By: Crystal Lawson
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
In In re Interstate Bakeries Corp.,[i] the United States Court of Appeals for the Eighth Circuit recently held that a trademark license agreement was not an executory contract because it was part of a larger, integrated sale agreement that had been substantially performed by both parties.[ii] Accordingly, since the debtor could not reject the agreement, the Eighth Circuit did not determine whether the rejection of a trademark-licensing agreement necessarily terminates the licensee’s rights in the trademark.[iii] In 1996, Interstate Brands Corp (“IBC”), a subsidiary of Interstate Bakeries Corporation (“Interstate Bakeries”), transferred two of its brands and certain related assets to Lewis Brothers Bakeries (“LBB”) pursuant to an antitrust judgment.[iv] In connection with the sale, the parties entered into an asset purchase agreement and a trademark license agreement.[v] In 2004, Interstate Bakeries and eight of its subsidiaries, including IBC, filed for bankruptcy under chapter 11 of the Bankruptcy Code.[vi] After Interstate Bakeries disclosed that it intended to assume the trademark license agreement, LBB commenced an adversary proceeding seeking a declaration that the agreement was not an executory contract under section 365(a) of the Bankruptcy Code and therefore, was not subject to assumption or rejection.[vii] Finding that both parties owed material obligations under the trademark license agreement, the bankruptcy court held that the agreement was executory.[viii] The district court affirmed that decision.[ix] The Eighth Circuit, however, reversed, holding that the trademark license agreement was not executory because it was part of a larger, integrated contract that had been substantially performed.[x]
Under section 365(a) of the Bankruptcy Code, a bankruptcy trustee or a debtor-in-possession, “subject to the court’s approval, may assume or reject any executory contract.”[xi] As a threshold issue, a contract must be “executory” in order to be subject to assumption or rejection under section 365(a). While the Bankruptcy Code does not define the term “executory contract,” most courts[xii] adopt the Countryman definition: “[a] contract 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 in excusing the performance of the other.”[xiii] Accordingly, if one or both parties has substantially performed their obligations under the contract, the contract will not be executory.[xiv] In Interstate Bakeries, the Eighth Circuit adopted the Countryman definition and concluded that the trademark license agreement was not executory.[xv] The Eight Circuit held (1) the trademark license agreement and the asset purchase agreement constituted a single, integrated agreement, and (2) the agreement was not executory because the parties had substantially performed their respective obligations under that agreement.[xvi] If a court finds that a trademark agreement is executory, however, the question remains as to “whether rejection of a trademark licensing agreement terminates the licensee’s rights to use the trademark.”[xvii]
Courts are divided to whether a trademark licensee loses rights in the trademark upon rejection of a license agreement by a debtor.[xviii] Traditionally, courts that have found that a licensee cannot retain trademark rights upon rejection of the trademark agreement by the licensor.[xix] For example, in Lubrizol Enterprises v. Richmond Metal Finishers, Inc.,[xx] the Fourth Circuit held that the licensee only has rights to damages once the debtor rejects the trademark license agreement.[xxi] In so holding, the Fourth Circuit relied on the legislative history of section 365, concluding that Congress intended for damages to be the exclusive remedy for a licensee in the event that the licensor rejects the trademark license agreement.[xxii] In particular, because the legislative history does not mention specific performance as a remedy for the licensee in section 365, the Fourth Circuit concluded that it would run contrary to the statute to allow the licensee’s rights to continue beyond the termination of the contract.[xxiii] Recently, however, most courts have treated the rejection of trademark license agreements similarly to the rejection of other intellectual property licenses, which does not necessarily terminate all of the licensee’s rights under section 365(n).[xxiv] For example, in Sunbeam Products v. Chicago American Manufacturing., LLC,[xxv] the Seventh Circuit held that “a licensor’s breach does not terminate a licensee’s right to use intellectual property” based on the plain language of section 365.[xxvi] The Seventh Circuit noted that a licensor’s breach of contract, outside of the bankruptcy context, does not terminate the licensee’s right to use the intellectual property.[xxvii] Therefore, the Seventh Circuit concluded that the effect of classifying rejection of a trademark license agreement as a “breach” is that the nonbreaching party’s rights do not terminate as a matter of law.[xxviii] The Eighth Circuit, however, declined to weigh in on this split because the issue did not present itself in Interstate Bakeries since the trademark license agreement there was not executory and could not be rejected.
The Interstate Bakeries decision is likely more important for what it does not state rather than for what it does. In particular, the Eighth Circuit declined to weigh in on either side of the current circuit split over the effect of the rejection of a trademark license agreement. Although the recent trend is to allow the licensee’s rights in intellectual property to continue after a debtor rejects a trademark license agreement, a court in the Eight Circuit may still choose to follow the traditional view of terminating a licensee’s rights upon rejection. Moreover, it is unclear whether other courts outside the Eight Circuit will avoid addressing the issue altogether by similarly finding that a trademark license agreement executed in connection with an asset purchase agreement constitutes a part of a single, integrated contract that is not executory because it has been substantially performed by parties. However, the Innovation Act, passed in the House of Representatives on December 5, 2013, may bring trademark license agreements within the scope of section 365(n)’s protection.[xxix] The Innovation Act amends section 365 of the Bankruptcy Code to include trademarks within the definition of intellectual property.[xxx] Although the amendment still needs to be passed by the Senate and signed by the President, the Innovation Act may encourage courts to continue the recent trend of treating rejected trademark licenses in the same way as any other rejected intellectual property license under section 365(n).
[i] Lewis Bros. Bakeries Inc. v. Interstate Brands Corp. (In re Interstate Bakeries Corp.), 751 F.3d 955 (8th Cir. 2014).
[ii] Id. at 963.
[iii] Id. at 964 n.2. “Because the agreement is not executory, we need not address whether rejection of a trademark-licensing agreement terminates the licensee’s rights to use the trademark.” Id.
[iv] Id. at 958; see also United States v. Interstate Bakeries Corp., No. 95 C 4194, 1996 U.S. Dist. LEXIS 19734, at *7 (N.D. Ill. Jan. 9, 1996).
[v] In re Interstate Bakeries, 751 F.3d at 958.
[vi] Id. at 959. See In re Interstate Bakeries Corp., No. 04-45814, 2010 Bankr. LEXIS 2332142 (Bankr. W.D. Mo. June 4, 2010).
[vii] In re Interstate Bakeries, 751 F.3d at 959.
[viii] Id.
[ix] Id. at 958.
[x] Id.
[xi] 11 U.S.C. § 365(a); see In re Interstate Bakeries, 751 F.3d at 961.
[xii] Some courts adopt the functional approach to determining whether a contract is executory. See 3 Collier on Bankruptcy, ¶ 365.02 [2] [a] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2014). Under the functional approach, the inquiry is into whether the debtor has unperformed duties that the trustee may elect to perform or breach, depending upon which will result in the best value for the estate. See id.
[xiii] In re Interstate Bakeries, 751 F.3d at 962; Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1973).
[xiv] In re Interstate Bakeries, 751 F.3d at 962.
[xv] Id. at 963.
[xvi] Id.
[xvii] Id. at 964 n.2. Although the Bankruptcy Code discusses the rejection of copyright, patent, and trade secret agreements, it does not address the rejection of trademark agreements. Peter M. Gilhuly, Kimberly A. Posin & Ted A. Dillman, Intellectually Bankrupt?: The Comprehensive Guide to Navigating IP Issues in Chapter 11, 21 Am. Bankr. Inst. L. Rev. 1, 34 (2013); see 11 U.S.C. § 365(n).
[xviii] In re Interstate Bakeries, 751 F.3d at 964 n.2.
[xix] Id. at 964 n.2.
[xx] Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985).
[xxi] Id. at 1048.
[xxii] Id.
[xxiii] Id.
[xxiv] See 11 U.S.C. § 365; In re Interstate Bakeries, 751 F.3d at 964 n.2.
[xxv] Sunbeam Prods. v. Chi. Am. Mfg., LLC, 686 F.3d 372 (7th Cir. 2012).
[xxvi] Id. at 376.
[xxvii] Id.
[xxviii] Id. at 377.
[xxix] See H.R. Rep. No. 113-279, at 64 (2013); see generally H.R. 3309.
[xxx] See H.R. 3309 § 6(d).