Seventh Circuit's Sunbeam Decision Offers Long-Awaited Response to Fourth Circuit's Lubrizol: Why the Time Is Right to Revamp Section 365 of the Bankruptcy Code

Nearly four thousand Americans file for bankruptcy every day. Further, for every one person who goes bankrupt, countless others face the inevitable and sometimes devastating reality that the money or obligations they were duly owed by the debtor will never be repaid. These “others,” known as creditors, must look to the Bankruptcy Code (“the Code”) to ascertain what rights they can assert, if any, in an attempt to minimize their damages. Thus, given the indisputable prevalence of bankruptcy in our capitalist system, interpreting the Code is an integral task with widespread implications. This has become abundantly clear in cases dealing with insolvent intellectual property (“IP”) licensors. At the onset of bankruptcy, § 365(a) of the Code permits a trustee to assume or reject any of the debtor’s preexisting executory contracts, subject to court approval. However, courts have become increasingly confused about the effect of rejection when the contract in question is a trademark license agreement, and two questions have emerged: (1) whether these agreements are “executory contracts,” and thus subject to § 365(a) rejection, and (2) if so, whether the rejection of a license agreement constitutes the revocation of the licensee’s continued right to use the license. In 1985, the Fourth Circuit infamously addressed this issue in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, holding that a licensor-debtor’s rejection of an executory patent license agreement meant the revocation of the licensee’s rights to continue using it. In response to the potentially chilling effects of this interpretation, Congress enacted § 365(n) to the Code as a part of the Intellectual Property Bankruptcy Protection Act of 1988 (“IPBPA”), giving intellectual property licensees the right to continue using their licenses despite rejection. However, the Code’s definition of “intellectual property” did not include trademarks, leading the bankruptcy courts into a state of perplexity regarding the effect of trademark license rejection. Twenty-five years later, the Third Circuit addressed the matter in In re Exide Technologies. There, the majority avoided the effect-of-rejection question by holding that the trademark license at hand was not “executory,” and thus not subject to § 365(a) rejection. In 2012, the Seventh Circuit, in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, confronted Lubrizol’s analysis in a trademark license rejection case and held that rejection did not revoke a licensee’s continued rights to use the license, creating a circuit split. By thoroughly examining the reasoning and results in Sunbeam, In re Exide and Lubrizol, as well as the function of § 365(n), two things become clear: rejection should not mean contractual revocation (the Seventh Circuit got this right), and executoriness is irrelevant for the purposes of license rejection analysis. This article proposes that Congress resolve the confusion surrounding the meaning of rejection by eliminating the requirement that contracts be executory in order to be rejected, and making adjustments to the Code that clarify the meaning of rejection. Finally, it proposes that with the implementation of these changes, section 365(n) serves no purpose in the Code, and should be removed.