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Sunbeam Eclipsed

By Kevin J. Walsh and Ella Shenhav
January 29, 2013

A recent decision of the Seventh Circuit Court of Appeals, Sunbeam Prods. v. Chi. Am. Mfg., LLC, 686 F.3d 372 (7th Cir. 2012), has been viewed by many, including the authors of this article, as signaling a potential trend in favor of non-debtor licensees of intellectual property. This decision, described in more detail below, permits the non-debtor licensee to retain trademark rights under a rejected license agreement. Trademarks do not fall within the scope of Section 365(n) of the Bankruptcy Code, which protects certain intellectual property rights of a licensee when a licensor files for bankruptcy and rejects the license. But just as intellectual property licensees may have begun to breathe easier, a reminder came from a Virginia bankruptcy court that their sigh of relief may be, after all, premature, because it may be that a bankruptcy sale free and clear of competing interests in the intellectual property pursuant to Section 363(f) may override all 365(n) and similar rights of non-debtor licensees of intellectual property.

Section 365(n) of the Bankruptcy Code was promulgated by Congress as a direct response to the Fourth Circuit Court of Appeal's decision in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985). In Lubrizol, the court held that when a debtor rejects an intellectual property license, the non-debtor party retains no rights in the intellectual property, but rather it is merely entitled to a money damages remedy. In the aftermath of this controversial decision, Congress amended the Bankruptcy Code by adding Section 365(n), which allows licensees to continue using the licensed intellectual property under certain circumstances after the debtor rejects the license. However, the amendment was not a perfect fix, as the Bankruptcy Code's definition of intellectual property (and thus the scope of those property rights protected by Section 365(n)) includes patents, copyrights and trade secrets, but does not include trademarks or franchise agreements.

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