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When a Trademark Licensor Goes Bankrupt

Yogi Patel - Tuesday, January 05, 2016

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.

Legal Update - January 2016 Newsletter

David Lloyd - Tuesday, January 05, 2016

Dear valued clients and supporters: Happy New Year. This month's newsletter will focus on: (1) The effect bankruptcy of a trademark licensor has on a licensee; (2) The limits on non-compete clauses; and (3) The emergence of "The Internet of Things" and its legal impact.

When a Trademark Licensor Goes Bankrupt
Businesses sometimes 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. For businesses that 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 potential failure of licensee's business. A more in-depth article on this issue is now available here on our website.

 

Grounds for Refusing to Enforce a Non-Compete
In New York, non-compete clauses must be necessary to protect a legitimate interest of an employer, and must be reasonable in scope, duration, and location. Non-compete clauses are generally disfavored as restraints on trade and will only be enforced if signed for adequate consideration - i.e. in exchange for something. In a recent commercial court case involving three former executives of a Suffolk County-based vitamin distributor, NBTY, the judge addressed the validity of a non-compete clause signed after the executives were already employed. Years after being hired, the executives signed a stock option agreement containing a clause prohibiting them from working for any competitor in North America, Europe, or China for one year. The executives all then resigned and began working for a competitor without exercising the stock options.

The court held that the non-compete clause was not supported by new consideration and therefore unenforceable because the executives had chosen resigning over exercising their options. By forfeiting their right to any benefit under the stock option agreement, they rendered the non-compete clause invalid. Additionally, the court found that the geographic scope was unreasonable, noting that such a global restriction was only generally appropriate when a business is sold. Finally, the court rejected the argument that the executives would inevitably misappropriate confidential information, requiring more than hypothetical speculation to form the basis of such a claim.

This case highlights how employers who wish to hold their employees to non-compete clauses must be careful in tailoring their restrictions not only so that they are reasonable and necessary, but also so that they are in exchange for adequate consideration.

 

The "Internet of Things"
The Internet of Things refers to the everyday objects people use - smart phones, smart watches, smart cars, and even smart homes - that are digitally interconnected and function through a computer network that transmits and analyzes high levels of data. These "things" can be typically controlled and/or accessed remotely, and the new digitized "ecosystem" of which they are a part allows for automation, constant monitoring, and instant access to seemingly endless information. Any single device can be composed of parts made by multiple manufacturers, require a local "gateway" through which it connects to a greater network and other devices, and function through a cloud computing platform. While consumers and businesses alike enjoy the increased functionality the Internet of Things provides, the ever-expanding network of devices, systems, subsystems, clouds, and people has created a whole universe of legal considerations.

 

For one, with such vast access to and exchanges of data, participants in the Internet of Things must take steps to protect the privacy of personally identifiable information. Additionally, other data, such as sensitive or secret information, and control over a computer network, must also be heavily protected, making cybersecurity paramount. Other potential sources of intense litigation will be over the ownership of the various data generated by the Internet of Things, the ownership of the underlying technology/processes on which it all functions, and as well as accusations of anti-trust violations. Finally, when things go wrong and devices malfunction, break, and/or injure a user, with all the potential parties involved, determining whom to hold liable will be a complicated matter. All of this inevitably will result in an increase of rules, laws, and regulations governing the Internet of Things as it develops, and any supplier, manufacturer, or participant should consult with an attorney about potential liabilities before injecting a product into this emerging ecosystem.

Readers are encouraged to follow us on Twitter (@lloydpatelllp) and Facebook to receive updates on this and other issues throughout the month.

 


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