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Protecting the Rights of Trademark Licensors in Licensee Bankruptcy Case

By: Arianna Clark

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

 A court will not allow a licensee to assign trademark licenses without the consent of the licensor of the trademark, subject to certain limited exceptions. The United States Bankruptcy Court for the District of Delaware applied this general rule when it held trademark licensee Rupari Holding Corp. (herein “Debtors”) could not assign its trademark license agreement (the “License Agreement”)[1] in connection with the sale of a substantial portion of its assets to a third party[2] without first obtaining the consent of the licensor, Roma Dining, LLC, and RomaCorp, Inc. (jointly, “Roma”).  Moreover, the court modified the automatic stay, which prevented Roma from exercising any of its rights in connection with the License Agreement, to permit Roma to  repossess the License Agreement retroactively to the date[3] upon which it was clear to both parties that the License Agreement was not going to be assigned as part of the sale of Debtors’ assets.[4] The court’s holdings reflect a victory for intellectual property rights, vindicating and protecting the rights of mark owners when their licensees file for bankruptcy and attempt to sell their assets.[5]

In May 2007, Roma and Debtors entered into a licensing agreement, in which Roma granted the Debtors exclusive use of Roma’s licensed TONY ROMA trademarks for frozen meat products, which the Debtors’ were producing, selling and distributing.[6] Roma subsequently terminated the licensing agreement based on alleged material breaches committed by Debtors. Thereafter, Debtors filed voluntary Chapter 11 petitions for relief.  In connection with the bankruptcy case, Debtors filed a complaint against Roma (“First Adversary Proceeding”), seeking a declaratory judgment finding Roma’s termination of the License Agreement void.[7] Additionally, Debtors filed a motion to sell substantially all of their assets and approval of the assumption and assignment of the License Agreement in connection with the sale.[8]

Pursuant to Bankruptcy Code §365(a), a trustee or debtor in possession may, subject to court approval, assume or reject an executory contract[9]. A debtor may assign an executory contract that has been assumed only if the debtor provides adequate assurance of future performance by the assignee.[10] However, §365(c)(1) of the Bankruptcy Code provides that if assignment is prohibited by applicable non-bankruptcy law, such as, federal trademark law, then the debtor or trustee may not assign the executory contract.[11]

In in re Trump Entertainment Resorts, Inc., the Bankruptcy Court for the District of Delaware recognized that federal trademark law generally bans assignment of trademark licenses without the licensor’s approval.[12]  Otherwise, the purpose of trademark licensing, to ensure uniform quality of the products bearing the licensor’s trademark, would be negated because of the lack of control the licensor would have over the identity of the licensee.[13] However, there is an exception to the exception. Parties of a license agreement may “contract around” the general rule disallowing assignments of such licenses without consent.[14] Nonetheless, the Rupari Court found that despite the anti-assignment clause being replaced in the License Agreement, it was far from an express allowance of assignment without consent, and therefore, the exception under Bankruptcy Code §365(c)(1) was still applicable.[15] Roma’s Assignment Provision clearly limited the License Agreement to being assigned by operation of law or as part of a sale of substantially all of Debtors’ assets. Thus, because Debtors had already closed on the sale of substantially all assets, the court held there could be no subsequent assignment pursuant to the language of the Assignment Provision, as well as Bankruptcy Code §365(c)(1).[16]

In addition, the court retroactively modified the stay to permit Roma to regain control of the License Agreement as of the date it became apparent to both parties that the sale of the Debtors’ assets would not include assignment and assumption of the License Agreement.  Under Bankruptcy Code §362(d), upon request of the party in interest, and following a notice and hearing, a court can grant relief from the stay for cause.[17] In determining whether a stay should be modified retroactively, courts consider several factors including whether the bankruptcy petitioner filed in bad faith, whether the creditor was aware of the filing or encouraged violation of the stay, whether the debtor engaged in inequitable, unreasonable or dishonest behavior, and whether the creditor would be prejudiced.[18]

Here, the cause requirement for relief of the automatic stay was met because the court held that Debtors could not assign the License Agreement without Roma’s consent.[19] The court determined that the equities weighed in favor of granting the retroactive annulment of the stay because Debtors consciously revised the stalking horse agreement, removing the assumption and assignment of the License Agreement as a condition of sale, as well as filed a notice of dismissal for the First Adversary Proceeding.[20] The following day, Debtors confirmed these actions via a telephone conference, while Roma made it clear that any attempt to revive claims related to the License Agreement would cause serious interference for Roma’s trademarks and business.[21]  the court held it was clear to both parties as of the date of this teleconference that the License Agreement was not being assigned as part of the sale. Therefore, the continued automatic stay of Roma’s License Agreement from that point was prejudicial, and the court annulled the stay effective the date of the telephone conference.[22]

            A central purpose of trademark law is ensuring consumer protection in the market through companies’ use of unique source-identifiers signaling among other things, a specific quality or reputation of a product.  Here, the decision reflects this central purpose of trademark law, invalidating the Debtors’ attempts to bypass approval of assumption and assignment of the License Agreement through bankruptcy proceedings, and enabling Roma to reassert its rights as a trademark owner, having final say over who uses its mark, and thus ensuring that Roma controls the quality of the products bearing its marks. Moreover, through retroactively modifying the stay and returning to Roma its rights to the License Agreement, the court sent a message to licensees that there will be consequences when their actions harm the rights of the licensors.  This court’s decisions validated Roma’s rights as a trademark owner enabling it to maintain control over who uses its marks, upheld the purpose of federal trademark protection, and ensured that licensees are not able to manipulate bankruptcy proceedings to take advantage of their licensors through bypassing approval of the assignment of license agreements.



[1] In re Rupari Holding Corp., No. 17—10793 (KJC), 2017 WL 3600381 *1 (Bankr. D. Del. Aug. 18, 2017).

[2] Id. at 1, 6. The sale was to be carried out in accordance with under sections 363 and 365 of the Bankruptcy Code.

[3] Id. at 2, 7-8.  On May 2, 2017, Roma and Debtors engaged in a telephone conference in which Debtors confirmed that they had filed a Bankruptcy Rule 7041 Notice of Voluntary Dismissal as to the First Adversary Proceeding regarding their request for a declaratory judgment that would have voided Roma’s attempt to terminate the license agreement. Roma made clear that any subsequent attempts by Debtors to revive License Agreement related claims would be challenged.

[4] Id. at *7-8.

[5] Id. at *2.

[6] Id. at *3.

[7] Id. at *3-4.

[8] Id. at * 2-3.

[9] Id. As defined by the Third Circuit, an executory contract is one “‘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] Id. at *3-4.

[11] Id.

[12] Id; see also, In re Trump Entertainment Resorts, Inc., 526 B.R. 116, 123-24 (Bankr. D. Del. 2015).

[13] Id. at *4. Without the licensor’s consent, the ability to ensure that all products under the mark were of uniform quality – thus identity of the licensee is vital.

[14] Id. at *5.

[15] Id.; see also, In re Wellington Vision Inc., 364 B.R. 129, 136 (S.D. Fla. 2007) (Finding a clause prohibiting unreasonable withholding of consent is not the equivalent of a clause expressly allowing assignment without consent

[16] In re Rupari Holding Corp., 2017 WL 3600381 at *5-6.

[17] Id.  at *6.

[18] Id. at *7.

[19] Id.

[20] Id.

[21] Id.

[22] Id. at *7-8.