Seventh Circuit sheds light on trademark licensees' rights in bankruptcy cases

In Sunbeam Products Inc v Chicago American Manufacturing LLC (Case 11-3920, July 9 2012), the US Court of Appeals for the Seventh Circuit has issued an important decision regarding the effect a trademark licensor’s bankruptcy has on a trademark licensee’s ability to sell products bearing the licensed trademark. The court held that, if a trademark licence is rejected as part of a bankruptcy proceeding under § 365 of the Bankruptcy Code, the trademark licensee’s rights under the licence remain intact, and the licensee may continue to sell products bearing the licensed mark if the licence allowed such sales. This decision creates a split among the circuits on this issue.

In 2008 Chicago American Manufacturing Inc (CAM) entered into a licence agreement with Lakewood Engineering & Manufacturing Co that allowed CAM to manufacture box fans using Lakewood’s patents and place Lakewood’s trademarks on the completed fans. Pursuant to the agreement, Lakewood would take orders for the fans, CAM would ship the fans to the customers and Lakewood would pay CAM for the fans that CAM shipped to customers. Due to CAM’s concerns regarding Lakewood’s financial stability, Lakewood agreed to allow CAM to sell any fans Lakewood did not sell out of the 1.2 million fans Lakewood estimated it would need to meet customer needs in 2009. In February 2009 several of Lakewood’s creditors filed an involuntary bankruptcy petition against Lakewood and the court appointed a trustee who sold Lakewood’s business to Sunbeam Products Inc d/b/a Jarden Consumer Solutions. Jarden did not want the remaining LAKEWOOD-branded fans in CAM’s inventory, nor did it want CAM to sell the fans, which would compete with Jarden’s own products. Lakewood’s bankruptcy trustee rejected the licence agreement between CAM and Lakewood pursuant to 11 USC § 365(a).

CAM continued to sell the LAKEWOOD-branded fans, and Jarden filed an adversary action against CAM (Lakewood Eng’g & Mfg Co (459 BR 306) (Bankr ND Ill 2011)). After holding a trial, the bankruptcy judge ruled that CAM was entitled to make as many fans as Lakewood estimated it would need for 2009 and sell them under Lakewood’s marks. The bankruptcy judge noted that, although the Bankruptcy Code allows licensees to continue using the licensed intellectual property after rejection, the code’s definition of 'intellectual property' includes only patents, copyrights and trade secrets. Without resolving the issue of whether the Bankruptcy Code allows the use of licensed trademark after the licence is rejected, the bankruptcy judge allowed CAM to continue to use the Lakewood marks “on equitable grounds”, noting that CAM had invested substantial resources in making the LAKEWOOD-branded fans. Jarden appealed the bankruptcy judge’s decision. 

On appeal, the Seventh Circuit stated that rights in bankruptcy depend “on what the code provides rather than on notions of equity”, and that the grounds for the bankruptcy judge’s decision were “untenable”. Nevertheless, the Seventh Circuit agreed with the judge’s decision in CAM’s favour, albeit for different reasons. First, the court noted the Fourth Circuit’s decision in Lubrizol Enterprises Inc v Richmond Metal Finishers Inc, in which that court held that, when an IP licence is rejected in bankruptcy, the licensee loses the ability to use any licensed copyrights, trademarks and patents. Using the Bankruptcy Code as a guide, the Seventh Circuit stated that it disagreed with the Fourth Circuit’s holding in Lubrizol. Citing § 365(g) of the code, the Seventh Circuit held that rejection of an IP licence under § 365(a) constitutes a breach of the licence. Thus, as is the case when a licensor breaches a trademark licence outside of bankruptcy, when a licence is rejected in bankruptcy the licence continues to exist and the licensee’s rights under the licence remain in place. In this case, rejection of the trademark licence between CAM and Lakewood constituted a breach of the licence by Lakewood. CAM’s rights under the licence agreement, including the right to sell the LAKEWOOD-branded fans that Lakewood anticipated it would need for 2009, remained in place.

The Seventh Circuit’s decision is in direct conflict with the Fourth Circuit’s decision in Lubrizol, which the Seventh Circuit stated “devoted scant attention to the question whether rejection cancels a contact”. This is an important decision for trademark licensees, in that - at least in the Seventh Circuit - a licensee’s rights under the licence remain intact should the licensor enter bankruptcy and the licence be rejected pursuant to § 365(a) of the Bankruptcy Code. This provides protection for the licensee’s investment in the licence and licensed products. 

Joshua S Frick, Brinks Hofer Gilson & Lione, Chicago