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Crumbs Bake Shop’s Trademark Licensees Permitted to Continue Using Brand Name Despite Rejection of Licenses and “Free and Clear” Sale of Debtors’ Assets

Bankruptcy Code § 365(n) provides significant protections to licensees under intellectual property licenses that are rejected by debtor-licensors.[1] Section 365(n) permits a licensee to retain its rights in licensed intellectual property post-rejection in exchange for the continued payment of royalties.[2] Where the licensee elects to retain its rights, the debtor-licensor has no continuing obligations under the license.[3]

The definition of “intellectual property” in Bankruptcy Code § 101(35A) does not reference trademarks or trade names. This omission raises the question: Does § 365(n) protect trademark licensees, or can licensees be stripped of their trademark rights by rejection of the license? Courts are split on this issue. Some have ruled that the plain language of § 101(35A) bars trademark licensees from the protections of § 365(n).[4] Others have ruled that trademark licensees can retain their rights post-rejection.[5]

Asset sales have become more prevalent in bankruptcy cases. This development raises an additional question about § 365(n): Do the protections of § 365(n) survive the “free and clear” sale of a debtor’s intellectual property assets under § 363(f)?

This article examines a recent decision in the Crumbs Bake Shop Inc., et al. chapter 11 cases, in which Judge Kaplan of the U.S. Bankruptcy Court for the District of New Jersey grappled with both of these issues, determining that § 365(n) did apply to the Crumbs trademark licenses and that the specific protections of § 365(n) trump the more general “free and clear” provisions of § 363(f), absent consent of the licensee.[6]

Click here to read the full article on the ABI Committees’ website.

[1] Congress enacted this provision in response to Lubrizol Enters. Inc. v. Richmond Metal Finishers Inc., 756 F.2d 1043 (4th Cir. 1985), in which the Fourth Circuit held that a debtor could reject intellectual property licenses and leave licensees with only a monetary damages claim.

[2] 11 U.S.C. § 365(n) (2006).

[3] Id.

[4] See, e.g., In re Old Carco LLC, 406 B.R. 180, 211 (Bankr. S.D.N.Y. 2009) (Section 363(n) does not apply to trademark licenses because “[t]rademarks are not ‘intellectual property’ under the Code”); In re HQ Global Holdings Inc., 290 B.R. 507, 513 (Bankr. D. Del. 2003) (“[S]ince the Bankruptcy Code does not include trademarks in its protected class of intellectual property ... the Franchisee’s right to use the trademark stops on rejection.”); Raima UK Ltd. v. Centura Software Corp. (In re Centura Software Corp.), 281 B.R. 660, 673 (Bankr. N.D. Cal. 2002) (“Section 365(n) is controlling post-rejection and ... does not protect trademarks.”).

[5] See, e.g., Sunbeam Prods. Inc. v. Chi. Am. Mfg. LLC, 686 F.3d 372, 377-78 (7th Cir. 2012) (permitting trademark licensee to retain trademark rights notwithstanding plain language of § 101(35A); In re Exide Techs., 607 F.3d 957, 967 (3d Cir. 2010) (suggesting that trademark licensee could have continued to use trademark post-rejection had license been subject to rejection).

[6] In re Crumbs Bake Shop Inc., Case No. 14-24287, 2014 Bankr. LEXIS 4568 (Bankr. D.N.J. Oct. 31, 2014).