Business Bankruptcy & Licensee Rights
The rights afforded to a licensee under Section 365(n) trump "free and clear" sales under Section 365(f). This was the holding in a recent decision by Judge Kaplan in the Crumbs Bake Shop bankruptcy case; case number 14-24287. A court order allowing the sale of a bankrupt business free and clear of all liens will not reject or terminate a licensee's rights.
Prior to their bankruptcy filing, Crumbs Bake Shop had entered into licensing agreements with third parties which allowed these third parties to use the debtor's trademarks and trade secrets as well as sell products under the debtor's brand. Crumbs Bake Shop then sold, with bankruptcy court approval, its business. The purchaser of the business argued that the license agreements should be terminated as they were not part of the sale and the purchase of the business was free and clear.
Are Trademarks Part of Intellectual Property?
The issue is whether trademarks are part of Section 365(n) which deals with intellectual property and the rights of patent or copyright licenses. "Intellectual property" is a defined bankruptcy term that does not include trademarks. Section 365(n) gives those with intellectual property rights the option to either (1) treat the bankruptcy as a termination of the license and assert a claim for rejection damages, or (2) retain the rights to use the license and continue to make royalty payments. This recent decision gives trademark licensees these same options.
Bankruptcy Does Not Void Business Licences
The rejection by a debtor of a license agreement in bankruptcy only excuses the debtor from performing its obligations. The use of the license by the licensee is unaffected by this rejection. This now mirrors how it works outside of a bankruptcy case when there is a breach in the agreement.
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