Authored by D. Brian Kacedon, Douglas W. Meier, and John C. Paul
The Seventh Circuit, in In re XMH Corp.,1 recently addressed the assignability of trademark licenses in the context of bankruptcy proceedings. In so doing, the Court recognized a "default rule" prohibiting the assignment by a trademark licensee of the rights under a trademark license without an express provision providing for an assignment right by the licensee.
The In re XMH Corp. Decision
In 2009, the clothing firm, XMH Corp., along with a subsidiary, Simply Blue, sought Chapter 11 bankruptcy protection. XMH asked the bankruptcy court for permission to sell Simply Blue's assets to two third-party purchasers. The bankruptcy court granted permission for the sale. XMH told the bankruptcy court that an executory contract between Simply Blue and Western Glove Works, another clothing firm, would be assigned to those purchasers because it was an asset of Simply Blue. Western objected to this assignment, arguing that the contract was a sublicense to Simply Blue of a trademark licensed by Western and could not be assigned without Western’s permission. The bankruptcy court agreed. Eventually, after a complex procedural path, the case was heard by the Seventh Circuit.
At issue on appeal was the contract between Western and Simply Blue, which contained a trademark sublicense to Simply Blue in exchange for a 12.5% royalty. Oddly, this provision originally applied only for two weeks, ending on December 31, 2002. In March 2003, three months after the expiration of the sublicense, the parties agreed to extend the sublicense retroactively from January 1, 2003 through June 30, 2003. The contract also contained a services provision, which became effective after the expiration of the trademark sublicense. This service provision provided that Western would resume selling the trademarked apparel covered by the contract between Western and Simply Blue, and Simply Blue would perform a host of related services in return for 30% of Western’s net sales.
Section 365(c)(1) of the Bankruptcy Code limits the assignment of an executory contract of the debtor if "applicable law" authorizes the other party to the contract to refuse to accept performance from an assignee "whether or not such contract . . . prohibits or restricts assignment." The Court explained that "applicable law" means any law applicable to a contract other than bankruptcy law. In this case, the Court considered the relevant applicable law to be trademark law.
The Court noted that the universal rule is that trademark licenses are not assignable by the licensee in the absence of a clause expressly authorizing assignment, citing Miller v. Glenn Miller Productions, Inc., 454 F.3d 975, 988 (9th Cir. 2006), and In re N.C.P. Marketing Group, Inc., 337 B.R. 230, 235-36 (D. Nev. 2005). A trademark, the Court reasoned, is a shorthand designation of a brand, which conveys to a consumer certain information about the product. Because a trademark owner would generally prefer that the trademark not be assigned by a licensee without consent—or knowledge—the Court explained that a default rule prohibiting the assignment of a trademark license without the owner’s express permission makes sense. Because the contract in this case contained no express permission for assignment of the trademark sublicense, the central question for the Court was whether the trademark sublicense was still in effect at the time that XMH assigned the contract to the third-party purchasers. If the sublicense was in effect at the time of assignment, then the assignment was void.
Ultimately, the Seventh Circuit found that the trademark sublicense had expired at the time of XMH’s assignment, and that the contract was effectively a service agreement at the time of assignment. Because the trademark sublicense had expired, the service contract was freely assignable by the bankruptcy court. Accordingly, the Seventh Circuit affirmed that the contract could be assigned to the purchasers.
Similar Default Rules in Patent and Copyright Law
This default rule comports with other similar rules in other areas of intellectual-property law. Specifically, the Sixth Circuit has held that federal common law governs questions on the assignability of a patent or copyright license. Cincom Systems, Inc. v. Novelis Corp., 581 F.3d 431, 436 (6th Cir. 2009). In Cincom Sys., the Court held that in the context of intellectual property, a license is presumed to be nonassignable and nontransferable in the absence of express provisions to the contrary. The logic, according to the Court, is that if this were not the case, any entity seeking to acquire a license could approach either the original inventor or one of the inventor’s licensees. Without a federal rule of decision, state law would transform every licensee into a potential competitor with the patent or copyright holder—a clearly undesirable result. Although state contract law continues to govern the interpretation of a license because a license is merely a type of contract, where state law would allow for the transfer of a license without express authorization, state law must yield to the federal-common-law rule prohibiting such unauthorized transfers. Cincom Sys., 581 F.3d at 437.
The Federal Circuit has likewise examined this issue, explaining that on the question of the transferability of patent licenses, many courts have concluded that federal law governs. Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corp., 284 F.3d 1323, 1328 (Fed. Cir. 2002). According to the Federal Circuit, courts generally have acknowledged the need for a uniform national rule that patent licenses are personal and nontransferable in the absence of an agreement authorizing assignment, contrary to the state common-law rule that contractual rights are assignable unless forbidden by an agreement.
It should be noted, however, that the courts of at least one state, California, have disagreed with this approach and held that state law should determine the assignability of a patent license. Superbrace v. Tidwell, 124 Cal. App. 4th 388 (2004). And under California law, there is a policy in favor of free transferability of contracts.
Strategy and Conclusion
The default rule will prohibit the assignment of most intellectual-property licenses that are silent on the subject, but best practices still recommend specifically addressing assignability in the agreement. Both licensees and licensors benefit from the increased certainty of dictating in advance when and how and an agreement can be assigned. For licensees, however, this is especially important as silence will likely result in an inability to transfer license rights as illustrated by this case.
1 The In re XMH Corp. decision: http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=10-2596_002.pdf.
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