects of rejection under section 365(g) of the Bankruptcy Code. The Seventh Circuit started with the fundamental proposition that "rejection" of a contract in bankruptcy means simply that the debtor breached the contract (which, for the purposes of allowance of a licensee's claim, is deemed to occur as of the day immediately before the bankruptcy filing). But the licensee's rights to use the trademark should not necessarily be terminated simply because the debtor has "rejected," and is deemed to have breached, the license agreement. Accordingly, in the Seventh Circuit at least, a trademark licensor may effectively get the same protections as section 365(n), without being covered by the statute the rights may not be compromised by rejection in the first place. The Seventh Circuit's decision examines once again the scope of a licensee's rights after rejection of a license agreement by the licensor, and the effect of a counterparty's rejection of an executory contract more generally. And the Seventh Circuit's decision creates a circuit split with the Fourth Circuit in Lubrizol, albeit one where the...