Journal of Corporate Renewal

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