for the term to “generally include[]
contracts on which performance
remains due to some extent on both
sides.” S. Rep. No. 95-989, 95th Cong.,
2d Sess. 58 (1978), reprinted in 1978
U.S.C.C.A.N. 5787, 5844; see also
H.R. Rep. No. 95-595, 95th Cong.,
1st Sess. 347 (1977). A majority of
courts have adopted the Countryman
definition of an executory contract
under 11 U.S.C. § 365, which defines
an executory contract as follows:
Under the agreement, Exide remained
the owner of the trademark and used
it in other areas outside the industrial
battery business. Exide decided to
get back into the industrial battery
business in 2000 and approached
EnerSys about reacquiring use of the
Exide trademark, but the parties were
unable to reach an agreement. Unable
to place its own trademark on its
industrial batteries, Exide commenced
a Chapter 11 bankruptcy case in U.S.
free license for the Butternut Bread
trademark for use in the Chicago area.
a contract under which the obligation
of both the bankrupt and the other
party to the contract are so far
unperformed that the failure of either
to complete performance would
constitute a material breach excusing
the performance of the other.
Countryman, Executory Contracts
in Bankruptcy: Part I, 57 Minn.
L. Rev. 439, 460 (1973).
Most trademark licenses involve material,
ongoing obligations and are considered
executory under the Bankruptcy Code.
2
This is evident when the licensee pays
periodic royalties and must meet quality
standards that are regularly measured,
and when the licensor undertakes
regular quality inspections and protects
the mark against infringement.
After a hearing on the issue, the
Bankruptcy Court held that the four
agreements were executory contracts
subject to assumption or rejection,
finding that several ongoing material
obligations remained as to both parties.
Importantly, the Bankruptcy Court
found that the agreements were an
integrated agreement for purposes
of analysis under 11 U.S.C. § 365. This
finding was not challenged by either
party on appeal. The District Court
affirmed the Bankruptcy Court’s holding.
But some trademark licenses involve
sale transactions in which the licensee
pays a lump sum at closing in return
for a perpetual, royalty-free license
subject to minimal ongoing interaction
with the licensor over quality and
infringement issues. Two recent
cases highlight the different possible
outcomes with these licenses.
As to LBB’s obligations under the
trademark license, both the District
Court and the 8th Circuit focused on
the language of the trademark license,
which differed from the license in Exide
and expressly stated that LBB’s failure
to maintain the character and quality
of goods it sold under the Butternut
name would be a material breach.
Thus, the 8th Circuit found that at least
one material obligation remained as to
LBB and affirmed the District Court.
4
In EnerSys Del., Inc. v. Exide Techs.,
Inc. (In re Exide Techs., Inc.), 607 F.3d
957 (3d Cir. 2010), the 3d U.S. Circuit
Court of Appeals held that a trademark
license was not an executory contract
because it was part of an integrated
asset purchase agreement that had
been substantially performed under
New York law. Exide Technologies sold
substantially all of its industrial battery
business to EnerSys Delaware Inc. in
1991. The parties executed nearly two
dozen agreements to complete the
transaction, including a trademark
license agreement that authorized
EnerSys to use the Exide trademark in
manufacturing industrial batteries.
On appeal, the 3d Circuit held that the
trademark license was not an executory
contract. Because the agreements were
each governed by New York law, the 3d
Circuit applied New York contract law,
which provides that when a breaching
party has substantially performed
under a contract and this performance
occurred prior to the breach, the other
party may not be excused from its
performance. The 3d Circuit held that
the agreements had been substantially
performed under New York law, so
no material obligations remained.
In Lewis Brothers Bakeries v. Interstate
Brands Corp., 690 F.3d 1069 (8th Cir.
2012),
3 the 8th U.S. Circuit Court of
Appeals held that a perpetual, royalty-free trademark license was an executory
contract subject to assumption or
rejection under 11 U.S.C. § 365. In
1996, Interstate Brands Corporation
( IBC) entered into an agreement with
Lewis Brothers Bakeries (LBB) to sell
IBC’s Chicago area bread baking
business to LBB for $20 million. IBC
also entered into a license agreement
granting LBB a perpetual, royalty-
Effects of Rejection
If a debtor-licensor is permitted to
reject a trademark license under 11
U.S.C. § 365, does the licensee have to
stop using the trademark? Under 11
U.S.C. § 365(n), a licensee may retain its
right to use intellectual property under
a rejected executory contract so long
as the licensee continues to pay any
royalties required under the contract.
Intellectual property is defined under 11
U.S.C. § 101(35A). Although commonly
considered intellectual property in
the world of business, trademarks are
expressly omitted from the definition
of intellectual property under the
Bankruptcy Code. Accordingly, when
a debtor-licensor rejects a trademark
license, it is unclear whether a
trademark licensee can continue to use
Journal of
Corporate
Renewal
April
2013