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Federal Trademark Law Trumps A Licensee’s Right to Assume in Bankruptcy

By:  Olivia Cheung

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

            In In re Trump Entertainment Resorts, Inc., the United States Bankruptcy Court for the District of Delaware held that trademark licenses are not assignable by a debtor licensee without the consent of the licensor.[1]  In interpreting applicable federal trademark law, the court noted that exclusive or non-exclusive trademark licenses are precluded from assignment by a licensee without the licensor’s consent, even if the original license agreement did not expressly prohibit such an assignment.[2]  In this instance, the trademark license agreement granted Trump Entertainment Resorts (“TER”) a royalty-free license to use the names and likenesses of Donald and Ivanka Trump in connection with three casinos in Atlantic City, New Jersey.[3]  The license was subject to termination if TER failed a quality assurance review and did not cure the deficiencies within a specific period of time.[4]  If TER failed the review, the licensor would have the right to start proceedings to terminate the license in New Jersey state court.[5]  TER allegedly failed a quality assurance review, and the licensor sued in New Jersey state court seeking to terminate the agreement.[6]  The state court action was stayed automatically when TER filed petitions for relief under chapter 11.[7]  Pursuant to TER’s proposed plan of reorganization, TER would cure any defaults and assume the license agreement.[8]  Subsequently, the licensor filed a motion in the bankruptcy court seeking to have the stay lifted so that the licensor could proceed with the state court termination action.[9]

            Executory contracts are “contracts under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other.”[10]  Outside of bankruptcy, the ability to assign an executory contract may be prohibited by a clause within an agreement itself or by applicable nonbankruptcy law.[11]  However, Section 365(f)(1) of the Bankruptcy Code provides that a debtor may assume an executory contract, even if the non-debtor objects.[12]  Nevertheless, the Court in In re Trump Entertainment Resorts, Inc. found exceptions to this rule and determined that under federal trademark law, a trademark license agreement is non-assignable without the licensor’s consent.[13]  “Because intellectual property and technology licenses are generally executory contracts, a debtor may assume or assign of them under Section 365 of the United States Bankruptcy Code.”[14]  In In re Trump Entertainment Resorts, Inc., the Delaware Bankruptcy Court adopted the “hypothetical test,” a strict interpretation of Section 365(c) of the Bankruptcy Code.[15]  The Trump Entertainment bankruptcy court concluded that because the agreement was unassignable pursuant to non-bankruptcy law, TER could not assume it.[16]  Under the hypothetical test, pursuant to federal trademark law, a debtor may not assume an executory contract over the objection of the non-debtor even if the debtor does not have any intentions of assigning the contract.[17]  There are many companies incorporated under Delaware law and are able to seek bankruptcy relief in that state’s court system even if their principal place of business is in another jurisdiction.[18]  This case exemplified the importance of choice of venue when companies that are licensees of intellectual property rights file for chapter 11.[19]  If this case was filed in a jurisdiction that did not follow the hypothetical test, then Section 365(c) would not have prevented the assumption of the trademark license, and there would have been no relief from the automatic stay.[20]

[1] In re Trump Entertainment Resorts, Inc., 526 B.R. 116, 118 (Bankr. D. Del. 2015).

[2] Id. at 125.

[3] Id. at 118.

[4] Id. at 119.

[5] Id.

[6] Id. at 120.

[7] Id.

[8] Id.

[9] Id.

[10] Id. at 121.

[11] Michelle Morgan Harner, Carl E. Black, Eric R. Goodman, Debtors Beware: The Expanding Universe of Non-Assumable/non-Assignable Contracts in Bankruptcy, 13 Am. Bankr. Inst. L. Rev. 187, 197 (2005).

[12] See id. at 258.

[13] See id. at 122.

[14] Harner et al., Debtors Beware: The Expanding Universe of Non-Assumable/non-assignable Contracts, 13 Am. Bankr. Inst. L. Rev. 187, 210 (2005) (Explaining importance of this for debtors with these types of licenses because federal common law typically bars ability to transfer or assign these licenses outside of bankruptcy).

[15] In re Trump Entertainment Resorts, Inc., 526 B.R. 116, 125 (Bankr. D. Del. 2015).

[16] Id. at 123.

[17] See id. at 122.

[18] Mathews, Susan, Corporate Chapter 11 Bankruptcies: The Case for Venue Reform; October 2014;

[19] See id.

[20] In re Trump, 526 B.R. at 120–21.