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A New Bankruptcy-Related U.S. Supreme Court Decision and What it Means for Licensors of Trademarks Who Are Considering Chapter 11

A recent ruling from the U.S. Supreme Court addressed an important question that may impact many commercial entities considering Chapter 11 bankruptcy. For (potential bankruptcy debtor) entities that are also trademark licensors, what happens to the licensee’s rights if the license is rejected in bankruptcy? While the court’s ruling limited power of rejection somewhat, providing some good news for licensees, it stopped well short of giving licensees unfettered rights after a rejection. In other words, if your entity is a holder and licensor of trademarks and is considering bankruptcy, Chapter 11 may be a viable option. Consult a knowledgeable South Florida bankruptcy attorney to help you make the best choice for your business.

The case upon which the high court ruled this spring involved a manufacturer of athletic wear with cooling technology. The manufacturer also held several trademarks which it had licensed. One of the licenses the manufacturer had issued, as part of a co-marketing and distribution agreement, was to a New York-based provider of cooling towels and other cooling items for athletes.

The manufacturer filed for Chapter 11 bankruptcy in 2015. At that time, the New York licensee still possessed its license to use the manufacturer’s trademark. The manufacturer sought to reject the New York licensee’s rights under the distribution agreement as part of its bankruptcy action.

When that happens, what rights to licensees have following the bankruptcy filing? Can they pursue a claim for rejection damages, or can they merely file a general unsecured claim in the bankruptcy case?

The high court determined that a debtor’s rejection of a license in bankruptcy essentially amounts to a breach of the underlying contract. That meant that a licensee, like this New York distributor, would be entitled to pursue a claim for damages and would still retain the same rights after the breach as it would have outside bankruptcy. In other words, under this decision, an entity cannot use rejection under a Chapter 11 filing to unilaterally terminate all of the licensee’s rights under the license agreement.

Justice Sotomayor: Licensees do not have unfettered rights

Justice Sonia Sotomayor provided some further clarification for licensors potentially considering a Chapter 11 filing. Justice Sotomayor’s concurring opinion stated that the court’s decision in this dispute did not mean that all licensees now had free reign to use the trademark as they saw fit post-rejection. Instead, the law now says that courts should perform a case-by-case analysis to assess whether or not the licensee’s rights would remain intact under the applicable non-bankruptcy law. So, in some cases, a licensor’s bankruptcy potentially may still trigger an end to the licensee’s right to use the mark.

While the high court’s ruling is not as favorable for Chapter 11 debtors as the First Circuit Court of Appeals decision in this case was, entities with trademark licenses considering Chapter 11 bankruptcy should not despair. Even with more a limited version of rejection, bankruptcy can still provide essential and unique help in the form of things like an automatic stay and cramdown. In other words, Chapter 11 may still be the best option for your entity. To help you in making that vital determination of a best path forward, rely upon the experienced South Florida bankruptcy attorneys at Stok Kon + Braverman. Our bankruptcy lawyers have been providing diligent advocacy and creative solutions to our Florida Chapter 11 clients for many years.

Contact us online or by calling (954) 237-1777 to schedule your consultation and find out how this firm can help you.

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