Although the U.S. Supreme Court has taken up a number of high profile intellectual property issue this term, it recently announced that it will not consider the status of trademarks during bankruptcy. The specific issue before the Court was whether a trademark licensee retains the ability to use a debtor’s trademarks after the contract is rejected in bankruptcy.
Many were hoping that the Supreme Court would resolve a split of authority between the 4th and 7th Circuit Court of Appeals regarding what happens to IP licenses that are rejected during bankruptcy. In Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985), the 4th Circuit determined that when an intellectual property license is rejected in bankruptcy, the licensee loses the ability to use licensed IP rights.
Displeased with the ruling, Congress amended the Bankruptcy Code in 1988 to expressly allow licensees to continue using IP after rejection (provided its meets certain conditions). However, trademarks were not included in the definition of intellectual property, leaving much ambiguity regarding whether the rejection of an IP license ends the licensee’s right to use trademarks.
In Sunbeam Products Inc. v. Chicago American Manufacturing, the 7th Circuit rejected Lubrizol. It concluded that the rejection of a license during bankruptcy constitutes a breach of such contract. The court reasoned that a licensor’s breach does not generally terminate a licensee’s right to use intellectual property and, therefore, the same should apply in bankruptcy. As the court explained:
What §365(g) does by classifying rejection as breach is establish that in bankruptcy, as outside of it, the other party’s rights remain in place. After rejecting a contract, a debtor is not subject to an order of specific performance. [. . . ] The debtor’s unfulfilled obligations are converted to damages; when a debtor does not assume the contract before rejecting it, these damages are treated as a pre-petition obligation, which may be written down in common with other debts of the same class. But nothing about this process implies that any rights of the other contracting party have been vaporized.
In refusing to grant certiorari, the 7th Circuit’s decision remains intact. Although some ambiguity still remains, the decision has undoubtedly strengthened the IP protections available during bankruptcy.