Sunbeam Products: Trademark Licensees Victorious In Seventh Circuit's Bankruptcy Ruling

What's Next For Licensees and Debtor Licensors?

Trademark licensees can continue using licensed trademarks after their licenses are rejected in bankruptcy, the U.S. Court of Appeals for the Seventh Circuit ruled on July 9, 2012, in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC.1 The court's ruling repudiates a frequently criticized, but widely cited, 1985 decision of the U.S. Court of Appeals for the Fourth Circuit in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc.2 Lubrizol addressed a nonexclusive patent license and, among other things, held that rejection of such a license "deprived the non-debtor party of all rights under that license,"3 effectively terminating the license.

Lubrizol later inspired the enactment of section 365(n) of the Bankruptcy Code, generally providing certain protections to a licensee when the debtor is a licensor of certain "intellectual property."4 However, the Bankruptcy Code's definition of "intellectual property" omitted trademarks (as well as, it has been argued, other rights generally considered IP). Therefore, many bankruptcy courts have inferred from the statute's omission of trademarks that, because trademark licensees are not entitled to section 365(n) protection, Lubrizol still applied to trademarks.5

The Seventh Circuit was unpersuaded by Lubrizol and this line of cases. It found that the definition of "intellectual property" which Congress adopted for the Bankruptcy Code "does not affect trademarks one way or the other."6

Trademark licensees across the country will likely now cite Sunbeam for the proposition that rejection of their license agreements in bankruptcy does not terminate their licenses, allowing them to continue using the licensed trademarks post-rejection. The same arguments may also be made by licensees of other IP, particularly licensees of other rights not necessarily included within the Bankruptcy Code's definition of "intellectual property."

But what additional ramifications might Sunbeam have? Will Sunbeam affect how licensees address the protections for what bankruptcy law does define as "intellectual property" that are provided under section 365(n), which grants licensees the option of retaining certain rights upon rejection of a license"?7 How will courts apply Sunbeam to exclusive licenses? Could Sunbeam's holding affect the bidding for trademark and other IP assets in bankruptcy, particularly if a potential asset purchaser risks having to compete with a rejected licensee that continues using the licensed IP? If a debtor elects to reject a trademark license, how does this affect the ability of the debtor or a purchaser of the trademark to police the use of the trademark as required by trademark law? To what extent could these potential outcomes affect a debtor's decision to assume and assign, rather than reject, such license?

We do not yet have answers to these questions, but we can say that Sunbeam is likely to have significant and wide-ranging effects on the jousting between licensors in bankruptcy and their licensees.

THE DECISION

In Sunbeam, Lakewood Engineering & Manufacturing Co. ("Lakewood") manufactured and sold a variety of consumer products, including box fans. After losing money on the box fans, Lakewood outsourced its manufacturing of the fans to Chicago American Manufacturing LLC ("CAM") and executed a supply agreement that included a license to CAM to use its...