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Trademark Licenses in Bankruptcy - Cert Denied: This Time

The U.S. Supreme Court denied cert last week on a debtor/trademark licensee's petition seeking to reverse a Ninth Circuit opinion affirming an important decision originating in the Bankruptcy Court for the District of Nevada. In N.C.P. Marketing Group, Inc. v. BG Star Productions, Inc., et al. 556 U.S. ______ (2009),** the Supreme Court let stand an order granting the trademark licensors' motion to compel rejection of their nonexclusive trademark license for the marks Tae Bo® and Billy Blanks®, depriving the debtor of the ability to assume the license and/or assign its rights in the license.

The petition concerned the power of a trustee-typically the debtor-in-possession-to assume its executory contracts under Section 365(a) of the Bankruptcy Code. The section, as more fully discussed in the informative accompanying article, "Executory Contracts in Entertainment Bankruptcy Cases," by Howard J. Weg, provides the debtor-in-possession with the ability to choose whether to continue to receive the benefits of an agreement if both parties have duties remaining to be performed. Executory contracts can include licenses to use others' property. But, as Weg explains, pursuant to Section 365(c), a debtor-in-possession cannot compel a non-debtor party to an executory contract to continue to perform if (a) the law excuses the non-debtor party from performing, and (b) the non-debtor party does not consent to assumption or assignment of the contract.

In other words, if nonbankruptcy law wouldn't allow the assignment of rights or the delegation of duties under the contract without the consent of the non-debtor party, then the executory contract may not be assumed or assigned in bankruptcy.

The parties in N.C.P. Marketing Group, Inc. did not dispute that the licensing of the trademarks was executory, or that trademark law is the "applicable federal law" for purposes of § 365 (c)(1). They disputed whether trademark law in a nonbankruptcy setting would bar assignment of the trademark license to a third party without consent of the trademark owner/licensor. If nonbankruptcy law wouldn't allow the license to be transferred without the licensor's consent, then §365 (c) would bar the trustee or debtor-in- possession from taking the license over the licensor's protest. Trademark licenses can be argued to be personal to the licensor, akin to a personal services contract, and this is a key reason the debtor licensee lost the right to assume the non-exclusive Tae Boe® and Billy Blanks® trademark license.

Trademarks, unlike patents or copyrights, serve to indicate source of the goods or services sold under the marks. Trademarks arise from use of the mark in commerce in connection with the branded goods or services, and indeed no registration is required for their protection under the Federal trademark law, the Lanham Act. With proper care a trademark, whether registered or unregistered, can last forever. This care mandates the licensor to exercise quality control over the goods or services sold by its licensees under the trademark. This is because a trademark symbolizes the good will of the brand owner. A trademark is not a right in gross in the hands of its owner. It protects the public from a likelihood of confusion as to the source of what is being sold under the brand. That said, it is an extremely valuable asset - sometimes the company's most valuable asset.

If the licensor of a trademark doesn't or can't control the quality of use by its licensees, the trademark rights can be seriously undercut or even eviscerated. It is not sufficient to deputize the licensee to control its own quality. For this reason, it is of critical significance for brand owners who license their marks to pick their licensees with care, and the law permits this, outside of a bankruptcy setting.

On the flip side, losing the right to continue as licensee can spell disaster for the trademark licensee whose business depends on the license. In the entertainment industry, as in others, it is often a bundle of rights being licensed, not just the trademarks. Without the trademarks, the rest of the bundle may under some circumstances be unmarketable. This is made more of a challenge because § 365(n), which states that a licensee may elect to retain its rights if the rejected license is one of "intellectual property," excludes trademarks by definition of intellectual property found in § 101(35A).

Justice Kennedy, with whom Justice Breyer joined, pointed to the split in the circuits regarding whether the Ninth Circuit's "hypothetical" test under § 365(c), clarified by Howard J. Weg herein, is the proper one, or whether the debtor in possession may assume an executory contract if it has no "actual" intent to assign the contract to someone else. Said Justice Kennedy:

"The division in the courts over the meaning of §365(c)(1) is an important one to resolve for Bankruptcy Courts and for businesses that seek reorganization. This petition for certiorari, however, is not the most suitable case for our resolution of the conflict. Addressing the issue here might first require us to resolve issues that may turn on the correct interpretation of antecedent questions under state law and trademark-protection principles. For those and other reasons, I reluctantly agree with the Court's decision to deny certiorari. In a different case the Court should consider granting certiorari on this significant question."

Given the significance of trademark licenses in this troubled economy, it shouldn't be too difficult for the U.S. Supreme Court to find that "different case" this term.

* Jane Shay Wald is a partner of Irell & Manella LLP and chair of its Trademark Practice Group. She is Secretary of the Century City Bar Association.

** N.C.P. Mktg. Group, Inc. v. Billy Blanks (In re N.C.P. Mktg. Group, Inc.), 337 B.R. 230 (D. Nev. 2005), aff'd sub nom., N.C.P. Mktg. Group, Inc. v. BG Star Prods., Inc., 279 F. App'x 561 (9th Cir. 2008), cert. denied, 556 U.S. __ (2009).

_{Jane Shay Wald
Irell & Manella, LLP
1800 Avenue of the Stars
Los Angeles, CA 90067
(310) 203-7017
www.irell.com}

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