Tech Bankruptcy
June 22, 2014
Eight Circuit follows Third Circuit's Exide in En Banc Review of Interstate Bakeries
Complex corporate transactions often include ancillary intellectual property licenses. For various reasons, when one company sells off part of its business operations it may not be able to transfer intellectual property rights to the acquiring entity. Usually, this is because the selling entity still needs to retain the IP rights for the operations it doesn't sell. The parties resolve the problem by licensing the IP to the divested portion of the business - usually these IP licenses are perpetual and fully paid. In intent, the licensee receives the rights to the IP within a particular scope - possibly geographical or perhaps in connection with a specific brand or product.
When the seller files a bankruptcy can it reject these ancillary IP licenses? What if, by so doing, it effectively unwinds a fully completed business divestiture? The Court of Appeals for the Eighth Circuit had to address this issue recently in the Interstate Bakeries Corporation case. The debtor had previously sold off several food brands as part of a business divestiture, but licensed the trademarks instead of assigning them. Now, the debtor sought to reject the trademark license - effectively unwinding the prior business transaction.
In the Exide Technologies case, the Court of Appeals for the Third Circuit had faced a similar situation. It held that the trademark license was not executory because the parties had substantially performed the material provisions of the agreement when the prior business divestiture was completed. The remaining trademark license was thus substantially performed and non-executory. The debtor could not reject it.
The Court of Appeals for the Eight Circuit initially reached a different conclusion, even though on similar facts, holding that the remaining trademark license was executory. In distinguishing Exide, the Eight Circuit noted the existence of additional provisions requiring the licensor to continue to monitor the licensee's use of the marks. These provisions, the Court said, made the license executory.
On En Banc review, the full Court of Appeals reversed. Following Exide, it reviewed the license agreement as part of an integrated sale agreement, which it held had been substantially performed. Along the way, the court discussed the concept of considering the IP license in context. The Court felt that the central purpose of the agreement was the sale of certain brands and related operations to the buyer - not a trademark license. The trademark license itself was an ancillary part of the transaction and, thus, the remaining unperformed terms were not material.
When the seller files a bankruptcy can it reject these ancillary IP licenses? What if, by so doing, it effectively unwinds a fully completed business divestiture? The Court of Appeals for the Eighth Circuit had to address this issue recently in the Interstate Bakeries Corporation case. The debtor had previously sold off several food brands as part of a business divestiture, but licensed the trademarks instead of assigning them. Now, the debtor sought to reject the trademark license - effectively unwinding the prior business transaction.
In the Exide Technologies case, the Court of Appeals for the Third Circuit had faced a similar situation. It held that the trademark license was not executory because the parties had substantially performed the material provisions of the agreement when the prior business divestiture was completed. The remaining trademark license was thus substantially performed and non-executory. The debtor could not reject it.
The Court of Appeals for the Eight Circuit initially reached a different conclusion, even though on similar facts, holding that the remaining trademark license was executory. In distinguishing Exide, the Eight Circuit noted the existence of additional provisions requiring the licensor to continue to monitor the licensee's use of the marks. These provisions, the Court said, made the license executory.
On En Banc review, the full Court of Appeals reversed. Following Exide, it reviewed the license agreement as part of an integrated sale agreement, which it held had been substantially performed. Along the way, the court discussed the concept of considering the IP license in context. The Court felt that the central purpose of the agreement was the sale of certain brands and related operations to the buyer - not a trademark license. The trademark license itself was an ancillary part of the transaction and, thus, the remaining unperformed terms were not material.
Labels: executory contract, Exide, Interstate Bakeries, trademark, trademark license
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