Protecting intellectual property rights is a top priority among businesses throughout the world. When intellectual property rights stem from a financially weak counterparty, it becomes substantially more difficult to protect those rights. For years, trademark licensees have faced the prospect of losing their intellectual property rights if their licensor filed for federal bankruptcy protection. At least in one circuit, however, the tide has shifted. In Sunbeam Products v. Chicago American Manufacturing , 2012 U.S. App. LEXIS 13883 (7th Cir. Jul. 9, 2012), the U.S. Court of Appeals for the Seventh Circuit recently held that rejection of a trademark license agreement simply constitutes a contract breach occurring at the time immediately prior to bankruptcy. As a result, the nondebtor’s rights under the contract do not “vaporize,” but rather remain as they would have under the contract and applicable nonbankruptcy law. In so ruling, the Sunbeam decision runs directly contrary to the Fourth Circuit’s decision in Lubrizol Enterprises v. Richmond Metal Finishers , 756 F.2d 1043 (4th Cir. 1985), as it relates to trademarks.
In Lubrizol , the Fourth Circuit held that a nondebtor licensee’s intellectual property rights terminate upon rejection of the technology licensing agreement. The issue in Lubrizol was whether the Bankruptcy Code allowed the debtor licensor to reject an executory technology licensing agreement, and subsequently whether that rejection terminated the licensee’s right to use the technology. The court found that it was an exercise of sound business judgment for the debtor to reject the contract because the debtor’s continued obligations to the licensee, Lubrizol Enterprises, would hinder its prospective ability to sell or license the technology under more advantageous terms to other licensees. The court reasoned that the debtor’s rejection was to be treated by Lubrizol as a breach of contract and could seek money damages. It could not, however, retain its technology rights through a demand for specific performance, even if specific performance ordinarily would have been available upon breach of the contract. The court also reasoned that entitling Lubrizol to continue using the technology would undercut the purpose of rejection, which is to allow a debtor to avoid contracts when such obligations place too great a burden on the estate.
