Academic journal article Vanderbilt Law Review

Trademarked for Death? A Licensee's Trademark Rights after an Executory Contract Is Rejected in Bankruptcy

Academic journal article Vanderbilt Law Review

Trademarked for Death? A Licensee's Trademark Rights after an Executory Contract Is Rejected in Bankruptcy

Article excerpt

I. INTRODUCTION: A FAMILY FEUD

In 1872, a young man named Claudio Alvarez Lefebre began manufacturing and selling high-quality rum in Cuba under the bran d name "Ron Matusalem."1 In 1948, as the family-run business prospered , the company registered a trademark and corporate logo in the Unite d States.2 Upon his death, Lefebre left the business-and the secret formulas for making his rum -to his wife and children. By the early 1960s, Lefebre's wife and children had immigrated to the United States , and they split the rum-making business into two separat e corporations.3 These two distinct entities negotiated an executory contract4 in the form of a franchise agreement with a trademark license . This agreement granted the franchisee corporation the right to sell Ron Matusalem rums worldwide under the Ron Matusalem trademark. 5 The franchisor corporation retained the right to control the nature and quality of the rums sold and the right to terminate the agreement if the franchisee failed to meet its standards.6 For the next two decades, the two corporations operated as a cohesive family business, or, as a court described them, a "loose knit strada of corporations. "7

However, in late 1981, a family "squabble " emerged, and the leadership of the two corporations ceased cooperating.8 Years of "litigation for litigation's sake" followed the quarrel.9 Ten years later , the franchisor corporation filed a voluntary Chapter 11 bankruptc y proceeding. Unlike a typical Chapter 11 reorganization, this bankruptcy petition was not to reorganize and revitalize the corporation. Instead, the franchisor asked the court to reject the trademark license and end the franchisee 's rights to the Ron Matusalem trademark. The franchisor had discovered a strategic pat h for ending the family squabble : pushing the franchisee out of the business entirely.10

When a trustee or debtor-in-possession rejects an executory contract involving trademark rights, courts have two potentia l approaches for determining who retains the right to use the trademark.11 One approach terminates the licensee 's right, only providing the licensee with the opportunity to sue for rejection damages.12 The other approach grants the licensee continued use of the trademark rights under the theory that rejection is not rescission but instead is a contract breach whereby the nonbreaching party 's rights remain in place.13 Without a controlling Supreme Court opinion on point, differing approaches create confusion as courts struggle to balance intellectual property rights with the contractual rights of licensees.

Part II of this Note e xamines relevant sections of 11 U.S.C. § 365, subsequent amendments under the Intellectu al Property Licenses in Bankruptcy Act ( "IPLBA"), and theoretica l interpretations and definitions of what "rejection" means within the context of bankruptcy law. Part III analyzes the circuit split, discussin g the merits and weaknesses of each approach. Part IV suggests that the Supreme Court resolve the circuit split by adopting a modified version of the Seventh and Third Circuits' approach, but adding the requirement that trademark licensees maintain the quality control standards initially contained in the parties' original licensin g agreement.

II. BACKGROUND: 11 U.S.C. § 365, THE SIGNIFICANCE OF EXECUTORY CONTRACTS IN BANKRUPTCIES, AND THE 11 U.S.C. § 365(N) ISSUE

Section 365(a) of the Bankruptcy Code states that a trustee in bankruptcy may assume or reject any executory contract or unexpire d lease of the debtor.14 Because the Bankruptcy Code does not define "rejection " or "executory contract," the meaning of these terms requires further examination. Although the codification of the Intellectu al Property Licenses in Bankruptcy Act15 provides protections for licensees, it does not protect trademark licensees because trademark s are not included in the Bankruptcy Code's definition of "intellectu al property."16 However, a court may still grant a trademark licensee continued use of a trademark by treating a trustee 's rejection as a "breach" of an executory contract. …

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