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Trademarks Are Treated Differently from Other IP in Bankruptcy

February 2010

This is the fourth in a series of five "IP/Bankruptcy Law Alerts."

Trademark and service mark licenses are unique intellectual property in bankruptcy. Whether by congressional intent or mistake, a trademark or service mark (together, “Trademark”) licensee has less statutory protection in a bankruptcy filing than any other licensee of IP. Accordingly, Trademark licensees need to be aware of this constraint and take extra precautions to minimize economic damage to their businesses in the event of their licensor’s bankruptcy filing.

A trademark is generally defined as a word, name or symbol used by a person or entity to distinguish their goods from those manufactured or sold by others. A service mark distinguishes services from those provided by others. For example, the name “Target” functions as both a trademark and a service mark, as does the Target “Bullseye” logo. For most Trademark licensees, the use of Trademarks is an integral part of their company and business model.

The case of In re HQ Global Holdings, Inc., 290 B.R. 507 (Bankr. D. Del. 2003) graphically illustrates the impact a licensor’s bankruptcy may have upon a Trademark licensee. Global Holdings involved a debtor franchisor, which had filed for bankruptcy and opted to reject its franchise agreement with the franchisee, as provided in Section 365 of the Bankruptcy Code. The loss of the use of the Trademark would be devastating to the franchisee. Accordingly, the franchisee sought to preserve its ability to use the Trademark license, notwithstanding the bankruptcy filing. The Court held, however, that the franchisee lost complete use of the Trademark license due to the franchisor’s rejection of the contract. This result would not apply to licensees of other IP in bankruptcy.

The Court noted that while the Bankruptcy Code permitted patent, copyright and other IP licensees to retain their license rights to use IP when the debtor licensor rejected their license, Trademarks – as a distinct category of IP – were expressly excluded from this provision of the Bankruptcy Code. Accordingly, when a debtor licensor rejects a Trademark license, the Trademark licensee does not have the same protections other IP licensees enjoy. Practically speaking, this means that a debtor licensor can revoke the Trademark license around which a licensee has built its business, with the licensee’s sole remedy being limited to seeking damages for a breach of contract.

While a debtor/licensor holds significant power over a Trademark licensee in bankruptcy, there are certain precautions a prudent licensee may consider. First, if various forms of intellectual property are intertwined or naturally “bundled” in a single license agreement, a court may hesitate to allow rejection of the agreement in its entirety, even if part of the bundle includes a Trademark. Trademark licensees also should avoid paying large upfront license fees to licensors and, instead, negotiate annual payments to avoid monetary losses if the license is rejected in bankruptcy. Finally, licensees should make it standard practice to periodically conduct a thorough due diligence review of a licensor’s financial health to anticipate a potential bankruptcy filing.

If you have any questions, or would like additional information about this series of Alerts or recent bankruptcy filings that may affect your business, please contact:

Bankruptcy and Creditors’ Rights Group:
Robert E. Nies ¦ Member of the Firm ¦ Phone (973) 530-2012 ¦ Email
Karen L. Gilman ¦ Member of the Firm ¦ Phone (973) 530-2006 ¦ Email
David N. Ravin ¦ Member of the Firm ¦ Phone (973) 530-2034 ¦ Email 

Intellectual Property Group:
Peter E. Nussbaum ¦ Member of the Firm ¦ Phone (973) 530-2025 ¦ Email
Jeffrey M. Weinick ¦ Member of the Firm ¦ Phone (973) 530-2028 ¦ Email