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Franchisor Wins IP Dispute
In bankruptcy, the debtor is entitled to reject (not perform) burdensome contracts. For franchise agreements that contain trademark licenses, the effects of rejection are decided on a case-by-case basis. Sometimes the licensees of the trademarks can continue to use the trademarks over the objection of the franchisor and sometimes not. This issue arose in the Crumbs Bake Shop case in connection with the sale of its assets.
The franchisees (called licensees) of baked goods retailer Crumbs Bake Shop Inc. can continue to use the Crumbs trademark and sell products under the Crumbs brand for the remainder of their licenses' terms, even though the retailer, acting as debtor-in-possession, had moved to reject the licenses following the court's approval of the sale of the business's assets, in In re Crumbs Bake Shop, No. 14-24287, Bankr. N.J. (Oct.31, 2014, Kaplan, M.). The licensees could elect, under 11 U.S.C. Section 365(n), to retain their rights under their respective licenses even though “trademarks” were not included in the Bankruptcy Code definition of “intellectual property.” In addition, sale of the retailer's assets pursuant to 11 U.S.C. Sections 363(b) and (f) did not affect the rights of third-party licensees under Section 365(n). The court held royalties generated as a result of this use were payable to the retailer, because the agreements themselves had not been assumed, assigned, or rejected, and thus continued to be the retailer's property.
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