Bankruptcy Circuit Split May Go to Supreme Court

     CHICAGO (CN) - Trademarks licenses can still be valid after a company's bankruptcy, the 7th Circuit ruled, going against its sister courts on an issue likely to go before the Supreme Court.
     The high court affirmed another controversial bankruptcy decision from the 7th Circuit, RadLAX Gateway Hotel v. Amalgamated Bank, earlier this year.
     In the case at hand, Lakewood Engineering and Manufacturing Co. contracted Chicago American Manufacturing to produce its box fans in 2008.
     The contract included a license authorizing Chicago American to practice Lakewood's patents and place its trademarks on the fans.
     Because Lakewood was experiencing financial difficulty, Chicago American sought security before it began producing the 1.2 million fans that would be needed for the 2009 season.
     Chicago American was authorized to sell the 2009 run of box fans for its own account if Lakewood did not purchase them.
     Three months into the contract, Lakewood's creditors forced the company into an involuntary bankruptcy. The court-appointed trustee sold the business to Sunbeam Products, which operates under the name Jarden Consumer Solutions.
     Jarden did not want the fans in Chicago American's inventory and did not want Chicago American to become a competitor by selling the fans. The trustee thus rejected the executor portion of the Lakewood-Chicago American contract.
     When Chicago American continued to produce and sell Lakewood-branded fans, Jarden filed an adversary action against it.
     The bankruptcy court ruled that Chicago American was entitled to make as many fans as Lakewood estimated it would need in 2009 and sell them bearing Lakewood's marks.
     But the court declined to address whether the trustee's rejection of the intellectual property licenses could prevent such use by Chicago American.
     In its 1985 resolution of Lubrizol Enterprises v. Richmond Metal Finishers, the 4th Circuit held that the licensee loses the ability to use any copyrights, trademarks and patents when an intellectual-property license is rejected in bankruptcy.
     Congress later amended the bankruptcy code to undo the ruling, but did not include trademarks in the definition of intellectual property.
     Though some bankruptcy judges have interpreted the amendments to apply to trademarks, the 7th Circuit said Monday that "an omission is just an omission."
     Section 365 of the Bankruptcy Code states that rejection of a contract constitutes a breach. When a breach occurs, the other party still maintains rights under the contract.
     "According to the Senate committee report on the bill that included §365(n), the omission was designed to allow more time for study, not to approve Lubrizol," Chief Judge Frank Easterbrook wrote for a three-member panel.
     "The subject seems to have fallen off the legislative agenda, but this does not change the effect of what Congress did in 1988," he added.
     "What §365(g) does by classifying rejection as breach is establish that in bankruptcy, as outside of it, the other party's rights remain in place. ... The debtor's unfulfilled obligations are converted to damages; when a debtor does not assume the contract before rejecting it, these damages are treated as a pre-petition obligation, which may be written down in common with other debts of the same class. But nothing about this process implies that any rights of the other contracting party have been vaporized."
     "Scholars uniformly criticize Lubrizol, concluding that it confuses rejection with the use of an avoiding power. ... Lubrizol does not persuade us."
     The opinion was circulated to all active judges on the 7th Circuit before publication because of the circuit split it creates. No judge voted for rehearing en banc.
     In the 2003 case In Re: Exide Technologies, the 3rd Circuit concluded that the bankruptcy code neither codifies nor disapproves Lubrizol as applied to trademarks. Judge Thomas Ambro called Lubrizol mistaken in a concurring opinion.