Seventh Circuit Holds Trademark License Not Assignable in Bankruptcy Case

 By: Heather Hili

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re XMH Corp.,[1] the Seventh Circuit added trademark licenses to the types of intellectual property that cannot be assigned in bankruptcy without the licensor’s permission.[2] In 2009, XMH Corporation (“XMH”) and some of its subsidiaries sought relief under chapter 11 of the Bankruptcy Code (“the Code”).[3] Blue, a debtor subsidiary of XMH, attempted to sell its assets to purchasers, Emerisque Brands and SKNL, including a trademark license agreement with Western Glove Works (“Western”).[4] The bankruptcy court refused to allow Blue to assign its trademark license agreement to the purchasers because Western would not consent to the assignment, and trademark law prohibits the non-consensual assignment of a trademark.[5]

Section 365 of the Code, which addresses the assignability of executory contracts (including trademark licenses) in bankruptcy cases, provides that a debtor may not assign an executory contract if “applicable law” allows the non-debtor party to refuse assignment, regardless of whether the underlying contract requires the non-debtor’s consent to assignment.[6] The Seventh Circuit determined that “[t]he term ‘applicable law’ means any law applicable to a contract, other than bankruptcy law, since bankruptcy law would permit any assignment that was in the best interest of the creditors.”[7] In this case, the Seventh Circuit determined that “applicable law” was U.S. trademark law and that it prohibits the non-consensual assignment of a trademark license. Thus, Blue’s trademark license agreement could not be assigned to the purchasers because the trademark license agreement did not contain a clause expressly authorizing assignment and Western refused to consent to the assignment.[8] This decision is consistent with the seminal Ninth Circuit opinion in Perlman v. Catapult Entertainment, Inc. (In re Catapult Entertainment, Inc.)[9] that applied similar reasoning to hold that non-exclusive patent licenses could not be assigned in bankruptcy.[10]

The Seventh Circuit’s decision will make it difficult for debtors to assign a trademark license over the objection of the licensor when the underlying contract does not contain a clause expressly authorizing assignment. One common solution to difficulties assigning trademark license agreement is to keep the subsidiary-licensee out of bankruptcy or to sell such entity as a going concern.[11] The opinion may also make it difficult for a debtor to reorganize if its business depends on the continuation of a trademark license because of cases holding that debtors may not even assume executor contracts that are not assignable.[12] Interestingly, the Seventh Circuit failed to discuss tests used by other circuits to decide such cases: the “hypothetical” test[13] and the “actual” test.[14] Both tests have been subject to significant criticism.[15] In applying the “hypothetical” test, “a debtor in possession may not assume an executory contract over the non-debtor's objection if applicable law would bar assignment to a hypothetical third party, even where the debtor in possession has no intention of assigning the contract in question to any such third party.”[16] Whereas the under the “actual” test, “the statute bars assumption by the debtor in possession only where the reorganization in question results in the non debtor actually having to accept performance from a third party.”[17]