By: Kathryn Swimm
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
In a case of first impression, the Seventh Circuit in Sunbeam Products, Inc. v. Chicago American Manufacturing held that a trademark licensee is entitled to the contracted-for rights to that trademark even after a chapter 7 trustee rejects the trademark license as an executory contract.[1] Lakewood Engineering & Manufacturing Co. (the “Licensor”) entered into a contract with Chicago American Manufacturing (the “Licensee”) giving the Licensee the right to sell fans bearing the Licensor’s trademark.[2] It also provided that the Licensee could continue to use the trademark for the period of the contract even if the Licensor breached.[3] Three months later, the Licensor was forced into an involuntary chapter 7 bankruptcy proceeding in which the trustee rejected the licensing agreement as an executory contract.[4] When Sunbeam Products, Inc. (the “Purchaser”) acquired the Licensor’s assets, including the trademark, it demanded that the Licensee cease using the trademark.[5] The Licensee refused, and the Purchaser sought an injunction to prevent the Licensee from producing and selling fans bearing the Licensor’s trademark.[6] The bankruptcy court held for the Licensee on equitable grounds.[7] On a direct appeal, the Seventh Circuit held for the Licensee, but did so on different grounds.[8]
The Seventh Circuit held that the Licensee’s trademark rights survive the trustee’s rejection of the underlying executory contract as a matter of law.[9] It reasoned that the rejection of an executory contract during bankruptcy proceedings is no different than a breach of an executory contract outside of bankruptcy.[10] The Seventh Circuit stated that rejection cannot be used as a way to avoid the contract altogether because the rights of the Licensee remain intact after breach of the contract.[11] Section 365(g) states that rejection “constitutes a breach of such contract.”[12] It does not provide that avoidance of the contract returns the Licensor and Licensee to their pre-contract positions.[13] Therefore, the Licensee was entitled to the rights it bargained for in the contract, including the use of the trademark.[14] The Seventh Circuit specifically noted that it was following the logic of Judge Ambro’s concurring opinion in In re Exide, in which Judge Ambro reasoned that bankruptcy should not be used to reclaim trademark rights that had already been fairly bargained away.[15]
The Seventh Circuit’s decision directly conflicts with Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., in which the Fourth Circuit held that all intellectual property rights were lost as a result of the trustee’s rejection of the executory contract.[16] Outside of the Third, Fourth, and Seventh Circuits, no other circuits have expressly addressed the issue of trademark licensing in bankruptcy proceedings.[17] Several bankruptcy and district courts have followed the Lubrizol rule, even though they have noted that it seems to call for a severe result.[18] Commentators have been very critical of the Lubrizol rule as well.[19] The Seventh Circuit’s decision in Sunbeam Products clearly protects a trademark licensee’s bargained-for rights regardless of whether a trustee rejects the underlying licensing agreement. As a petition for certiorari has been filed, the wider effects of this decision will only be measurable if the Supreme Court decides to hear the case or when other circuits weigh in on this issue.
[1] Sunbeam Products, Inc. v. Chicago American Manufacturing (In re Lakewood Engineering & Manufacturing Co., Inc.), 686 F. 3d 372, 376–78 (7th Cir. 2012).
[2] Id. at 374.
[3] Id.
[4] Id.
[5] Id.
[6] Id. at 374–75.
[7] Id. at 375; In re Lakewood Engineering & Manufacturing Co., Inc., 459 B.R. 306, 345–46 (2011).
[8] Sunbeam Products, 686 F.3d 375–76.
[9] Id. at 377
[10] Id.; 11 U.S.C. § 365(g)(2006).
[11] Sunbeam Products, 686 F.3d 377.
[12] Id. at 376 (quoting 11 U.S.C. § 365(g)).
[13] Id. See Jay Lawrence Westbrook, The Commission’s Recommendations Concerning the Treatment of Bankruptcy Contracts, 5 Am. Bankr. Inst. J., Winter 1997 at 463, 470–472 (arguing that Lubrizol decision was incorrect because court confused rejection and avoidance powers); Michael T. Andrew, Executing Contracts in Bankruptcy: Understanding Rejection, 59 U. Colo. L. Rev. 845, 916–918 (1988) (criticizes Lubrizol court for using rejection as avoidance power).
[14] Sunbeam Products, 686 F.3d 377.
[15] Id at 376; In re Exide Technologies, 607 F.3d 957, 967 (3rd Cir. 2010) (Ambro, J., concurring).
[16] Congress overruled the Lubrizol holding in section 365(n) but refrained from including trademarks in its definition of intellectual property, thus leaving the Lubrizol holding theoretically intact regarding trademarks. 11 U.S.C. § 365(n) (2006); Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043, 1048 (4th Cir. 1985); Sunbeam Products, 686 F.3d 378. See also 7th Cir. R. 40(e) (describing procedure for issuing decision in direct conflict with another decision).
[17] In re Exide, 607 F.3d 957; Lubrizol, 756 F.2d 1043; Sunbeam Products, 686 F.3d 372.
[18] See, e.g., In re Centura Software Corp., 281 B.R. 660, 674–75, (Bankr. N.D. Cal. 2002) (holding that “upon the rejection of a trademark license, Lubrizol’s harsh holding controls…”); In re HQ Global Holdings, Inc., 290 B.R. 507, 513 (Bankr. D. Del. 2003) (holding that since section 365(n) does not apply to trademark cases, Lubrizol’s holding is controlling on trademark matters).
[19] See generally, Jay Lawrence Westbrook, The Commission’s Recommendations Concerning the Treatment of Bankruptcy Contracts, 5 Am. Bankr. Inst. J., Winter 1997 at 463, 470–472 (arguing that Lubrizol decision was incorrect because court confused rejection and avoidance powers); Michael T. Andrew, Executing Contracts in Bankruptcy: Understanding Rejection, 59 U. Colo. L. Rev. 845, 916–918 (1988) (criticizes Lubrizol court for using rejection as avoidance power).
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