Licensor Chapter 11s May Put
Trademark Licenses at Risk
Contract Rejection Issues for
BY PAUL M. HOFFMANN, PARTNER & NICHOLAS J. ZLUTICKY, ASSOCIATE,
STINSON MORRISON HECKER LLP
Strategic divestitures are becoming more common in the restructuring and
rebranding of financially struggling
corporations. In considering these
options, turnaround managers must be
particularly aware of how trademarks
are treated in a proposed transaction.
While trademark licensing is often used
to permit an acquiring corporation to
use a trademark in connection with its
acquisition of a business or territory,
these licenses may be put at risk if the
licensor commences a bankruptcy case.
This article discusses the implications of
the U.S. Bankruptcy Code on trademark
licenses and strategies turnaround
managers can use to protect trademark
licensees if the licensor subsequently
files bankruptcy. This should help
turnaround managers of licensors
get the best price possible for these
licenses and turnaround managers of
licensees to protect a license in any
future bankruptcy case of the licensor.
Under 11 U.S.C. § 365, a trustee or
debtor in possession may assume
or reject executory contracts and
unexpired leases. Thus, consideration
of a motion to assume or reject an
executory contract requires a two-part analysis. First, the Bankruptcy
Court must determine whether the
agreement is an executory contract.
If not, the debtor is not permitted to
assume or reject the contract, and
any benefits or obligations under the
contract are merely assets or liabilities
of the debtor’s bankruptcy estate.
If the agreement is executory, the
Bankruptcy Court then determines
whether the decision to reject the
agreement is within the debtor’s
reasonable business judgment.
a consequence, a debtor’s decision
to assume or reject an executory
contract will ordinarily be upheld.
There are two main disputes with
respect to rejection of trademark
licenses under 11 U.S.C. § 365: ( 1)
whether the trademark license is
an executory contract; and ( 2) what
happens to the licensee’s rights to use
the trademark if the license is rejected.
License or Executory Contract?
“Executory contract” is not defined in
the Bankruptcy Code, but the legislative
history evidences Congress’ clear intent