For 25 years, trademarks, service marks and trade names have occupied a unique position in bankruptcy law.  While Congress adopted section 365(n) in 1988 to give special protection to licensees of “intellectual property” in cases where debtor/licensors rejected the licenses, trademarks, service marks and trade names were intentionally omitted from the definition of “intellectual property”.

Thus licensees of patents and copyrights could elect to retain their rights in the licensed property notwithstanding the debtor/licensor’s rejection of the license.  However, until the Seventh Circuit’s Sunbeam decision, trademark licensees were generally viewed as losing their rights upon rejection.  Compare Sunbeam Products, Inc. v. Chicago American Mfg., LLC, 686 F.3d 372 (7th Cir. 2012) (holding that rejection does not terminate licensee’s rights) with Lubrizol Ent., Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985) (holding that rejection terminates licensee’s rights).  

The Innovation Act, H.R. 3309, which recently passed the House of Representatives with overwhelming bipartisan support, would settle that issue by expanding the “intellectual property” definition to include trademarks, service marks and trade names.  While that change is not particularly astounding, what is remarkable about the bill is that rejection of a trademark, service mark or trade name license does not relieve the trustee (or debtor) of its “contractual obligation to monitor and control the quality of a licensed product or service.”

That provision addresses a unique aspect of trademark law.  Unlike patents and copyrights, a trademark can be lost if the licensor does not retain the right to monitor and control quality.  Thus, a licensee would want contractual assurances that the licensor will protect the trademark since failure to do so may render the licensed mark worthless.  However, by imposing such an on-going post-bankruptcy obligation on the debtor/licensor, this provision effectively creates an exception to the Chapter 11 discharge.  It is not clear how this provision might apply in a Chapter 7 case or whether it might give rise to an administrative expense priority like some on-going environmental obligations do.

In a case where the debtor/licensor is continuing to operate the business that uses the mark, the debtor would have an incentive to monitor quality even without this statutory requirement.  The requirement might, however, limit the debtor’s freedom to change the nature of the underlying product or service if such a change violated the terms of the rejected license agreement.  In cases where the debtor did not want to maintain the mark, query whether the debtor could avoid this obligation by abandoning the mark and taking no action to assume or reject the licenses.