Businesses often enter into licensing agreements to use a trademark belonging to someone else. One of the most essential circumstances to consider before expending any resources on a trademark license is what happens in the event that the owner of the trademark declares bankruptcy. Businesses who develop products, perform research, and make sales revolving around a trademark license, savvy planning in advance is essential for protecting their interests. Poor planning or a failure to do so can result in the license being revoked, even if paid for in advance, resulting in the licensee's business potential failure. A more in-depth article on this issue is now available on our website.
In general, courts have found trademark licensing agreements to be executory, meaning the parties to the agreement still have duties remaining to be performed. When a licensor declares bankruptcy, it has the option of assuming or rejecting the agreement. If the agreement is accepted and certain conditions are met, everything continues as normal. However, if the agreement is rejected, there is the very real risk that the licensee will lose all rights to use the trademark, leaving the owner free to re-license the trademark to someone else. While Bankruptcy laws offer some protections for intellectual property, such as patents, copyrights, and trade secrets, courts have split on whether trademarks are included. Because Bankruptcy Courts have the authority to resolve trademark issues, licensees must take steps to minimize the risk of an unfavorable decision.
One possibility is to structure the licensing agreement as a sale or assignment of the trademark. This minimizes or reduces the risks to the licensee as it transfers ownership in the trademark and creates a non-executory contract. However, when this is not possible, another option is to require that the trademark be owned by a limited liability company with the single purpose of holding the trademark. The LLC can also be prevented from incurring debt, which greatly reduces the risk of a bankruptcy filing. One last alternative is for the licensee to take a security interest in the trademark, but this is not commonly used as it creates disincentives for both parties. While there are additional drafting techniques one should adopt, such as explicitly referencing Bankruptcy Law protections, combining trademarks in the same agreement as other protected intellectual property, and paying royalties over time, anyone considering entering into a trademark licensing agreement should enlist the services of an attorney to make sure their rights are protected.