Section 365(a) of the Bankruptcy Code sets forth the basic power of a trustee in bankruptcy or a debtor in possession to assume or reject an executory contract. A debtor's ability to assume or reject an executory contract allows a debtor to keep favorable contracts and to discard burdensome contracts, subject to the bankruptcy court’s approval. The bankruptcy court will apply a two-part test to determine whether assumption or rejection should be allowed. First the court will determine whether the contract is executory. If the court determines that the contract is executory, the court will then determine whether assumption or rejection is advantageous to the bankruptcy estate. In determining whether assumption or rejection is advantageous to the bankruptcy estate, the court will typically defer to the debtor’s business judgment. The court will generally approve the debtor’s request to assume or reject an executory contract if the debtor satisfies both parts of the test.
Courts have long struggled when determining whether the rejection of a trademark license agreement under section 365 acts to terminate such an agreement. Section 365(n) provides that rejection of an executory contract under which the debtor is a licensor of a right to intellectual property does not act to terminate the contract unless the licensee elects to treat the contract as terminated. Although section 365(n) addresses the rejection of a copyright, patent, or trade secret license agreement, it does not address the rejection of a trademark license agreement because the definition of “intellectual property” in the Bankruptcy Code excludes trademarks. Consequently, court decisions are split as to whether the rejection of a trademark license agreement acts to terminate such an agreement.
This Article discusses the current state of the law regarding whether the rejection of a trademark license agreement operates to terminate the licensee’s rights in the mark. Part I discusses section 365 generally. Part II discusses Lubrizol Enterprises v. Richmond Metal Finishers, Inc. and section 365(n) which specifically treats the rejection of intellectual property licenses. Part III discusses the current split over whether the rejection of a trademark license agreement terminates such agreement. Part IV will analyze the implications of the current split of authority.