Rejection Revisited: 7th Circuit Holds Rejection Does Not Terminate Right to Use Trademarks

In the recent decision in Sunbeam Products v. Chicago American Manufacturing, the 7th U.S. Circuit Court of Appeals held that the rejection of a trademark agreement by the debtor-licensor in its bankruptcy case did not abrogate the licensee’s license to sell products branded with the debtor’s trademark. The appeals court affirmed the decision of the lower court, the U.S. Bankruptcy Court for the Northern District of Illinois, which held in favor of the licensee. This is the first appellate decision to directly reject the holding of the much criticized landmark Lubrizol case decided 27 years earlier.

In 1985, the 4th Circuit, in Lubrizol Enterprises v. Richmond Metal Finishers, held that when a debtor-licensor rejected an intellectual property licensing agreement, the licensee’s only remedy was a monetary damages claim and not specific performance of the right to retain the use of the intellectual property under the license agreement.

Responding to the predicament of licensees stripped of the intellectual property, in 1988 Congress enacted Section 365(n) of the Bankruptcy Code to afford certain protections to licensees upon rejection of a license agreement by a debtor-licensor. The licensee may either treat the license as rejected and assert a claim for damages or elect to retain certain rights under the license, including the continued use of the intellectual property.

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