• Trademark Licensees Beware: Bankruptcy of the Trademark Owner May Affect Your Rights in Unexpected Ways
  • January 12, 2013 | Authors: David B. Cupar; Matthew A. Salerno
  • Law Firm: McDonald Hopkins LLC - Cleveland Office
  • If a trademark owner grants you a license to use a trademark on your products, and that owner enters bankruptcy and rejects your license, can you still use that trademark? Surprisingly, the answer can depend on the location where the trademark owner filed the bankruptcy. If the bankrupt trademark owner files in Illinois, Indiana or Wisconsin the answer appears to be that you can continue to use that trademark in your business. If, however, the bankrupt owner files in Maryland, North Carolina, South Carolina, Virginia, or West Virginia, then the answer appears to be the opposite. You likely need to stop using that trademark once the bankrupt trademark owner rejects your license.

    If you live in any other states, there appears to be an open issue on whether or not you have a continued right to do business with that trademark. This inconsistency came to a head on December 10, 2012 when the Supreme Court of the United States declined to hear and lost an opportunity to address, a split among circuit courts on this issue.

    The Bankruptcy Code generally allows the bankrupt entity to “reject” contracts to which it is a party. By rejecting contracts, bankrupt entities can provide themselves significant leverage in getting out of contracts that adversely affect their business. This can adversely affect the rights of the party in the agreement with that bankrupt entity.

    There is, however, an important exception to that rule-contracts involving patent and copyright licenses. The Bankruptcy Code allows patent and copyright licensees to elect to continue using that intellectual property after rejection if the licensee waives certain bankruptcy rights, such as any setoff rights as well as its right to any administrative claims, which are significant.

    However, the Bankruptcy Code’s definition for “intellectual property” is silent about whether it includes trademarks. Thus, assuming the Code’s intellectual property definition does not include “trademarks,” a licensee seeking to retain its trademark rights is out of luck. If their licensor files for bankruptcy, they stand to lose their entire investment.

    The dilemma for licensees began in 1984 when the Fourth Circuit held the rejection of a license in bankruptcy means that the licensee loses the ability to use the licensed intellectual property. Of course, from a licensee’s perspective, the problem with the decision is that a licensee could spend years and significant money developing and marketing a new product based on the license, but then lose those rights and the investment.

    In disagreeing with the Fourth Circuit, the Seventh Circuit recently concluded that, not withstanding the rejection of a trademark license agreement in bankruptcy, a licensee could continue its use of a licensed mark. The trademark owner petitioned the Supreme Court to resolve this inconsistency, which the Supreme Court denied. Based on this inconsistency, and the Supreme Court’s refusal to resolve it, the stakes are higher than ever for parties entering into or in trademark license agreements to understand their rights-and potential liabilities-in licensing trademarks from an entity that may end up in bankruptcy.