Sunbeam Ruling Strengthens Rights of IP Licensees in Bankruptcy

Earlier this month, the Seventh Circuit Court of Appeals ruled in Sunbeam Products v. Chicago American Manufacturing that rights held by a trademark licensee do not automatically end when the license agreement is rejected by a trademark owner in bankruptcy.

It’s a significant ruling for IP licensees because it allows them to continue to use the licensed trademark despite a licensor’s bankruptcy. From law firm Skadden Arps:

“The Sunbeam decision means that, at least in the Seventh Circuit, trademark licensees do not lose their rights simply because the licensor files for bankruptcy and rejects the license under Section 365 of the Bankruptcy Code. The Sunbeam case could result in benefits to licensees of other intellectual property as well, beyond those rights protected by Section 365(n) of the Bankruptcy Code.”

For your reference, a roundup on legal commentary and analysis on the topic:

Seventh Circuit Rules on Trademark Licensees’ Bankruptcy Rights (Skadden, Arps, Slate, Meagher & Flom LLP):

“[D]ebtor-licensors interested in selling trademark assets in bankruptcy should consider the Sunbeam decision, as, absent the consent of the licensee, it may limit their ability to sell these assets free and clear of a licensees’ trademark rights — even in situations where the agreement granting the trademark license has been rejected. Accordingly, debtors looking to maximize value from the disposition of a trademark portfolio may not be able to realize the same value in a jurisdiction that follows Sunbeam as in a jurisdiction that follows Lubrizol.” Read on>>

Sunbeam Decision Gives a Ray of Hope to Intellectual Property Licensees (Mintz Levin):

“Section 365(n) of the Bankruptcy Code was promulgated by Congress in response to the Fourth Circuit Court of Appeal’s decision in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. In Lubrizol, the Court held that when a debtor rejects an intellectual property license, the nondebtor party retains no rights in the intellectual property, but rather it is merely entitled to a money damages remedy. In 1988, three years after Lubrizol, Congress amended the Bankruptcy Code by adding Section 365(n), which allows licensees to continue using intellectual property under certain circumstances after the debtor rejects the license.” Read on>>

Sunbeam Products: Trademark Licensees Victorious in Seventh Circuit’s Bankruptcy Ruling — What’s Next For Licensees and Debtor Licensors? (Morrison & Foerster LLP):

“The Seventh Circuit was unpersuaded by Lubrizol and this line of cases. It found that the definition of ‘intellectual property’ which Congress adopted for the Bankruptcy Code ‘does not affect trademarks one way or the other.’ Trademark licensees across the country will likely now cite Sunbeam for the proposition that rejection of their license agreements in bankruptcy does not terminate their licenses, allowing them to continue using the licensed trademarks post-rejection.” Read on>>

Seventh Circuit Bankruptcy Decision Is a Victory for Trademark Licensees (Bryan Cave):

“Trademarks are a distinct form of intellectual property, inasmuch as they serve to identify the source of particular goods or services. Because of the unique nature of trademarks, Congress concluded, back in 1988, that further study would be required before it would include trademarks in section 365(n). Congress seemed to recognize, at some level, that the Lubrizol rule might make sense with respect to trademarks. The Sunbeam decision effectively took the leap Congress was unwilling to take. Sunbeam thus opens the door to a host of potential developments.” Read on>>

Seventh Circuit Allows Trademark Licensees to Continue Using License After Rejection of Licensing Agreement (Dechert LLP):

“The Seventh Circuit’s decision demonstrates the insignificance of the omission of trademarks from section 365(n) of the Bankruptcy Code by finding that trademark licensees can continue to use the intellectual property despite rejection of the licensing agreement by a licensor-debtor. Moreover, the opinion cautions bankruptcy courts against overestimating the impact of rejection of executory contracts in general by emphasizing that breach of a contract by a debtor does not abrogate the counterparty’s contractual rights.” Read on>>

Trademark Licensee’s Rights Survive Rejection of License in Bankruptcy in Sunbeam Decision (Katten Muchin Rosenman LLP):

“Noting that the Lubrizol decision has been criticized, however, the court found that section 365(g) did not mandate the loss of all of a non-debtor counterparty’s rights upon rejection, concluding that section 365(n) neither codifies nor disapproves Lubrizol as applied to trademarks. The Seventh Circuit acknowledged that its decision now creates a split in the circuit courts that may lead to future consideration of the issue by the Supreme Court.” Read on>>

Seventh Circuit Strengthens Protection for IP Licenses in Bankruptcy (Ropes & Gray LLP):

“The Seventh Circuit’s Sunbeam Products opinion is an important development that has the potential to significantly strengthen the rights of licensees to intellectual property licenses. The immediate benefit will be in areas where § 365(n) may be read as providing little or no protection for licensees, such as in trademark licenses, U.S. law governed licenses where the licensor has filed bankruptcy in a foreign jurisdiction, and licenses of non-U.S. patents and copyrights.” Read on>>

Two Recent Decisions From Courts of Appeals Address Important Intellectual Property Issues in Bankruptcy (Davis Wright Tremaine LLP):

“Although Lubrizol’s holding on this issue has been criticized in academic circles, the 7th Circuit’s decision in Sunbeam represents the first time that another court of appeals has squarely rejected it. Sunbeam does not change the law in the 4th Circuit (which must adhere to Lubrizol), but it is binding within the 7th Circuit, and should prove persuasive in other jurisdictions. The decision would mean that trademark licensees are not subject to losing their rights just because the licensor files for bankruptcy and rejects the license.” Read on>>

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