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licensee’s rights upon rejection of the intellectual property license. Three years after this decision, Congress enacted § 365(n), which gives licensees of intellectual property the choice whether to continue using the licensed intellectual property through the end of the license term (or any extension that can be unilaterally exercised by the licensee) or to seek rejection damages. In the 1988 Legislative History of §365(n), Congress explained that it excluded trademarks from the definition of intellectual property because, unlike other intellectual property licenses, trademark licenses require the debtor/licensor to monitor the quality of the trademarked products, thus creating a situation where the debtor/licensor would be burdened with continuing performance under the license, if the licensee chose to continue to use the licensed trademark, even after rejection. Congress reasoned that trademark licenses required more study before they could be covered under §365(n). Congress stated, however, that, despite this specific exclusion, the bankruptcy courts should develop equitable treatment for trademark licensees based on the facts and circumstances of particular cases before them.
The Seventh Circuit in Sunbeam held that exclusion from §365(n) did not end the inquiry into treatment of trademark licensees post-rejection. Instead, the Seventh Circuit looked to §365(g), which treats rejection as a prepetition breach of the affected contract. Relying on non-bankruptcy law, the Seventh Circuit held that a licensor’s breach under a trademark license does not terminate the licensee’s rights. The Seventh Circuit reasoned that treating the debtor’s breach as a termination of the non-debtor’s rights is akin to holding that “. . . a borrower could end the lender’s right to collect just by declaring that the debt will not be paid.”4
In contrast, in Tempnology, the First Circuit ruled that rejection of a trademark license left the licensee with only a prepetition damage claim. The First Circuit reasoned that the burden imposed by retaining the licensee’s trademark rights defeats the main purpose of rejection. Quoting the Supreme Court’s decision NLRB v. Bildisco & Bildisco5, the First Circuit explained that “. . . Congress’s principal aim in providing for rejection was to ‘release the debtor’s estate from burdensome obligations that can impede a successful reorganization.’”6 The First Circuit held that the aim of rejection is not met where the debtor would be compelled to continue to enforce quality control of the trademarked goods. In fact, under applicable trademark law, failure to enforce quality control can result in abandonment of the trademark.7 The First Circuit rejected an equitable approach suggested in the dissent, reasoning that the debtor’s burden in enforcing quality control can be affected by the licensee’s post-rejection behavior. Relying on Lubrizol, the First Circuit reasoned that §365(g)’s purpose is to provide monetary damages as the sole remedy for rejection. “Allowing specific performance would obviously undercut the core purpose of rejection under § 365(a).”8 The First Circuit used this distinction to justify its failure to consider the effect of breach under applicable, non-bankruptcy law.
The plain language of the Bankruptcy Code does not settle the issue before the Supreme Court in Tempnology. The reasoning under both the First and Seventh Circuits’ decisions gives the Supreme Court ample ammunition to support a decision either way. What is certain, though, is that the result will have far-reaching effects on trademark licenses of companies in bankruptcy.
4686 F.3d at 377
5465 U.S. 513, 528 (1984)
6879 F.2d at 402 (quoting Bildisco) see supra note 5
7879 F.3d at 403
8879 F.3d at 396 (quoting Lubrizol)
Annette represents banks, financial institutions, and numerous other parties nationwide in resolving concerns related to Chapter 11 bankruptcy cases and out-of-court workouts. She is a member of her firm's Management Committee and the Partner-in-Charge of the Transactions Practice Groups at Dorsey.