Crumbs Court Deals Protection For Trademark Licensees In Bankruptcy

The Bankruptcy Code definition of "intellectual property" does not explicitly include "trademarks."1 This has led to trademark licensees losing their rights to use the trademark upon rejection of the license in bankruptcy.

A recent decision in the Crumbs2 bankruptcy case in New Jersey addressed this and related issues, finding that trademark licenses can be afforded the protections of § 365(n) based on a court's equitable powers, notwithstanding their absence from the definition of "intellectual property." Without consent from licensees to have their rights affected in a § 363 sale, these rights are preserved.

Some licensees are therefore permitted to continue using any intellectual property under such license agreements for the duration of their terms. Any royalties generated under these license agreements are payable directly to the debtor until the sale closes, provided the purchaser purchases the debtor's accounts receivable, or until rejected or assumed and assigned.

Background

As with many Chapter 11 cases in recent years, the Crumbs bankruptcy was sold pursuant to § 363 almost two months after the petition date pursuant to a credit bid Asset Purchase Agreement (APA) entered into on the petition date with Lemonis Fischer Acquisition Company, LLC (LFAC).

Following Court approval of the sale to LFAC, the Debtors moved to reject certain executory contracts, including six license agreements (the License Agreements) for use of the Debtors' "Crumbs" trademark and trade secrets (the IP).3 The License Agreements were originally procured for the Debtors by Brand Squared Licensing (BSL), which also provided certain ancillary licensing services to the Debtors. BSL replied to the rejection motion, asserting the Licensees could elect to retain their rights under the License Agreements pursuant to § 365(n), and that BSL would be entitled to royalties derived from the Licensees' continued use of the IP. The Debtors withdrew the rejection motion as to the License Agreements. LFAC then moved for an order in aid of the Court's sale order to clarify several open issues concerning the effect of the sale order on the parties' respective rights with regard to the License Agreements.

In a written opinion filed on October 31, 2014 (the Crumbs Opinion),4 the Court denied LFAC's motion and considered: (i) whether trademark licensees are within the scope of § 365(n) upon rejection of their respective trademark licenses, even though "trademarks" are not...