Can Bankruptcy terminate a licensee’s rights in a trademark license?

By Matthew J. Booth

The Supreme Court has on its docket this term a very important case that affects trademark licensees if the owner (licensor) of the trademark goes into bankruptcy. Here’s the scenario, the owner of the trademark (licensor) or Company A enters into licensing agreement for intellectual property with Company B. The licensing can include different types of intellectual property such as trademarks, trade secrets, patents, and/or copyrights. These types of licenses occur with big and small companies and can be seen everywhere. One example is a national brand doing business in a town where the brand is being operated by a small business that includes the tag “locally owned and operated”.

So, what happens in a typical bankruptcy? When a company enters into bankruptcy, the trustee or debtor (we will just refer to either as the debtor), has the option to reject executory contracts so the other party to the contract is left with a damages claim for the breach of contract, but not the ability to compel further performance. This other party ends up with an unsecured claim and is tossed in with other unsecured creditors and may settle for a reduced amount on the breach of contract claim as part of the bankruptcy.

But what happens with an intellectual property license in bankruptcy? First a little background, in 1985, the Federal Court of Appeals for the 4th Circuit, held that a debtor (and licensor) could use bankruptcy to unilaterally revoke the rights of the licensee of a patent license. See Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985). The revocation also meant that licensee did not even have an unsecured claim in bankruptcy. The revocation basically meant that the license was obliterated and simply disappeared, a very harsh result.

Soon after that case, Congress moved to overrule that result and added into the Bankruptcy Code a new provision that gives the licensee of an intellectual property license the option to either treat the license as terminated and have a claim as an unsecured creditor or retain the intellectual property rights under the original license and continue the license. See 11 USC 365(n). To support this new section, Congress also added new definitions to the Bankruptcy Code and specifically defined “intellectual property” to include trade secrets, patents, and copyrights to mention a few. See 11 USC 101(35A). But Congress did not specifically mention trademarks in this new definition section. Rather, Congress said it needed more time to study trademark licenses. Mind you, this was in 1988 and Congress still has not revisited this issue, leaving trademark licenses unprotected by the same protections given to other forms of intellectual property.

Since 1988, various bankruptcy courts have gone in different directions on whether a trademark license is an intellectual property license as defined in section 365(n) of the Bankruptcy Code. The Third Circuit looked at this issue in 2010, and while it decided that case on different grounds, a concurring opinion disagreed with Lubrizol on trademark licenses. See In re Exide Technologies, 607 F.3d 957, 966–67 (3d Cir. 2010) (Ambro, J., concurring) (concluding that 365(n) neither codifies nor disapproves Lubrizol as applied to trademarks).

In 2012, the Seventh Circuit Court of Appeals looked at Lubrizol and determined that it did not apply to trademark licenses. See Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012). The Fifth Circuit (where I live) like some other circuits, has not yet weighed in on this issue. And finally, the First Circuit last year weighed in and rejected Sunbeam, followed Lubrizol, and found that a trademark license does not survive bankruptcy and can be terminated. See Mission Prod. Holdings, Inc. v. Tempnology, LLC (In re Tempnology, LLC), 879 F.3d 389 (1st Cir., 2018).

Since Congress has never revisited this issue in over 20 years, there is still lingering uncertainty. In the Fourth and First Circuits, licensees are out of luck if the licensor goes into bankruptcy. In the Seventh Circuit, licensees have protection and have a choice of how to proceed. In other circuits, like the Fifth Circuit, who knows what will happen. Hopefully, the Supreme Court will provide guidance on this issue since Congress never got around to it.

The case is Mission Product Holdings, Inc. v. Tempnology, LLC, nka Old Cold LLC, No. 17-1657 (US). Link to the case. Oral arguments on the case were heard on Wednesday, February 20, 2019.

Lawful Use in Commerce for Wine

By Matthew J. Booth

As I was thinking about celebrating Texas Independence Day (March 2), I saw a story about Trademarks and Texas Wines that caught my eye.

This case was a Concurrent Use proceeding at the U.S. Trademark Trial and Appeal Board for the concurrent use of a trademark between a Texas vineyard and a California vineyard. What intrigued me about this case was that it was both a concurrent use application and the case turned on the concept of “lawful use in commerce.” However, as you read on, you will see that I end up somewhere different.

I am throwing around a lot of trademark terms so first a little trademark background information. A concurrent use trademark registration is a type of registered trademark that splits the country into different geographic areas; one company has rights to the trademark in one area and another company has rights in a different geographic area. In today’s system of commerce, I think it is going to become harder and harder to make a case for a concurrent use trademark where there is no likelihood of confusion between the different owners in the different geographic areas but that is a topic for another time. The term “lawful use in commerce” comes about because the language for use for concurrent use trademarks is slightly different than for a regular federal trademark registration. In the case of a regular federal trademark, the term is “use in commerce”. See 15 USC 1051 (Application for registration), 15 USC 1052 (Trademarks registrable on principal register; concurrent registration), and 15 USC 1127 (Definitions).

To legally sell wine in this country, you need to have a Certificate of Label Approval (“COLA”) so that a label can be applied to the wine bottle. A COLA is obtained from the U.S. Department of the Treasury Alcohol and Tobacco Tax and Trade Bureau. The Texas vineyard failed to obtain a COLA in a timely fashion and the U.S. Trademark Trial and Appeal Board (TTAB) held that that failure meant its use of the mark did not satisfy the “lawful use in commerce” requirement for a concurrent trademark registration. Therefore, the Texas vineyard did not obtain a trademark registration. See Scott Stawski v. John Gregory Lawson, Proceeding No. 94002621 (TTAB 12/21/2018).

From the records in the case it looks like the Texas vineyard had pre-sales activity that actually predated the use date of the California vineyard, but the Texas vineyard did not successfully take the next step in achieving use in commerce to properly establish its trademark rights. In the interim, the California Vineyard applied for and received a federal trademark registration. Instead of adopting a different trademark in light of the prior registration, the Texas Vineyard attempted to perfect a flawed trademark application through the concurrent use trademark process. Unfortunately, the use criteria for concurrent use is slightly different and this is when “lawful use in commerce” rears its ugly head. Because the Texas vineyard did not receive its COLA until after the California vineyard received its federal registration, the TTAB discounted all of the Texas vineyard’s pre-sale activity because all of that activity occurred before the issuance of a COLA so it was not lawful use in commerce.

I started out thinking this was a case about wine and concurrent use, however, what really hit home with me was something I hadn’t expected. To me this case is really a cautionary tale about the importance of trademark professionals and their role in branding and marketing. The Texas vineyard did not engage trademark counsel at any point through this process. Trademark counsel could have sat down with the vineyard at the beginning of the process and devised a strategy for pursuing trademark protection. I think a solid strategy would have been for the vineyard to file an Intent to Use (ITU) trademark application as soon as they picked a trademark so as to preserve their trademark rights. After receiving a Notice of Allowance on the ITU application, an Applicant has up to 36 months to begin using the trademark in commerce (there are caveats here so consult your trademark counsel). This would have given them time to work on a “use in commerce” strategy. This is especially critical for vineyards because the actual production and sale of wine make take up to or even more than 3 years. Options could have included entering into an agreement to sell products made by a contract manufacturer so as to establish sales under the trademark such as using the private label option. The private label option has another vineyard produce the wine and then the applicant company puts its own label on the bottle (which by the way, still needs a COLA so that the wine is now “lawfully in commerce”). Had the Texas vineyard followed the above steps, they could have filed a trademark application before the California vineyard, and received the registration first. If that had happened there would have been no need for the concurrent use proceeding.

Being a business owner myself, I know the necessity of keeping an eye on the bottom line. However, in this case, I think the dollars would have been well spent on a trademark professional because at the end of the day, the Texas vineyard would have had a registered trademark. They could have avoided the lengthy and ultimately unsuccessful legal proceedings and concentrated on their passion, producing wine. The vineyard’s job is wine. A trademark professional’s job is trademarks. No offense to my friends that practice trademark law, but when my wife sends me out for a good bottle of wine to celebrate Texas Independence Day, I am going to rely on a vineyard to have produced that bottle, not a trademark attorney.