INSIGHT: Steps to Prevent Losing Trademark Rights If the Owner Seeks Bankruptcy

Monday, May 11, 2020

Bankruptcy filings in the U.S. are rising, which is not surprising given the economic uncertainty caused by Covid-19. While many business owners are concerned about whether they will get paid for goods and services provided, trademark licensees face a different dilemma: Whether they may continue to use the trademarks they license if the owner/licensor files for bankruptcy or they suspect it might soon.

The U.S. Patent & Trademark Office registered almost 400,000 trademarks in 2019 alone. That number is expected to rise in 2020. Most businesses rely on trademarks to distinguish their goods and services. Many own their trademarks outright, but others license their trademark rights from the owner, or licensor.

The Walt Disney Company is the world’s largest trademark licensor, pulling in more than $50 billion in licensed product sales in 2015, including license fees paid by others that use its trademarks. While Disney appears financially sound, other trademark licensors may not be in such enviable financial shape, especially this year.

In fact, it is highly likely that a certain number of trademark owners/licensors may seek protection under the bankruptcy laws.

Minimize Your Risk of Losing Trademark Rights

Here’s what you need to know and three steps you can take now to minimize the risk of losing your trademark rights.

1. First, review your trademark license agreement. While not common, some trademark licenses include language that addresses bankruptcy, often in or near the termination provision(s). For example, “in the event that either party makes an assignment for the benefit of creditors, or files a petition in bankruptcy (whether voluntary or involuntary) or for reorganization, or becomes insolvent or unable to pay its debts as they become due, then the other party may terminate this Agreement immediately upon giving notice to the other.”

In this example, were that provision enforceable in a bankruptcy case, the licensee would have the right, but not the requirement, to terminate the license agreement, stop paying the license fee, and also stop using the trademark. Assuming, however, that the licensee does not want to terminate the license and wants to continue using the trademark (or no language in the license address bankruptcy at all), the licensee should go to step number two.

2. Look to the U.S. Supreme Court’s recent decision in Mission Product Holdings Inc. v. Tempnology LLC. Why? Because, strangely, trademarks are not included in the Bankruptcy Code’s definition of “intellectual property.” Section 365(n) of the code gives most “intellectual property” (patent, copyright and trade secret) licensees the option to terminate their licenses or continue performing under them for the duration, and any extensions, even after the licensor files for bankruptcy protection and rejects the license agreement.

The Supreme Court’s decision in Mission Product clarified that trademark licensees—despite lacking express language in the Bankruptcy Code—must now be treated similar to other licensees whose contracts are rejected in bankruptcy. In other words, trademark licensees now have the option to continue using the licensed trademark (and paying the license fee) or treat the license as terminated, even if the owner/licensor rejects the license in the bankruptcy. It is the licensee’s option.

3. Third, consider making an offer to buy the trademark from the owner or the bankruptcy trustee administering the dissolution or reorganization. In all cases, the schedules filed together with, or following, the filing of a bankruptcy petition will include a list of all of the debtor’s property, including intellectual property such as trademarks and registrations. Even if the debtor fails to properly list its trademark, as a licensee you know that trademark rights are in fact owned by the debtor.

Depending on the type of bankruptcy and the severity of debt, the trademark may be for sale. The present value of the future license payments is one estimate of the trademark’s value. Make sure to involve your trademark lawyer too because you must make certain that you acquire all of the trademark rights, registrations and goodwill. The purchase agreement need not be complicated, but it does need to be done right since the previous owner may soon no longer exist to correct anything missed.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Tony Zeuli, a partner at Merchant & Gould in Minneapolis, is a trial lawyer specializing in IP litigation, including patent, trademark and copyright.

Ron Roteman, a partner at Stonecipher Law Firm in Pittsburgh, is a bankruptcy lawyer concentrating in the areas of debtors’ and creditors’ rights, as well as restructuring matters.

The views of this article are those of the authors, and not the firms.

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