After a brief hiatus, we’re back – and just in time to discuss a recent decision of some import to trademark owners and licensors.
For many years, insolvency practitioners have recognized the value of the Bankruptcy Code in permitting a reorganizing firm to assign contractual rights to a third party, even where the contract itself prohibits assignment. That power is limited, however, where “applicable [non-bankruptcy] law” prohibits the assignment without the non-bankrupt party’s consent.
In recent years, the “anti-assignment” provisions of federal copyright and patent law have limited the transfer of patent and copyright licenses through bankruptcy. Whether the transfer of trademark licenses is likewise limited has been an open question, at least amongst the Circuit Courts of Appeal.
In late July, the Seventh Circuit Court of Appeals found in In re XMH Corp. that trademarks were not assignable.
XMH Corp. involved the former Hartmarx clothing company’s Chapter 11, along with the related filings of several subsidiaries. XMH ultimately sold its assets and assigned contracts to a group of third-party purchasers. Those assets included certain trademark licenses for jeans held by one of the XMH subsidiaries. The trademarks were owned by a Canadian firm.
The Canadian firm objected to the trademark assignment, and the bankruptcy court agreed. The District Court reversed, and the licensor appealed to the Seventh Circuit.
In a succinct, 15-page decision, Judge Posner found that where “applicable law” prohibits the assignment of a trademark, it cannot be assigned through a bankruptcy proceeding absent the trademark owner’s consent.
Judge Posner apparently reached this decision despite a lack of either party to articulate which “applicable law” actually prohibited the assignment:
Unfortunately the parties haven’t told us whether the applicable trademark law is federal or state, or if the latter which state’s law is applicable (the contract does not contain a choice of law provision)—or for that matter which nation’s, since [the licensor] is a Canadian firm. ([The licensee's] headquarters are in the State of Washington.) None of this matters, though, because as far as we’ve been able to determine, the universal rule is that trademark licenses are not assignable in the absence of a clause expressly authorizing assignment. Miller v. Glenn Miller Productions, Inc., 454 F.3d 975, 988 (9th Cir. 2006) (per curiam); In re N.C.P. Marketing Group, Inc., 337 B.R. 230, 235-36 (D. Nev. 2005); 3 McCarthy on Trademarks § 18:43, pp. 18-92 to 18-93 (4th ed. 2010).
But the Seventh Circuit then turned to the question of whether the contract actually contained a valid trademark license - and found that though the agreement appeared to provide a relatively short-term license of the trademark, what remained at the time of the proposed assignment was merely a contract for services.
Despite its brevity, XMH Corp. is instructive in two respects:
- Trademarks cannot be assigned – at least not in the 7th Circuit.
- Contract drafters and negotiators must be careful to identify and preserve the trademark rights at issue.