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Seventh Circuit Protects Trademark Licensees in Bankruptcy Court
An executory contract is one where the material obligations of both parties have not yet been substantially performed. Section 365(a) of the Bankruptcy Code allows a bankruptcy trustee to reject the executory portion of contracts made with the debtor. In 1985, the Fourth Circuit concluded that when a trustee in bankruptcy rejects an executory intellectual property license, the licensee loses all rights to use the licensed patents, trademarks or copyrights. Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985). In 1988, Congress partly overruled that decision by adding ' 365(n) to the Bankruptcy Code. That provision permits a licensee to continue to use the licensed intellectual property (with certain conditions, such as paying royalties) after rejection by the trustee. However, ' 365(n) only covers patent, copyright and trade secret licenses, not trademark licenses. Some courts have inferred from that omission that Lubrizol still applies to trademark licenses, ending the licensee's rights when the license is rejected by the trustee.
The Seventh Circuit has now adopted the conflicting view that ' 365(n) does not affect trademark licenses in one way or another and that Lubrizol was incorrectly decided. Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, __ F.3d __ (7th Cir. 2012).
The problem arose when Lakewood Engineering & Manufacturing Co., a consumer products company, licensed the patents and trademarks for its unprofitable box fan business in 2008 to Chicago American Manufacturing, LLC (“CAM”) so that CAM could take over manufacturing and shipping the fans to Lakewood's customers. Lakewood estimated that it would need 1.2 million units for 2009. Because CAM was concerned about Lakewood's financial condition, the license permitted CAM to sell the fans made in 2009 to its own customers if Lakewood did not buy them.
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