Weathering the Storm: Sunbeam Sheds New Light on the Rights of Trademark Licensees

On July 9, 2012, the Seventh Circuit decided in Sunbeam¹ that the rejection of a trademark license by a bankrupt trademark licensor does not deprive the trademark licensee of its right to continue to use the trademark, and disagreed with the 1985 Fourth Circuit decision in Lubrizol² that held to the contrary.³ In reaction to the Lubrizol decision, which held that the rejection of a license by a bankrupt licensor of intellectual property terminated the rights of the licensee, Congress enacted Section 365(n) of the Bankruptcy Code, which allows the licensee to continue to use intellectual property after the rejection, provided the licensee meets certain conditions.

However, the definition of “intellectual property” in the Bankruptcy Code does not include trademarks, and some courts have inferred from that omission that Congress codified the ruling in Lubrizol by omission. The Sunbeam court disagreed, observing that the Senate committee report on the bill that included Section 365(n) noted that the omission was designed to allow more time for study, not to approve Lubrizol. Trademark law requires a degree of control by the licensor, and rejection of a license divests the debtor/licensor of the contractual obligation to control the use of the licensed mark.⁴ Thus, rejection of a trademark license creates different issues than those created by the rejection of a patent license or other forms of intellectual property. The court in Sunbeam agreed with Judge Thomas Ambro’s concurring opinion in the Exide case that Section 365(n) neither codifies nor disapproves of Lubrizol as applied to trademarks.

Section 365(g) of the Bankruptcy Code provides that the rejection of an executory contract constitutes a breach of the contract. Outside of bankruptcy, a licensor’s breach does not terminate a licensee’s right to use the licensed intellectual property, including trademarks. The Sunbeam court reasoned that a licensor’s breach could not have ended the licensee’s right to use the trademark any more than a borrower could end the lender’s right to collect just by declaring that the debt will not be paid. After rejecting a contract, a debtor is not subject to an order of specific performance. The debtor’s unfulfilled obligations are converted to a damage claim, but nothing about the bankruptcy rejection process implies that any rights of the other contracting party have been vaporized. Rejection is not the functional equivalent of rescission.

Lubrizol has been uniformly criticized by scholars and the holding in Sunbeam creates a conflict among the circuit courts. But the ruling in Sunbeam is sound, provides a greater degree of certainty to trademark licensees without depriving trademark owners of their rights, and should be adopted by future courts.

¹ Sunbeam Prods. v. Chi. Am. Mfg., LLC, 2012 U.S. App. LEXIS 13883 (7th Cir. Ill. July 9, 2012).

² Lubrizol Ent., Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985).

³ A debtor in possession or a trustee is allowed to assume or reject executory contracts, including trademark licenses, in accordance with the provisions of Section 365 of the Bankruptcy Code.

⁴ However, because the license is not automatically terminated by the rejection, the trademark licensor may still have some contractual or common law rights to control the use of the mark.

⁵ In re Exide Techs., 607 F.3d 957, 964 (3rd Cir. 2009).

⁶ Sunbeam Prods. v. Chi. Am. Mfg., LLC, 2012 U.S. App. LEXIS 13883 at *9.

⁷ Id. at *10