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What Happens to Someone’s License to Use a Trademark When the Trademark Owner Goes Bankrupt?

Robert & Mihaela Vicol [Public domain], via publicphoto.orgOur bankruptcy system has found ways to deal with most types of assets, debts, and other interests, through both the federal Bankruptcy Code and the caselaw developed in the bankruptcy courts. Somehow, trademark rights have fallen through the cracks, but a recent bankruptcy court decision, In re Crumbs Bake Shop, Inc., No. 14-24287, mem. decision (Bankr. D.N.J., Oct. 31, 2014), provides some clarity. This sort of issue largely pertains to business bankruptcies, but individuals may occasionally deal with trademark rights in various ways. See, e.g., In re First Draft, Inc., 76 U.S.P.Q.2d 1183 (T.T.A.B. 2005).

“Intellectual property” (IP) is a broad legal term that addresses ownership and usage of creative works. Copyright law covers creative works, like songs, books, and pictures. Patent law covers inventions. Trademark law applies to names, brands, and logos used to identify a company, product, or service. The creator of a work may register it with the government to obtain the relevant type of IP protection. It may then sell those rights to others, or license others to use a particular work. An owner who licenses the right to use a trademark is known as the “licensor,” and the party that obtains usage rights is the “licensee.”

The Bankruptcy Code gives a court-appointed trustee wide discretion to accept or reject certain contractual obligations on a debtor’s behalf. When a licensor files for bankruptcy, the Code specifically gives IP licensees the right to continue exercising their rights, even if the trustee rejects their contract with the debtor. 11 U.S.C. § 365(n). Rejection of the contract by the trustee does not terminate the license, but rather gives the licensee the option of terminating it or finishing the term of the license. See In re American Suzuki Motor Corp., 494 B.R. 466, 482 n. 7 (Bankr. C.D. Cal. 2013). Oddly, however, the Bankruptcy Code’s definition of “intellectual property” omits trademarks, 11 U.S.C. § 101(35A), so the effect of a trustee’s rejection of a trademark license has remained unclear.

The debtor in Crumbs Bake Shop sold baked goods and beverages through retail stores and catering services, online sales, and wholesale distribution. It licensed its brand name to third parties to enable them to sell its products, and it entered into a representation agreement with a “brand licensing” company to procure additional licensing opportunities. Crumbs Bake Shop, mem. dec. at 3. The company filed for bankruptcy in July 2014. Since it filed under Chapter 11, it was able to act in the capacity of trustee. It entered into an agreement to sell its assets, including all trademark rights, to a third party. See 11 U.S.C. §§ 363(b), (f).

After the court approved the asset sale, the debtor moved to reject the existing trademark licenses under § 365. The brand licensing company objected, asserting its right to retain the license under § 365(n). The court held that, even though the Bankruptcy Code does not specifically mention trademarks, the rights provided by § 365(n) apply. It further held that the asset sale did not extinguish the licensee’s rights, and that the debtor, as licensor, is still entitled to collect royalties under the original license agreement.

Bankruptcy lawyer Devin Sawdayi has guided Los Angeles individuals and families through the Chapter 7 and Chapter 13 bankruptcy processes since 1997. To schedule a free and confidential consultation with an experienced and knowledgeable advocate, contact us today online or at (310) 475-9399.

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How Bankruptcy Might Help with Some California License Suspensions, Los Angeles Bankruptcy Lawyer Blawg, October 6, 2014

Photo credit: Robert & Mihaela Vicol [Public domain], via publicphoto.org.