As effective and efficient bankruptcy proceedings have become increasingly important in recent years, so has the need to protect intellectual property licenses. The Bankruptcy Code allows the representative of a bankrupt estate, with the court's approval, to reject executory contracts. Although rejection has taken many forms over the years, its goal is to offer debtors and trustees with a means to maximize the value of the bankrupt estate's remaining assets. Rejection accomplishes this by treating contracts that contain unfulfilled obligations by both parties as having been breached by the representative of the bankrupt estate.
However, the implications of this breach are anything but clear. Contrary to previous cases, the Seventh Circuit, in Sunbeam Products, Inc. v. Chicago American Manufacturing LLC, held that the rejection of a trademark license did not prevent the licensee from further use of the trademark. This decision has created a split among the circuits, primarily with the Fourth Circuit.
In 1985, the Fourth Circuit, in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., held that rejection gave the representative of the bankrupt estate the right to reclaim licensed intellectual property. Worried that decisions like Lubrizol would have a chilling effect on the intellectual property production and licensing industry, Congress enacted Section 365(n) of the Bankruptcy Code in 1988, which precludes representatives of bankrupt estates from rejecting intellectual property licenses.
Section 365(n) included copyright and patent licenses, but excluded trademarks until further research could be done. Since the enactment of Section 365(n), courts have used their equitable powers to prevent representatives of bankrupt estates from rejecting trademark licenses. However, Sunbeam held that courts should not rely on equity when the statutory language provides licensees the same protections.
According to Sunbeam, rejection is not tantamount to rescission, but rather treats the executory aspects of the contract as having been breached by the representative of the bankrupt estate. The licensee may continue using the intellectual property, but merely has a prepetition claim for money damages with regards to the breached portions of the contract. This eases the representative of the bankrupt estate's burden by allowing it to choose not to perform any further obligations, while the licensee may continue using the property it had previously bargained for.
This Note discusses the various theories of rejection as they apply to trademarks and other intellectual property. Furthermore, this Note argues that Sunbeam was properly decided and that the Supreme Court should settle what it means to reject trademark license agreements.
Alexander N. Kreisman,
Calling All Supreme Court Justices! It Might Be Time to Settle This "Rejection" Business Once and For All: A Look at Sunbeam Products v. Chicago American Manufacturing and the Resulting Circuit Split,
Seventh Circuit Rev.
Available at: https://scholarship.kentlaw.iit.edu/seventhcircuitreview/vol8/iss1/3