Debtors Cannot Assume or Assign Trademark License Without Licensor's Consent

Trademark rights are governed by the Lanham Act, plus statutes and state common law. Trademark law protects the trademark owner's rights and also protects the public from deception by identifying and distinguishing one company's products from another. See, eg, Gorenstein Enters., Inc. v. Quality Care-USA, Inc., 874 F.2d 431, 435 (7th Cir. 1989). Trademarks are not government grants, in contrast to patents and copyrights, but rather a means to help customers distinguish products in the marketplace by preventing deception and confusion as to source.

Trademark Licensing

A trademark owner can license its trademark. The Lanham Act codified the existing common law by providing that a trademark registration is not invalidated when the mark is used by a 'related company.' See 15 U.S.C. ' 1055. The Lanham Act defines a related company as 'any person whose use of a mark is controlled by the owner of the mark with respect to the nature and quality of the goods or services on or in connection with which the mark is used.' See 15 U.S.C. ' 1127. A trademark licensee 'acquires only the right to a limited use of the trademark and the control, right and title to the product remains in the licensor.' See Denison Mattress Factory v. Spring-Air Co., 308 F.2d 403, 409 (5th Cir. 1962). Thus, a trademark licensee has only a personal interest, but not a property interest in the licensed trademark. J. Thomas McCarthy, 2 McCarthy on Trademarks and Unfair Competition, ' 18:52 at 18-93.

Licensor's Duty to Exercise Complete Quality Control

Trademark law protects consumers' perception of the mark. Therefore, the trademark owner must all times exercise full control over the nature and quality of the goods sold by the licensee under the mark. If control is lacking, the owner may lose its rights in the mark. See, eg, Kentucky Fried Chicken Corp. v. Diversified Packaging Corp., 549 F.2d 368, 387 (5th Cir. 1977) ('If a trademark owner allows licensees to depart from its quality standards, the public will be misled, and the trademark will cease to have utility as an informational device. A trademark owner who allows this to occur loses its right to use the mark'). Franchised Stores of New York, Inc. v. Winter, 394 F.2d 664, 668 (2d Cir. 1968) ('[T]he trademark owner's ability to grant licenses is restricted by the fact that failure on his part to control his licensees may result in the cancellation of the mark').

Licensor's Duty and Exclusive Right to Choose the Licensee

The unfettered right to select a licensee is a fundamental part of an owner's power to control the quality of goods bearing its mark. As the leading commentator on trademark law explains, '[s]ince the licensor-trademark owner has the duty to control the quality of goods sold under its mark, it must have the right to pass upon the abilities of new potential licensees.' 4 McCarthy on Trademarks, ' 5:33 at 25-72 to 25-73; see also Miller, 318 F. Supp. 2d at 937 ('[I]f a trademark licensee could unilaterally sub-license a mark without notifying or obtaining consent from the licensor, then a trademark licensor would lose his ability to police his mark.'); Tap Publ'n, 925 F. Supp. at 218 (”[S]ince the licensor-trademark owner has the duty to control the quality of goods sold under its mark, it must have the right to pass upon the abilities of new potential licensees.”) (quoting 3 McCarthy on Trademarks, ' 25:07[2] (3d ed. 1996)). Thus, forcing a trademark owner to accept a stranger or, worse yet, a competitor or other hostile party, as licensee is contrary to fundamental trademark principles.

Framework for Reorganization Analysis

A Chapter 11 debtor in possession (DIP) can, with court approval, generally assume or reject executory contracts under 11 U.S.C. ' 365(a), and once assumed, a DIP can assign an executory contract under 11 U.S.C. ' 365(f)(2). A DIP can also ordinarily assign executory contracts even if the contract prohibits or restricts assignment. See 11 U.S.C. ' 365(f)(1). The exception to this rule is set forth in section 365(c)(1), which provides that the DIP may not 'assume or assign' any executory contract without consent of the non-debtor if (i) 'applicable law' excuses the non-debtor 'from accepting performance from or rendering performance' to a third party and (ii) the non-debtor 'does not consent' to the 'assumption or assignment.'

The Third, Fourth, Fifth and Ninth Circuits have adopted the so-called 'hypothetical test,' which provides that when non-bankruptcy law precludes assignment of an executory contract without consent, the plain language of ' 365(c)(1) also bars assumption without consent from the non-debtor. See West Elecs., 852 F.2d 83 (3d Cir. 1988) (2-1) (held, DIP could not assume government contract when applicable federal law prohibited assignment of contract without government's consent); RCI Tech. Corp. v. Sunterra Corp. (In re Sunterra Corp.), 361 F.3d 257, 271 (4th Cir. 2004) (prohibiting DIP's assumption of copyright license when applicable copyright law precluded assignment without licensor's consent); Perlman v. Catapult Entm't, Inc. (In re Catapult Entm't, Inc.), 165 F.3d 747, 750 (9th Cir. 1999) (prohibiting assumption of patent license when applicable patent law precluded assignment without licensor's consent); Turner v. Avery, 947 F.2d 772, 774 (5^th Cir. 1991) ('An executory contract is nonassumable if, under applicable law, any party other than the debtor may decline to accept performance by the trustee.'). Contra, Institut Pasteur v. Cambridge Biotech Corp., 104 F.3d 489, 494 (1st Cir. 1997) (rejecting hypothetical test and instead applying a 'case-by-case inquiry into whether the nondebtor party ' actually was being 'forced to accept performance under its executory contract from someone other than the debtor party with whom it originally contracted”).

Trademark Law Is 'Applicable Law'

Federal trademark law constitutes 'applicable law' under section 365(c)(1). See In re N.C.P. Marketing Group, Inc., at * 3 ('parties do not dispute the proposition that ' trademark law is 'applicable federal law' for purposes of section 365(c)(1)'). See also Sunterra Corp., 361 F.3d at 262 n.7 (applying copyright law); Perlman v. Catapult Entm't, Inc. (In re Catapult Entm't, Inc.), 165 F.3d 747, 750 (9th Cir. 1999) ('Federal patent law constitutes 'applicable law' within the meaning of ' 365(c)'); In re Golden Books Family Entm't, Inc., 269 B.R. 300, 310 (Bankr. D. Del. 2001) (applying copyright law).

Trademark Licenses Are Not Freely Assignable

A trademark owner should not be forced to accept performance from a licensee not of its own selection. Courts and commentators have observed that: 1) the interests of a trademark licensee are personal to the licensee; 2) a trademark licensee only has permission to use the mark and acquires no ownership rights in the mark itself; 3) trademark owners have the right and duty to control the quality of goods bearing their marks; and 4) the unfettered right to select a licensee is a fundamental part of an owner's power to control the quality of goods bearing its mark. See Blanks v. N.C.P. Marketing Group, Inc. (In re N.C.P. Marketing Group, Inc.), 2005 WL 3253268, * 5 (D. Nev. Nov. 21, 2005) (held, debtor licensee could not assume or assign non-exclusive trademark license absent licensor's consent because 'under applicable trademark law, trademarks are personal and non-assignable without the consent of the licensor.'); Miller v. Glenn Miller Prods., 318 F. Supp. 2d 923, 938 (C.D. Cal. 2004) (held, non-exclusive trademark licensee cannot sublicense without consent of original licensor); Travelot, 286 B.R. at 455 (noting that a non-exclusive trademark license is personal to licensee and cannot be freely assigned to a third party); Tap Publ'n, Inc. v. Chinese Yellow Pages (New York) Inc., 925 F. Supp. 212, 218 (S.D.N.Y. 1996) (held, exclusive trademark license was personal to licensee and not assignable without licensor's consent); Delta Tire Corp. v. Marion, 159 U.S.P.Q. 601, 603 (C.D. Cal. 1968) (finding that licensee was only authorized to use trademark in connection with sale of certain product and had no authority to assign or license trademark rights to third party; thus any such assignment would not be effective as against licensor/trademark owner); McCullough v. Dairy Queen of Michigan, 121 U.S.P.Q. 302, 303 (W.D. Mich. 1959) (court invalidated licensee's assignment without trademark owner's consent; license was 'a personal contract which could not be assigned without [licensor's] consent ' '); J. Thomas McCarthy, 4 McCarthy on Trademarks and Unfair Competition ('McCarthy on Trade-marks'), ' 25:33 at 25-72 to 25-73 (4th ed. 2004) ('[W]hile the case law is sparse, it appears to be the rule that unless the license states otherwise, a licensed mark is personal and cannot be assigned'); Louis Altman, 3 Callmann on Unfair Competition, Trademarks and Monopolies, ' 20:54 at 20-491 to 20-492 (4th ed. 1998) ('A [trademark] licensee may not assign his contract rights without the consent of the licensor. Such an assignment being void, the assignee acquires nothing').

In re Rooster, Inc., 100 B.R. 228 (Bankr. E.D. Pa. 1989) is often cited for the proposition that trademark licenses are assignable by a debtor/licensee. The Rooster court specifically stated that the issue before it was 'narrowly framed by the parties: does the licensing agreement constitute a contract for personal services, which applicable Pennsylvania law holds as unassignable?' Id. at 232. Rooster neither applied nor addressed federal trademark law.

Exclusive v. Non-Exclusive Distinction Is Irrelevant

A 'copyright' is a property right in an original work of authorship. See 17 U.S.C. ' 102. The federal government grants the author a monopoly in the form of a bundle of exclusive rights, including the right to exclude others from reproducing the work, adapting it, distributing it to the public, performing it, or displaying it in public. See 17 U.S.C. ' 106(1)-(6). The copyright owner can license to third parties any of its exclusive statutory rights. See 17 U.S.C. ' 201(d). Some courts reviewing copyright licenses hold that a licensor's consent to assignment is not required when the licensee has an exclusive license. But this distinction should not apply to trademark licenses.

The Copyright Act specifically distinguishes between exclusive and non-exclusive licenses. A 'transfer of copyright ownership' includes the grant of an exclusive license, but not a non-exclusive license. See 17 U.S.C. ' 101. Additionally, an exclusive licensee is entitled to all the rights and protections of the copyright owner to the extent of the license. See 17 U.S.C. ' 201(d)(2). By contrast, the non-exclusive licensee does not transfer any ownership rights; ownership remains in the licensor. Because '[o]wnership is the sine qua non of the right to transfer,' an exclusive licensee can assign its ownership interest without the consent of the licensor. In re Patient Educ. Media, Inc., 210 B.R. 237, 240 (Bankr. S.D.N.Y. 1997). Cf. Gardner v. Nike, Inc., 279 F.3d 774, 780 (9th Cir. 2002) (exclusive licensee does not have right to assign absent licensor's consent; exclusive license confers upon licensee only the 'protections and remedies' of a copyright owner).

The copyright analysis is inapplicable to trademarks for at least three reasons. First, trademark owners (unlike copyright owners) have an absolute duty and right to control the quality of products bearing their trademarks, regardless of whether the license is exclusive or non-exclusive. Second, there are no statutory provisions in the Lanham Act (unlike the Copyright Act) granting exclusive licensees an ownership interest in the trademark. Finally, the Lanham Act (unlike the Copyright Act) expressly permits the registrant to sue infringers. Compare 15 U.S.C. ' 1114 (granting trademark 'registrant' enforcement rights) with 17 U.S.C.
' 201(d)(2) (granting exclusive copyright licensee ' as owner ' enforcement rights). (Note: Unlike copyright cases, there is no line of authority distinguishing the rights of exclusive and non-exclusive patent licensees. The vast majority of reported decisions involve non-exclusive patent licenses, but courts require licensor consent for assignments of both exclusive and non-exclusive licenses. Compare Catapult Entm't, 165 F.3d at 752 n.4 (requiring consent for assignment of non-exclusive patent license) and In re Hernandez, 285 B.R. 435, 439-40 (Bankr. D. Arizona 2002) (exclusive patent license is unassignable without consent).)

Licensor Consent

Despite the prohibitions on assignment in trademark law, a licensee can waive those rights by consenting to assignment. Disputes often arise as to whether the licensor has, in fact, consented to the assignment under the terms of the licensee. To the extent that the debtor seeks to assign the trademark license consistent with contractual provisions, a licensor is not excused by 'applicable law' from self-imposed contractual obligations. When properly framed, the issue is whether the licensor has waived its rights under trademark law to control the identity of its licensee. Courts have found consent when the license permits the licensee to assign the trademark license freely to a buyer of substantially all of the licensee's assets (see In re Quantegy, Inc., Case No. 05-80042 (DHW), (Bankr. M.D. Ala. 2005), but have found no consent when the licensor merely permitted the licensee to assign the license freely to corporate affiliates within the licensee's control group. See Hernandez, 285 B.R. at 441.

Some courts (including the Fourth Circuit) have held that a limited consent provision to assignment applies to assignment only, but not to assumption: 'assumption and assignment describe two conceptually different events.' RCI Tech. Corp. v. Sunterra Corp. (In re Sunterra Corp.), 361 F.3d 257, 271 (4^th Cir. 2004) (quoting Catapult Entm't, 165 F.3d at 752). Accordingly, even if licensor had contractually pre-consented to assignment, that consent does not include assumption. This is an important distinction for cases in jurisdictions following the 'hypothetical test' used in the Third, Fourth, Fifth and Ninth Circuits.

Conclusion

A trademark licensee who cannot assume or assign a vital license will likely cease to be a viable going concern, impairing creditor recoveries. Trademark licensees should consider, therefore, whether Chapter 11 reorganization is a viable option. Lenders, too, should consider the value of their collateral if it includes a trademark license. The risk of disappearing collateral is real.

Michael L. Cook, a member of this newsletter's Board of Editors, and David M. Hillman are partners in the Business Reorganization Group at Schulte Roth & Zabel LLP, where they represent secured and unsecured creditors, debtors, directors, licensors and other parties in Chapter 11 cases.

Trademarks serve as symbols of good will and are a valuable asset of the business associated with the mark. Not surprisingly, trademark licenses typically require the licensor's consent for assignments, because licensors want the right to pass on the abilities of new potential licensees. In the event of bankruptcy filing by the licensee, the contractual restriction on assignment is ordinarily unenforceable. See 11 U.S.C. ' 365(f)(1). Bankruptcy Code ' 365(c)(1), however, provides an exception to this general rule: a debtor may not 'assume or assign' any executory contract without consent of the non-debtor if 'applicable law' provides that the non-debtor can refuse to accept performance from a third party.

The district court in Blanks v. N.C.P. Marketing Group, Inc. (In re N.C.P. Marketing Group, Inc.), 2005 WL 3253268 (D. Nev. Nov. 21, 2005) held that a trademark license is 'personal and non-assignable' under applicable trademark law, and cannot be assumed or assigned by the Chapter 11 debtor licensee without the licensor's consent. Affirming the bankruptcy court, the district court said that it was ruling on a matter of 'first impression' in the bankruptcy context. The ruling is consistent, however, with non-bankruptcy trademark law. See, eg, Miller v. Glenn Miller Prods ., 318 F. Supp. 2d 923, 938 (C.D. Cal. 2004) ( held , non-exclusive trademark licensee cannot sublicense without consent of original licensor); Tap Publ'n, Inc. v. Chinese Yellow Pages (New York) Inc. , 925 F. Supp. 212, 218 (S.D.N.Y. 1996) ( held , exclusive trademark license was personal to licensee and not assignable without licensor's consent). We review here fundamental principles of trademark law to show why trademark licenses are non-assignable (and, in some circuits, non-assumable) by licensees absent licensor consent.

The Nature of Trademarks

Trademark rights are governed by the Lanham Act, plus statutes and state common law. Trademark law protects the trademark owner's rights and also protects the public from deception by identifying and distinguishing one company's products from another. See, eg, Gorenstein Enters., Inc. v. Quality Care-USA, Inc. , 874 F.2d 431, 435 (7th Cir. 1989). Trademarks are not government grants, in contrast to patents and copyrights, but rather a means to help customers distinguish products in the marketplace by preventing deception and confusion as to source.

Trademark Licensing

A trademark owner can license its trademark. The Lanham Act codified the existing common law by providing that a trademark registration is not invalidated when the mark is used by a 'related company.' See 15 U.S.C. ' 1055. The Lanham Act defines a related company as 'any person whose use of a mark is controlled by the owner of the mark with respect to the nature and quality of the goods or services on or in connection with which the mark is used.' See 15 U.S.C. ' 1127. A trademark licensee 'acquires only the right to a limited use of the trademark and the control, right and title to the product remains in the licensor.' See Denison Mattress Factory v. Spring-Air Co. , 308 F.2d 403, 409 (5th Cir. 1962). Thus, a trademark licensee has only a personal interest, but not a property interest in the licensed trademark. J. Thomas McCarthy, 2 McCarthy on Trademarks and Unfair Competition, ' 18:52 at 18-93.

Licensor's Duty to Exercise Complete Quality Control

Trademark law protects consumers' perception of the mark. Therefore, the trademark owner must all times exercise full control over the nature and quality of the goods sold by the licensee under the mark. If control is lacking, the owner may lose its rights in the mark. See, eg , Kentucky Fried Chicken Corp. v. Diversified Packaging Corp . , 549 F.2d 368, 387 (5th Cir. 1977) ('If a trademark owner allows licensees to depart from its quality standards, the public will be misled, and the trademark will cease to have utility as an informational device. A trademark owner who allows this to occur loses its right to use the mark'). Franchised Stores of New York, Inc. v. Winter , 394 F.2d 664, 668 (2d Cir. 1968) ('[T]he trademark owner's ability to grant licenses is restricted by the fact that failure on his part to control his licensees may result in the cancellation of the mark').

Licensor's Duty and Exclusive Right to Choose the Licensee

The unfettered right to select a licensee is a fundamental part of an owner's power to control the quality of goods bearing its mark. As the leading commentator on trademark law explains, '[s]ince the licensor-trademark owner has the duty to control the quality of goods sold under its mark, it must have the right to pass upon the abilities of new potential licensees.' 4 McCarthy on Trademarks, ' 5:33 at 25-72 to 25-73; see also Miller, 318 F. Supp. 2d at 937 ('[I]f a trademark licensee could unilaterally sub-license a mark without notifying or obtaining consent from the licensor, then a trademark licensor would lose his ability to police his mark.'); Tap Publ'n, 925 F. Supp. at 218 (”[S]ince the licensor-trademark owner has the duty to control the quality of goods sold under its mark, it must have the right to pass upon the abilities of new potential licensees.”) (quoting 3 McCarthy on Trademarks, ' 25:07[2] (3d ed. 1996)). Thus, forcing a trademark owner to accept a stranger or, worse yet, a competitor or other hostile party, as licensee is contrary to fundamental trademark principles.

Framework for Reorganization Analysis

A Chapter 11 debtor in possession (DIP) can, with court approval, generally assume or reject executory contracts under 11 U.S.C. ' 365(a), and once assumed, a DIP can assign an executory contract under 11 U.S.C. ' 365(f)(2). A DIP can also ordinarily assign executory contracts even if the contract prohibits or restricts assignment. See 11 U.S.C. ' 365(f)(1). The exception to this rule is set forth in section 365(c)(1), which provides that the DIP may not 'assume or assign' any executory contract without consent of the non-debtor if (i) 'applicable law' excuses the non-debtor 'from accepting performance from or rendering performance' to a third party and (ii) the non-debtor 'does not consent' to the 'assumption or assignment.'

The Third, Fourth, Fifth and Ninth Circuits have adopted the so-called 'hypothetical test,' which provides that when non-bankruptcy law precludes assignment of an executory contract without consent, the plain language of ' 365(c)(1) also bars assumption without consent from the non-debtor. See West Elecs., 852 F.2d 83 (3d Cir. 1988) (2-1) (held, DIP could not assume government contract when applicable federal law prohibited assignment of contract without government's consent); RCI Tech. Corp. v. Sunterra Corp. (In re Sunterra Corp.), 361 F.3d 257, 271 (4th Cir. 2004) (prohibiting DIP's assumption of copyright license when applicable copyright law precluded assignment without licensor's consent); Perlman v. Catapult Entm't, Inc. (In re Catapult Entm't, Inc.), 165 F.3d 747, 750 (9th Cir. 1999) (prohibiting assumption of patent license when applicable patent law precluded assignment without licensor's consent); Turner v. Avery , 947 F.2d 772, 774 (5 th Cir. 1991) ('An executory contract is nonassumable if, under applicable law, any party other than the debtor may decline to accept performance by the trustee.'). Contra , Institut Pasteur v. Cambridge Biotech Corp., 104 F.3d 489, 494 (1st Cir. 1997) (rejecting hypothetical test and instead applying a 'case-by-case inquiry into whether the nondebtor party ' actually was being 'forced to accept performance under its executory contract from someone other than the debtor party with whom it originally contracted”).

Trademark Law Is 'Applicable Law'

Federal trademark law constitutes 'applicable law' under section 365(c)(1). See In re N.C.P. Marketing Group, Inc., at * 3 ('parties do not dispute the proposition that ' trademark law is 'applicable federal law' for purposes of section 365(c)(1)'). See also Sunterra Corp., 361 F.3d at 262 n.7 (applying copyright law); Perlman v. Catapult Entm't, Inc. (In re Catapult Entm't, Inc.), 165 F.3d 747, 750 (9th Cir. 1999) ('Federal patent law constitutes 'applicable law' within the meaning of ' 365(c)'); In re Golden Books Family Entm't, Inc., 269 B.R. 300, 310 (Bankr. D. Del. 2001) (applying copyright law).

Trademark Licenses Are Not Freely Assignable

A trademark owner should not be forced to accept performance from a licensee not of its own selection. Courts and commentators have observed that: 1) the interests of a trademark licensee are personal to the licensee; 2) a trademark licensee only has permission to use the mark and acquires no ownership rights in the mark itself; 3) trademark owners have the right and duty to control the quality of goods bearing their marks; and 4) the unfettered right to select a licensee is a fundamental part of an owner's power to control the quality of goods bearing its mark. See Blanks v. N.C.P. Marketing Group, Inc. (In re N.C.P. Marketing Group, Inc.), 2005 WL 3253268, * 5 (D. Nev. Nov. 21, 2005) (held, debtor licensee could not assume or assign non-exclusive trademark license absent licensor's consent because 'under applicable trademark law, trademarks are personal and non-assignable without the consent of the licensor.'); Miller v. Glenn Miller Prods. , 318 F. Supp. 2d 923, 938 (C.D. Cal. 2004) ( held , non-exclusive trademark licensee cannot sublicense without consent of original licensor); Travelot, 286 B.R. at 455 (noting that a non-exclusive trademark license is personal to licensee and cannot be freely assigned to a third party); Tap Publ'n, Inc. v. Chinese Yellow Pages (New York) Inc ., 925 F. Supp. 212, 218 (S.D.N.Y. 1996) ( held , exclusive trademark license was personal to licensee and not assignable without licensor's consent); Delta Tire Corp. v. Marion , 159 U.S.P.Q. 601, 603 (C.D. Cal. 1968) (finding that licensee was only authorized to use trademark in connection with sale of certain product and had no authority to assign or license trademark rights to third party; thus any such assignment would not be effective as against licensor/trademark owner); McCullough v. Dairy Queen of Michigan , 121 U.S.P.Q. 302, 303 (W.D. Mich. 1959) (court invalidated licensee's assignment without trademark owner's consent; license was 'a personal contract which could not be assigned without [licensor's] consent ' '); J. Thomas McCarthy, 4 McCarthy on Trademarks and Unfair Competition ('McCarthy on Trade-marks'), ' 25:33 at 25-72 to 25-73 (4th ed. 2004) ('[W]hile the case law is sparse, it appears to be the rule that unless the license states otherwise, a licensed mark is personal and cannot be assigned'); Louis Altman, 3 Callmann on Unfair Competition, Trademarks and Monopolies, ' 20:54 at 20-491 to 20-492 (4th ed. 1998) ('A [trademark] licensee may not assign his contract rights without the consent of the licensor. Such an assignment being void, the assignee acquires nothing').

In re Rooster, Inc., 100 B.R. 228 (Bankr. E.D. Pa. 1989) is often cited for the proposition that trademark licenses are assignable by a debtor/licensee. The Rooster court specifically stated that the issue before it was 'narrowly framed by the parties: does the licensing agreement constitute a contract for personal services, which applicable Pennsylvania law holds as unassignable?' Id. at 232. Rooster neither applied nor addressed federal trademark law.

Exclusive v. Non-Exclusive Distinction Is Irrelevant

A 'copyright' is a property right in an original work of authorship. See 17 U.S.C. ' 102. The federal government grants the author a monopoly in the form of a bundle of exclusive rights, including the right to exclude others from reproducing the work, adapting it, distributing it to the public, performing it, or displaying it in public. See 17 U.S.C. ' 106(1)-(6). The copyright owner can license to third parties any of its exclusive statutory rights. See 17 U.S.C. ' 201(d). Some courts reviewing copyright licenses hold that a licensor's consent to assignment is not required when the licensee has an exclusive license. But this distinction should not apply to trademark licenses.

The Copyright Act specifically distinguishes between exclusive and non-exclusive licenses. A 'transfer of copyright ownership' includes the grant of an exclusive license, but not a non-exclusive license. See 17 U.S.C. ' 101. Additionally, an exclusive licensee is entitled to all the rights and protections of the copyright owner to the extent of the license. See 17 U.S.C. ' 201(d)(2). By contrast, the non-exclusive licensee does not transfer any ownership rights; ownership remains in the licensor. Because '[o]wnership is the sine qua non of the right to transfer,' an exclusive licensee can assign its ownership interest without the consent of the licensor. In re Patient Educ. Media, Inc., 210 B.R. 237, 240 (Bankr. S.D.N.Y. 1997). Cf. Gardner v. Nike, Inc. , 279 F.3d 774, 780 (9th Cir. 2002) (exclusive licensee does not have right to assign absent licensor's consent; exclusive license confers upon licensee only the 'protections and remedies' of a copyright owner).

The copyright analysis is inapplicable to trademarks for at least three reasons. First, trademark owners (unlike copyright owners) have an absolute duty and right to control the quality of products bearing their trademarks, regardless of whether the license is exclusive or non-exclusive. Second, there are no statutory provisions in the Lanham Act (unlike the Copyright Act) granting exclusive licensees an ownership interest in the trademark. Finally, the Lanham Act (unlike the Copyright Act) expressly permits the registrant to sue infringers. Compare 15 U.S.C. ' 1114 (granting trademark 'registrant' enforcement rights) with 17 U.S.C.
' 201(d)(2) (granting exclusive copyright licensee ' as owner ' enforcement rights). (Note: Unlike copyright cases, there is no line of authority distinguishing the rights of exclusive and non-exclusive patent licensees. The vast majority of reported decisions involve non-exclusive patent licenses, but courts require licensor consent for assignments of both exclusive and non-exclusive licenses. Compare Catapult Entm't, 165 F.3d at 752 n.4 (requiring consent for assignment of non-exclusive patent license) and In re Hernandez, 285 B.R. 435, 439-40 (Bankr. D. Arizona 2002) (exclusive patent license is unassignable without consent).)

Licensor Consent

Despite the prohibitions on assignment in trademark law, a licensee can waive those rights by consenting to assignment. Disputes often arise as to whether the licensor has, in fact, consented to the assignment under the terms of the licensee. To the extent that the debtor seeks to assign the trademark license consistent with contractual provisions, a licensor is not excused by 'applicable law' from self-imposed contractual obligations. When properly framed, the issue is whether the licensor has waived its rights under trademark law to control the identity of its licensee. Courts have found consent when the license permits the licensee to assign the trademark license freely to a buyer of substantially all of the licensee's assets (see In re Quantegy, Inc., Case No. 05-80042 (DHW), (Bankr. M.D. Ala. 2005), but have found no consent when the licensor merely permitted the licensee to assign the license freely to corporate affiliates within the licensee's control group. See Hernandez, 285 B.R. at 441.

Some courts (including the Fourth Circuit) have held that a limited consent provision to assignment applies to assignment only, but not to assumption: 'assumption and assignment describe two conceptually different events.' RCI Tech. Corp. v. Sunterra Corp. (In re Sunterra Corp.), 361 F.3d 257, 271 (4^th Cir. 2004) (quoting Catapult Entm't, 165 F.3d at 752). Accordingly, even if licensor had contractually pre-consented to assignment, that consent does not include assumption. This is an important distinction for cases in jurisdictions following the 'hypothetical test' used in the Third, Fourth, Fifth and Ninth Circuits.

Conclusion

A trademark licensee who cannot assume or assign a vital license will likely cease to be a viable going concern, impairing creditor recoveries. Trademark licensees should consider, therefore, whether Chapter 11 reorganization is a viable option. Lenders, too, should consider the value of their collateral if it includes a trademark license. The risk of disappearing collateral is real.

Michael L. Cook, a member of this newsletter's Board of Editors, and David M. Hillman are partners in the Business Reorganization Group at Schulte Roth & Zabel LLP, where they represent secured and unsecured creditors, debtors, directors, licensors and other parties in Chapter 11 cases.