Licensing agreement held not to be subject to rejection in bankruptcy

United States of America

In In re Exide Technologies (Case 08-1872, June 1 2010), the US Court of Appeals for the Third Circuit has held that a trademark licensing agreement had been substantially performed and was thus not subject to rejection under §365(a) of the Bankruptcy Code.

The case stemmed from a June 1991 licensing agreement between Exide Technologies and EnerSys with regard to Exide’s concurrent sale of its industrial battery business to EnerSys. In 2002 Exide filed a voluntary bankruptcy petition under Chapter 11 of the Bankruptcy Code and sought to reject several of the agreements it had with EnerSys under 11 USC §365(a). The agreements in question concerned a perpetual, exclusive, royalty-free licence granted to EnerSys to use Exide’s trademark in its manufacturing and production of industrial batteries.

The bankruptcy court entered an order granting Exide’s motion to reject the licensing agreement as an executory contract under §365(a). The district court affirmed. EnerSys appealed to the Third Circuit, arguing that the district court had erred in holding that:

  • the agreement was an executory contract; and
  • rejection terminated EnerSys’ rights under the agreement.

The Third Circuit agreed, reversing the lower courts. As explained by the Third Circuit, while “executory contract” is not defined in the Bankruptcy Code, the legislative history indicates the term is intended to mean a contract so underperformed by both parties as to constitute a breach if either party should fail to complete performance. Under New York law, where the agreement took place, a material breach is one that is so substantial as to defeat the purpose of the entire transaction.

The Third Circuit found that the bankruptcy court had failed properly to measure whether either party had substantially performed and determined that EnerSys’ performance rendered thus far outweighed what remained. EnerSys paid the full $135 million purchase price and assumed Exide’s liabilities. The court found that the remaining obligations - concerning a use restriction to industrial batteries and a vague provision on quality standards - were largely conditions subsequent and did not relate to the purpose of the agreement. Thus, the court found that the performance under the agreement was largely completed and that EnerSys maintained the right to use the EXIDE trademark.

In a concurrence focusing on IP aspects of the case, Judge Ambro noted his belief that “a trademark licensor’s rejection of a trademark agreement under §365 does not necessarily deprive the trademark licensee of its rights in the licensed mark”. He pointed to §365(n) of the statute, which makes clear that the rights of an IP licensee cannot be unilaterally cut off as a result of the rejection of the licence pursuant to §365. Judge Ambro noted that:

  • trademarks are not included within the relevant statutory definition of 'intellectual property'; and
  • courts in other circuits reasoned by negative inference that Congress intended rejection to deprive a licensee of the right to use a trademark.

In Judge Ambro’s view, the reasoning runs against the legislative history, which demonstrates that Congress intended the bankruptcy courts to develop equitable treatment of executory trademark licenses in light of certain control issues that arise in connection with such licences. To allow a licensor to take back trademark rights it bargained away, he noted, makes bankruptcy “more a sword than a shield”.

Megan Heller, McDermott Will & Emery LLP, Washington DC

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