Reconciling Trademark Law with Bankruptcy Law in License Rejection

Abstract

Trademark law serves two primary purposes: protect the trademark holder’s property interest in the mark and protect the public’s interest in knowing the common source and consistent quality of anything bearing a trademark.  To achieve both objectives, trademark law allows trademark holders to license their marks but requires them to actively control the quality of the marks when doing so.  Trademark holders who do not actively control their licensed marks’ quality risk losing their rights to the trademark.  The quality control requirement becomes problematic in bankruptcy.  In bankruptcy, the estate of a bankrupt trademark licensor must decide whether to assume the license, thus taking on the obligations of the contract, or to reject the license, thus effecting a breach by the licensor immediately before bankruptcy and creating a pre-petition claim for damages but not unwinding the contract.  One key objective of rejection is to allow a bankruptcy estate to relieve itself of the burdens of ongoing obligations of contracts entered into by the bankrupt before bankruptcy.

The question for trademark licenses is what happens to the licensee’s rights to the trademark after the licensor rejects.  On the one hand, the trademark licensee has a property interest in the trademark that the bankruptcy estate does not––and should not be able to—acquire through rejection.  On the other hand, the bankruptcy estate should not be forced to protect its interest in the trademark by continuing to control the quality of the trademark after rejection.

The appellate courts are divided on this issue.  Most recently, the Seventh Circuit held in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC that the licensee may retain its rights to the trademark after the licensor’s bankruptcy estate rejected the license.  The Seventh Circuit’s holding does not adequately account for the tension between trademark law’s quality control requirement and bankruptcy law’s relief from ongoing obligations through rejection.

This Note examines why the bankruptcy estate should not be able to replace the licensee’s rights to the trademark with a pre-bankruptcy breach claim for damages and why the estate should not be required to allow the licensee to retain its rights to the trademark after rejection.  Instead, the bankruptcy estate should be able to terminate the licensee’s rights to the trademark by paying for those rights as administrative expenses, compensating the licensee in full dollars rather than in miniscule bankruptcy dollars.  In doing so, the estate can maximize its value and relieve itself of burdensome ongoing obligations, but only if it pays full value for the property interest owned by the licensee—a property interest the estate does not otherwise have.

The Author expresses immense gratitude to Professor Ronald Mann for his guidance and support throughout the entire process, to Professor Robert J. Jackson, Jr. for his insight and notes, and to Professor Richard Squire for his comments and thoughts. Many thanks to Bruce Howard for his constant feedback and to Evi Howard for her endless encouragement. Finally, much appreciation for the diligence and care the editors and staff of the Columbia Business Law Review generously provided in helping to prepare this Note for publication.