Trademarks, Bankruptcy and the U.S. Supreme Court.

Although this term of the Court is bound to be one for the ages as far as intellectual property goes, there are other decissions the Court has recently made that can affect you personally.

The Supreme Court let stand a 7th circuit decission regarding the status of trademarks during bankruptcy. The specific issue before the Court was whether a trademark licensee retains the ability to use a debtor’s trademarks after the contract is rejected in bankruptcy.

Many were hoping that the Supreme Court would resolve a split of authority between the 4th and 7th Circuit Court of Appeals regarding what happens to IP licenses that are rejected during bankruptcy. The 4th Circuit determined that when an intellectual property license is rejected in bankruptcy, the licensee loses the ability to use licensed IP rights.

Displeased with the ruling, Congress amended the Bankruptcy Code in 1988 to expressly allow licensees to continue using IP after rejection (provided its meets certain conditions). However, trademarks were not included in the definition of intellectual property, leaving much ambiguity regarding whether the rejection of an IP license ends the licensee’s right to use trademarks.

The 7th Circuit rejected the 4th Circuits result and concluded that the rejection of a license during bankruptcy constitutes a breach of contract. The court reasoned that a licensor’s breach does not generally terminate a licensee’s right to use intellectual property and, therefore, the same should apply in bankruptcy.  The court explained:

What §365(g) does by classifying rejection as breach is establish that in bankruptcy, as outside of it, the other party’s rights remain in place. After rejecting a contract, a debtor is not subject to an order of specific performance. [. . . ] The debtor’s unfulfilled obligations are converted to damages; when a debtor does not assume the contract before rejecting it, these damages are treated as a pre-petition obligation, which may be written down in common with other debts of the same class. But nothing about this process implies that any rights of the other contracting party have been vaporized.

In refusing to grant certiorari, the 7th Circuit’s decision remains intact. Although some ambiguity still remains, the decision has undoubtedly strengthened the IP protections available during bankruptcy.

How Can I Help?

If you are going through bankruptcy, or you know someone that is, be sure to contact me for a free 30 minute consultation at or call TOLL FREE at 1-855-UR IDEAS (1-855-874-3327) and ask for Norman.  You may be overlooking items that can help you during a bankruptcy proceeding.

– Ex astris, scientia –

I am and avid amateur astronomer and intellectual property attorney in Pasadena, California. As a former Chief Petty Officer in the U.S. Navy, I am a proud member of the Armed Service Committee of the Los Angeles County Bar Association working to aid all active duty and veterans in our communities. Connect with me on Google +