Amicus Curiae Brief — Mission Prod. Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 397 (2018) (No. 17-1657)

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No. 17-1657

IN THE

Supreme Court of the United States

MISSION PRODUCT HOLDINGS, INC.,

Petitioner,

TEMPNOLOGY, LLC, N/K/A OLD COLD LLC,

Respondent.

On Wait or Certiorari TO THE UNtrep States

Court or APPEALS FoR THE Fiest Circurr

AMICUS CURIAE BRIEF OF

THE INTERNATIONAL TRADEMARK

ASSOCIATION IN SUPPORT OF

PETITIONER

ELEANOR M. LACKMAN Davip H. BERNSTEIN

Cowan, Departs, ABRAHAMS Counsel of Record

& Sueprarp LLP Jerrrey P. Cunarp*

41 Madison Avenue, 38” Floor Jeremy FEIGELSON

New York, New York 10010 Henry LeBow!rz

(212) 974-7474 JASMINE BALL

JARED I, KAGAN

Evie J. WoRENKLEIN

Desevoise & Puimpron LLP

919 Third Avenue

New York, New York 10022

(212) 909-6000

dhbernstein@debevoise.com

*Resident in Washington,

D.C. Office

Attorneys for Amicus Curiae

The International Trademark Association

OO .

PMR?

TABLE OF CONTENTS

ee Oe I iniitctessinternicnntiimcncinininmiiasmanein iii

Interest of the Amicus Curiae ................c0ccccceeeeeeeeeee |

Sr IID scccniiiciienitiaidieiceeidenniaiediaiandimensdienl 6

SE ee RTE s]

I. A Rule That Best Promotes the Strength

and Stability of the Trademark System

Will Benefit the U.S. Economy and the

LEE SEES 9

A. The Law of Trademarks and

Trademark Licensing...........................------ i)

B. The Significance of Trademark

Licenses to the U.S. Economy. ................ 13

Il. The Sunbeam Rule Best Promotes the

Strength and Stability of the Trademark

SUTITI: intelettinsdadieedieitanthtsitaineientambdammnaibnbadarenineceds 18

A. The Sunbeam Rule Furthers the

Interests of Trademark Licensors,

Licensees, and Consumers. ..................... 18

B. The Sunbeam Rule is Consistent

with the Lanham Act’s Quality

EE IS eS 23

C. The Sunbeam Rule is Consistent

with the Text and Purpose of the

I aia aceicimmethiniiiasenaumarinnnds 30

D. The Force of the Sunbeam Rule is

Shown by the Other Courts That

ERE ES SS SE SE a 38

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TABLE OF AUTHORITIES

CASES

Aerogroup Intl, LLC v. Wiesner Prods., Inc.,

No. 17-51889 (KJC) (Bankr. D. Del. Jan. 2,

I CR 39

Already, LLC wv. Nike, Inc.,

I sideman 2

Am. Needle, Inc. v. Nat'l Footbal! League,

ee Si acecicantckicussdiliDecentéccnsvineccsscsoesese 13

Amscan Inc. v. Shutter Shades, Inc.,

No. 13-cv-1112, 2015 U.S. Dist. LEXIS

180647 (S.D.N.Y. Apr. 30, 2015) ......................... 28

B&B Hardware, Inc. v. Hargis Indus., Inc.,

PE i. UII iciniscindislcnntitisintindnadtticnceieensities 2,9

Banning Lewis Ranch Co. v. City of Colo.

Springs,

532 B.R. 335 (Bankr. D. Co. 2015) ......................39

Barcamerica Intl USA Tr. v. Tyfield

Importers, Inc.,

289 F.3d 589 (9th Cir. 2002).................... 10, 11, 29

Butner v. U.S.,

ER Ee rere AL es 26

Chloe v. Queen Bee of Beverly Hills, LLC,

ie sk

Christian Louboutin S.A. v. Yves Saint

Laurent Am. Holding, Inc.,

| & ff | | Eee 2

Cohen v. Drexel Burnham Lambert Grp. (In re

Drexel Burnham Lambert Grp., Inc.),

138 B.R. 687 (Bankr. S.D.N.Y. 1992)............ 26, 34

Dastar Corp. v. Twentieth Century Fox Film

Corp.,

ny SI isisidicirerssesicticcishdstaeiuatoadedaniantivedeieinad 2

Dawn Donut Co. v. Hart’s Food Stores, Inc.,

267 F.2d 358 (2d Cir. 1969) ..............cccsecccceeesss 25

Dickinson v. Zurko,

TI ts cicincinteiestnsecintnibiderdasustaieduandedions 2

Eastover Bank for Sav. v. Sowashee Venture,

19 F.3d 1077 (Sth Cir. 1994).................00ccece0s 34

Ferring B.V. v. Watson Labs., Inc.-Fla.,

oo | a 2

Fla. Prepaid Postsecondary Educ. Expense Bd.

v. Coll. Sav. Bank,

ee ad catia neliadeitasiasinniernantiianiaieees 2

Fourth Estate Pub. Benefit Corp. v. Wall-

Street.com, LLC,

138 S. Ct. 2707 (petition for certiorari

a EB ctrticiiitininicianindinmtcainnneientpese 2

Franchised Stores of N.Y., Inc. v. Winter,

394 F.2d 664 (2d Cir. 1968) ...............0...c0ccceeeeee002eO

Gorenstein Enters., Inc. v. Quality Care-USA,

Inc.,

ff ff. ff: ll Ee 24

Hana Fin., Inc. v. Hana Bank,

I 2

Hard Rock Cafe Int'l (USA), Inc. v. Hard Rock

Hotel Holdings, LLC,

808 F. Supp. 2d 552 (S.D.N.Y. 2011) .................. 15

Helpful Hound, L.L.C. v. New Orleans Bidg.

Corp., No. CV 18-3500,

2018 WL 3743817 (E.D. La. Aug. 7, 2018).......... 16

Huber Baking Co. v. Stroehmann Bros. Co.,

262 F.2d O46 (2d Cir. 1966) ..........ccccccccccccccccccccess 15

In re Columbia Gas Sys. Inc.,

re Be te Gs CD cccsetecevcecsvscincnccencsecoeves 26

In re Crumbs Bake Shop, Inc.,

522 B.R. 766 (Bankr. D.N.J. 2014).............. passim

In re Exide,

607 F.3d 957 (3d Cir. 2010) ..................-0.000 passim

In re Ortiz,

400 B.R. 755 (C.D. Cal. 2009).................000..sec0000 26

In re SIMA Int'l, Inc.,

No. 17-21761 (JT), 2018 WL 2293705

(Bankr. D. Conn. May 17, 2018).............. 12, 23, 39

In re Tempnology, LLC,

879 F.3d 389 (1st Cir. 2018)....................... passim

ITC Lid. v. Punchgini, Inc.,

482 F.3d 136 Gd Cir. 2007).........................

Joseph Bancroft & Sons Co. v. Shelley

Knitting Mills, Inc.,

212 F. Supp. 715 (E.D. Pa. 1962) ................

K Mart Corp. v. Cartier, Inc.,

Rs SI iia intnterianealiddas

Kopolow v. P.M. Holding Corp.,

900 F.2d 1184 (8th Cir. 1990)......................

KP Permanent Make-Up, Inc. v. Lasting

Impression I, Inc.,

Wee iniccichintacisnscinsbctcinisbaticintntimeinaia

Leasing Serv. Corp. v. First Tenn. Bank Natl

Ass'n,

826 F.2d 434 (6th Cir. 1987)....................-.-.

Levi Strauss & Co. v. Abercrombie & Fitch

Trading Co.,

633 F.3d 1158 (9th Cir. 2011)......................

Lewis Bros. Bakeries Inc. v. Interstate Brands

Corp.,

751 F.3d 955 (8th Cir. 2014).....................2+-

Louis Vuitton Malletier S.A. v. Haute Diggity

Dog, LLC,

507 F.3d 252 (4th Cir. 2007)............0.0000000-

Lubrizol Enters., Inc. v. Richmond Metal

Finishers, Inc.,

756 F.2d 1043 (4th Cir. 1985)......................

Matal v. Tam,

SAREE, A ERE apne aed ee eee 2,9

McGraw-Hill Cos., Inc. v. Vanguard Index Tr.,

139 F. Supp. 2d 544 (S.D.N.Y.), affd sub

nom. McCraw Hill Cos., Inc. v. Vanguard

Index Tr., 27 F. App’x 23 (2d Cir. 2001).............. 16

Me Renee LLC v. Elite World, S.A.,

674 F. App’x 620 (9th Cir. 2016) ......................... 14

Med. Malpractice Ins. Ass’n. v. Hirsch,

BBS Fe Bi Ge Ce BIO ccctccccccccsciccescccccsccceses 34

Monster, Inc. v. Dolby Labs. Licensing Corp..,

920 F. Supp. 2d 1066 (N.D. Cal. 2013)................ 28

Moore Bus. Forms, Inc. v. Ryu,

960 F.2d 486 (5th Cir. 1992)....................cceceee00ees 12

Moseley v. V Secret Catalogue, Inc.,

ac ecssesdulisensaeinianaes 2

NLRB v. Bildisco & Bildisco,

ne 36

O’Neil v. Cont’ Airlines, Inc.,

981 F.2d 1450 (Sth Cir. 1993) ...........cccccccceceeeeeeee- 34

Orion Pictures Corp. v. Showtime Networks,

Inc.,

re I IG Be eicccnsctnsentcenssccccnsecsesnstns 36

Pannell Kerr Forster Int Ass’n v. Quek,

5 F. App’x 574 (9th Cir. 2001) ....................c0000000 14

vill

Pepper v. Litton,

a Ie I iiacteisibneicniaceniconiinisbesinbenininitinesibie’

Pom Wonderful LLC v. Coca-Cola Co.,

le apis RE OE ecccsconcenscnsscsnesncconsesscsnss

Qualitex Co. v. Jacobson Prods. Co.,

I ee BR i Pcrccnccnanincersscenccerscccsenecnseess

Ritchie v. Williams,

395 F.3d 283 (6th Cir. 2005)...............:cccceeee

Rosetta Stone Ltd. v. Google, Inc.,

676 F.3d 144 (4th Cir. 2012).....0......c.ccccececeee-

Russello v. U.S..,

Sy Sic incicindcinieseuctiniusinteiensvensemsden

Shammas v. Focarino,

784 F.3d 219 (4th Cir. 2015).......................04.

Societe Comptoir de L’Industrie Cotonniere

Etablissements Boussac v. Alexander's

Dep't Stores, Inc.,

299 F.2d 33 (2d Cir. 1962) ...............csssecesseeee

Star-Kist Foods, Inc. v. P.J. Rhodes & Co.,

769 F.2d 1393 (9th Cir. 1985)........................

Starbucks Corp. v. Wolfe’s Borough Coffee,

Inc.,

588 F.3d 97 (2d Cir, 2009) ..--ccccccccscocseesesssssse

State of Idaho Potato Comm'n v. G & T

Terminal Packaging, Inc.,

425 F.3d 708 (9th Cir. 2005)................:cc000

Sunbeam Pruds, Inc. v. Chi. Am. Mfg., LLC,

686 F.3d 372 (7th Cir. 2012)....................005- passim

Superior Bedding Co. v. Serta Assocs., Inc.,

353 F. Supp. 1143 (N.D. Ill. 1972)....................... 16

Test Masters Educ. Servs., Inc. v. Singh,

428 F.3d 660 (Gth Cir. 2006)...........00.00....2..00.002.00. 3

Thompkins v. Lil’ Joe Records, Inc.,

476 F.3d 1294 (11th Cir. 2007)...................... 26, 34

TMT N. Am., Inc. v: Magic Touch GmbH,

124 F.3d 876 (7th Cir. 1997)................0.0.00000. 3. 37

Trace Minerals Research, L.C. v. Mineral Res.

Int'l, Inc.,

505 F. Supp. 2d 1233 (D. Utah 2007).................. 16

TrafFix Devices, Inc. v. Mktg. Displays, Inc.,

a a cshsinacwuntbede 2

Two Pesos, Inc. v. Taco Cabana, Inc.,

RIE Ee RN 2

U.S. v. Sealy, Inc.,

a iesuinsunbcecieabeenennn 13

U.S. v. Wong Kim Bo,

i PS GA... Ce ennem 35

UHS of Del., Inc. v. United Health Servs., Inc.,

227 F. Supp. 3d 381 (M.D. Pa. 2016) .................. 15

Visual Dynamics, LLC v. Chaos Software Lid.,

309 F. Supp. 3d 609 (W.D. Ark. 2018) ................ 15

Wal-Mart Stores, Inc. v. Samara Bros.,

ey ee Se i icicscinntesisuctureousssscosovsenceunsenialon 2

Warner Bros., Inc. v. Gay Toys, Inc.,

ee GO eee 28

Warner-Lambert Co. v. Northside Dev. Corp.,

ff ft) ): k 2 ee 29

Young v. U.S..,

ee Cee Ce ictanisisininsieenitiliasdbinantnimeieiinaaames 33

Zino Davidoff SA v. CVS Corp..,

oie? § | ff: 3 13

STATUTES

Be aay So ei acicvinsesretheescssscsinsotuntdsinneniinaails passim

eg Tt fe ee passim

OB RAE. Oe i itintnencittniieceniiiieecemasee 9, 24, 25

SS WE © BOG ccccicsninitisssvdienicinisneniaiaa i)

OTHER AUTHORITIES

2 J. Thomas McCarthy, MCCARTHY ON

TRADEMARKS AND UNFAIR COMPETITION

OS CE ee ccscinevecssscestescbettnteesisensanesesenie 11

3 J. Thomas McCarthy, MCCARTHY ON

TRADEMARKS AND UNFAIR COMPETITION

§§ 18:39, 18:40 (5th ed. 2017)........................ 11, 23

David J. Franklyn, The Apparent

Manufacturer Doctrine, Trademark

Licensors and the Third Restatement of

Torts, 49 Case W. Res. L. Rev. (1999)................. 17

David M. Jenkins, Licenses, Trademarks, and

Bankruptcy, Oh My: Trademark Licensing

and the Perils of Licensor Bankruptcy, 25

J. MARSHALL L. REV. (1991)..................... 19, 21, 29

Economics and Statistics Administration &

United States Patent and Trademark

Office, INTELLECTUAL PROPERTY AND THE

U.S. ECONOMY: 2016 UPDATE 22 (2016) .............. 16

lrene Calboli, The Sunset of “Quality Control”

in Modern Trademark Licensing, 57 AM. U.

Kayvan Ghaffari, The End to an Era of

Neglect: The Need for Effective Protection of

Trademark Licenses, 87 8. CAL. L. REV.

Laura Jelinek, Equity for Brand Equity: The

Case for Protecting Trademark Licensees in

Licensor Bankruptcies, 40 AIPLA Q.J.

Licensing Industry Merchandisers’

Association, LIMA GLOBAL LICENSING

INDUSTRY SURVEY 2015 REPORT 15 (2015).......... 17

Nicholas W. Quesenberry, Risky Business:

How the Economic Impact of the Risk of

Debtor Default Mandates Application of the

Presumptive-Contract Interest Rate in the

Case of a Cramdown Plan against a

Secured Creditor with a Lien on Personal

Property in Chapter 13, 22 J. BANKR. L. &

ee: Se, Bi i icccnccustencnennienasncnssnncnecesmaness 20

Peter S. Menell, Bankruptcy Treatment of

Intellectual Property Assets: An Economic

Analysis, 22 BERKELEY TECH. L.J. (2007)........... 19

RESTATEMENT (Third) of Unfair Competition

§ 33, comment c (Am. Law Inst. 1995).......... 28, 29

NG Se Sere ee RETO nT OE 1

S. Rep. No. 100-505, at 5 (1988), as reprinted

in 1988 U.S.C.C.A.N. 3200, 3204................ passim

William M. Landes and Richard A. Posner,

Trademark Law: An Economic Perspective,

30 J. LAW AND ECON. PERSP. 265, 270

WORLD INTELLECTUAL PROPERTY REPORT:

BRANDS — REPUTATION AND IMAGE IN THE

GLOBAL MARKETPLACE 9 (2013)...................000000000 5

AMICUS CURIAE BRIEF OF THE

INTERNATIONAL TRADEMARK

ASSOCIATION IN SUPPORT OF PETITIONER

The undersigned amicus curiae respectfully

submits this brief in support of Petitioner Mission

Product Holdings, Inc. and urges reversal of the

decision below in In re Tempnology, LLC, 879 F.3d

389 (ist Cir. 2018).'

INTEREST OF THE AMICUS CURIAE

Founded in 1878, amicus curiae The

International Trademark Association (INTA) is a

not-for-profit organization dedicated to the support

and advancement of trademarks and _ related

intellectual-property concepts as essential elements

of trade and commerce. INTA has more than 7,200

members in 191 countries. Its members include

trademark owners as well as law firms and other

professionals who regularly assist brand owners in

the creation, registration, protection, and

enforcement of their trademarks. All INTA members

share the goal of promoting an understanding of the

essential role that trademarks play in fostering

| Both Petitioner and Respondent have provided written

consent to INTA’s filing of this brief This brief was authored

solely by INTA and its counsel. No party or counsel for a party

made a monetary contribution intended to fund the preparation

or submission of this brief. No person other than amicus curiae,

ite members, and its counsel made such a monetary

contribution to its preparation or submission. See S. Ct. R. 37.6.

effective commerce, fair competition, and informed

decision-making by consumers.

INTA (formerly known as the United States

Trademark Association) was founded in part to

encourage the enactment of federal trademark

legislation after the invalidation on constitutional

grounds of the United States’ first trademark act.

Since then, INTA has been instrumental in making

recommendations and providing assistance to

eo8

;

ere

v. Taco Cabana, Inc., 505 U.S. 763 (1 K Mart Corp. v.

Cartier, Inc., 486 U.S. 281 (1988); Shammas v. Focarino, 7

F.3d 219 (4th Cir. 2015); Ferring B.V. v. Watson Labs., Inc.-

Fla., 764 F.3d 1382 (3d Cir. 2014); Christian Louboutin S.A. v.

Yves Saint Laurent Am. Holding, Inc., 696 F.3d 206 (2d Cir.

licensing arrangements, and are often parties in

trademark-related litigation as both plaintiffs and

defendants. IN'TA members also are often parties in

bankruptcy proceedings, as both debtors and

creditors.

INTA and its members have a particular interest

in this case, which presents the question of whether

a debtor-licensor’s§ rejection of an _ executory

trademark license agreement in bankruptcy

inevitably results in the agreement's complete

termination.® If so, rejection not only would have

the effect of freeing the debtor from any continuing

contractual obligations, but also would terminate

2012); Rosetta Stone Lid. v. Google, Inc., 676 F.3d 144 (4th Cir.

2012); Fleischer Studios, Inc. v. A.V.E.L.A., Inc., 654 F.3d 958

(9th Cir. 2011); Levi Strauss & Co. v. Abercrombie & Fitch

Trading Co., 633 F.3d 1158 (9th Cir. 2011); Chloe v. Queen Bee

of Beverly Hills, LLC, 616 F.3d 158 (2d Cir. 2010); Starbucks

Corp. v. Wolfe's Borough Coffee, Inc., 588 F.3d 97 (2d Cir. 2009);

ITC Ltd. v. Punchgini, Inc., 482 F.3d 135 (2d Cir. 2007); Louis

Vuitton Malletier S.A. v. Haute Diggity Dog, LLC, 507 F.3d 252

(4th Cir. 2007); Test Masters Educ. Servs., Inc. v. Singh, 428

F.3d 559 (5th Cir. 2005).

® Section 365 of the Bankruptcy Code only applies to license

agreements that qualify as executory contracts. See, e.g., Lewis

Bros. Bakeries Inc. v. Interstate Brands Corp., 751 ¥.3d 955,

962 (8th Cir. 2014) (an executory contract is “a contract under

which the obligation of both the bankrupt and the other party

to the contract are so far unperformed that the failure of either

to complete performance would constitute a material breach

excusing the performance of the other’ (citation omitted)). Not

all trademark license agreements are executory. Accordingly,

for the purpose of this amicus brief, INTA is only addressing

executory trademark license agreements.

the licensee's right to continue to use the

trademark and would effectively claw back the

trademark rights the licensor had licensed. That is

the position of the First Circuit, which revives the

flawed proposition that rejection § constitutes

complete termination, a proposition previously

associated with the largely discredited decision in

Lubrizol Enters., Inc. v. Richmond Metal Finishers,

Inc., 756 F.2d 1043 (4th Cir. 1985). The alternative

position, advanced by Petitioner and supported by

INTA, is that rejection of a trademark license

agreement may well result in termination of the

licensor’s obligations and a _ corresponding

breach of the agreement by the licensor, but it

does not terminate the licensee’s right to

continue to use the licensed trademark. This is

the rule properly adopted by the Seventh Circuit in

Sunbeam Prods, Inc. v. Chi. Am. Mfg., LLC, 686 F.3d

372 (7th Cir. 2012).

The question presented, which is the most

significant unresolved legal issue in trademark

licensing, has led to uncertainty in the market for

trademark licenses, an uncertainty that the First

Circuit’s decision exacerbates. Because parties to a

trademark license agreement do not know whether

the agreement might be at risk of termination in a

licensors bankruptcy, they often must negotiate

complex provisions to manage or allocate that risk.

This uncertainty has an adverse effect on the

broader business community. Trademarks are the

most widely used form of registered intellectual

property. World Intellectual Property Organization,

WORLD INTELLECTUAL PROPERTY REPORT: BRANDS

REPUTATION AND IMAGE IN THE GLOBAL

MARKETPLACE 9 (2013). Trademark rights thus are

often among a debtor's key assets. Not surprisingly,

therefore, the treatment of the debtor's licenses of

those rights is an issue that arises frequently in the

bankruptcy context.

Reversal of the First Circuit's decision and

uniform application of the Sunbeam rule would

facilitate restructuring for debtors in bankruptcy,

provide certainty for all parties, enhance the value of

trademark licenses in the pre-bankruptcy context,

and help trademarks better perform their core

function of guiding consumers to the products and

services they want, with reliable assurances of

source and quality. By contrast, affirming the First

Circuit's decision would negatively affect the value of

trademark license agreements, to the detriment of

licensors, licensees, and consumers.

SUMMARY OF ARGUMENT

This Court should reverse the First Circuit's

decision and adopt the rule articulated by the

Seventh Circuit in Sunbeam, which held that a

debtor-licensor’s reject*on of an executory trademark

license agreement is not a termination of the license

agreement but, rather, is a breach of the licensor’s

obligations under that agreement. Under that rule,

the trademark licensee is entitled to continue to use

the trademark under the terms of the rejected

agreement; these terms may provide for continuing

payments to the licensor and may restrict the extent

to which the licensee may use the licensed mark,

including the goods or services with which the mark

can be used, the jurisdictions in which the mark can

be used, and the duration of the licensee’s use of the

mark. The Sunbeam rule promotes the strength and

stability of the trademark system for the benefit of

all participants and, ultimately, for consumers.

In the decision below, the First Circuit held that

a debtor-licensor’s right to “reject” executory

contracts—to eliminate contractual obligations that

may interfere with its restructuring—has_ the

consequence of terminating the licensee’s right to

use the licensed trademark.

Other courts have taken a different approach:

They have held that the licensor’s rejection of a

trademark license agreement does not terminate the

licensee’s right to continue to use the trademark in

accordance with the agreement. Rather, the debtor-

licensors rejection simply excuses the licensor’s

contractual obligations under the agreement, but

does not terminate the agreement. For example, the

licensor would no longer be obligated to undertake or

fund enforcement efforts against infringers of the

licensed mark or defend third-party infringement

claims brought against the licensee; those rejected

tasks constitute a breach of contract, for which the

licensee may have an unsecured claim in the

bankruptcy (and, in some cases, the ability “©

mitigate its damages by pursuing those actions on

its own). These courts have concluded that the rule

that governs a debtor's rejection of other executory

agreements (which excuses the debtor's obligations

and gives its counter-party an unsecured claim for

breach of contract) should apply equally to the

rejection of a trademark license agreement.

The Court should hold that the Sunbeam rule is

the most equitable approach to reconciling the

interest of licensors and licensees in bankruptcy and

establishing a stable market for trademark licenses.

Such a rule enhances the value of trademark

licenses and promotes the stability of both

trademark law and bankruptcy principles:

e Licensors benefit because licensees will

pay more up front or in royalties for

licensed rights that are likely to survive a

potential bankruptcy filing by the licensor.

e Licensees, who have substantial reliance

interests in the licensed trademarks (e.z.,

having hired employees and/or established

manufacturing capacity to take advantage

of the rights), will not suddenly find their

rights invalidated by the licensor’s

termination of a _ trademark license

agreement.

e Above all, the American public will be

better off. The ultimate beneficiary of a

strong trademark system is the consumer,

who can rely on healthy trademarks as

sound indicators of source and quality.

William M. Landes and Richard A. Posner,

Trademark Law: An Economic Perspective,

30 J. LAW AND ECON. PERSP. 265, 270

(1987).

The Sunbeam approach also is consistent with

bankruptcy law and policy. Section 365 of the

Bankruptcy Code provides a debtor with a right to

reject an executory contract and allows it to

extinguish its onerous contractual obligations, such

as equipment lease payments or contracts to provide

services. It also provides that rejection constitutes a

pre-petition breach of the contract, which has the

same effect on the counter-party as a breach outside

of bankruptcy. Section 365 has never been intended

to be a vehicle for a debtor to recover, through the

artifice of rejection, legal rights it had granted pre-

petition, which is what the First Circuit's approach

would allow. Adopting the Sunbeam rule, therefore,

would be consistent with general bankruptcy policies

that govern the rejection of other executory contracts

under which the rejected contract is not terminated

and the counter-party retains its rights in

accordance with applicable non-bankruptcy law.

INTA urges the Court to reverse the First

Circuit’s decision and adopt the rule in Sunbeam.

ARGUMENT

lL A Rule That Best Promotes the Strength

and Stability of the Trademark System

Will Benefit the U.S. Economy and the

Bankruptcy System.

A. The Law of ‘Trademarks = and

Trademark Licensing.

A trademark is a designation used to identify and

distinguish the source of goods and services of a

person or company. Matal v. Tam, 137 S. Ct. 1744,

1751 (2017) (citing B & B Hardware, Inc. v. Hargis

Indus., Inc., 135 S. Ct. 1293, 1299 (2015)). Under the

Lanham Act (the “Act”), a trademark owner can

validly license a trademark or service mark to

another to use. See 15 U.S.C. § 1055 (providing that

“related companies” can use mark); 15 U.S.C. § 1127

(“related companies’ means any person whose use of

a mark is controlled by the owner of the mark with

respect to the nature or quality of the goods or

services on or in connection with which the mark is

used”). Because a licensed use must meet the quality

levels set by the trademark license agreement,

consumers can trust that products or services

marketed under particular marks will meet an

expected level of quality.

In order to protect consumers, the Act requires

that the licensor exercise control over the nature and

quality of the goods and/or services sold by the

licensee under the licensed mark. A license granted

without any such quality control is deemed a “naked

license” because it is lacking in a necessary condition

for the validity of a license agreement. See Societe

Comptoir de L’Industrie Cotonniere Etablissements

Boussac v. Alexander’s Dep’t Stores, Inc., 299 F.2d

33, 35 (2d Cir. 1962) (naked licensing is a form of

fraud on the public). Naked licensing by a trademark

owner can lead to invalidation of the trademark.

Barcamerica Intl USA Tr. v. Tyfield Importers, Inc.,

289 F.3d 589, 596 (9th Cir. 2002).

Consumers benefit from trademarks because, as

noted above, they can trust that the goods or services

sold under the mark will meet a certain level of

quality. One way that the Act extends the benefits of

trademarks and protects incentives to develop them

is by allowing trademark owners to license the use of

their marks to distributors, franchisees, and other

parties. Such licensing allows information about

source and quality to be efficiently conveyed to

consumers through the mark without the licensor

having to risk losing title to its mark. Indeed,

trademarks would be of much less value to society if

only vertically integrated firms using their own

trademarks could safely take advantage of

trademark law’s protections. See TMT N. Am., Inc. v.

Magic Touch GmbH, 124 F.3d 876, 882 (7th Cir.

1997) (citing 2 J. Thomas McCarthy, MCCARTHY ON

TRADEMARKS AND UNFAIR COMPETITION § 18:63 (4th

ed.1997)).

The Act reflects a decision by Congress to afford

trademark owners the right to license marks in

exchange for their statutory obligation to retain

quality control over the mark’s use, for the purpose

of ensuring the protection of the public.* If the

trademark owner fails to fulfill its affirmative duty

to police the mark as used by its licensee, it may lose

some or all of its rights in the mark. See

Barcamerica Int'l, 289 F.3d at 596 (“[W]here the

licensor fails to exercise adequate quality control

over the licensee, ‘a court may find that the

trademark owner has abandoned the trademark, in

which case the owner would be estopped from

4 Prior to the Act, it was not clear that trademark owners could

license their rights to third parties without risk of loss by

abandonment. See 3 J. Thomas McCarthy, TRADEMARKS AND

UNFAIR COMPETITION, § 18:39 (5th ed. 2017) (under early

theories of trademark protection, “trademark licensing was

viewed as impossible, since licensing meant that the mark was

being used by persons not associated” with the source).

asserting rights to the trademark.” (quoting Moore

Bus. Forms, Inc. v. Ryu, 960 F.2d 486, 489 (5th Cir.

1992))). This statutory obligation of a trademark

owner to exercise quality control is distinct from any

contractual rights—whether of the licensor or the

licensee—that arise under a license agreement. See

In re SIMA Int'l, Inc., No. 17-21761 (JT), 2018 WL

2293705, at *7 n.24 (Bankr. D. Conn. May 17, 2018)

(rejecting the First Circuit’s analysis in Tempnology

and explaining that “the legal rigors of trademark

policing, not contractual obligations imposed upon

the licensor to monitor its trademarks|[,] are the

source of the debtor’s burdens’).

Given the importance of the licensor maintaining

quality control, trademark license agreements

customarily specify the minimum level of quality

that the licensee must meet in its manufacture,

distribution and sale of the goods or services at

issue. See Raymond T. Nimmer & Jeff C. Dodd,

Viewing licenses through different prisms - The

Trademark license example, MODERN LICENSING

LAW § 1:20 (2018-2019 ed.) (because the failure to

retain such control can result in the unenforceability

of the mark, “trademark licenses typically contain

quality control provisions”). Quality control

provisions impose obligations on the licensee in favor

of the licensor. The licensee has the obligation to

comply with those requirements; the licensor has the

right to ensure that the licensee does so. If the

licensee fails to meet its quality obligations, that can

result in use of the trademark defrauding the public,

which is why the licensor then has the right to

enforce the quality requirements including, if

permitted by the agreement, either terminating the

licensee’s right to use the mark or seeking specific

performance to require the licensee to meet the

specified quality levels. See Zino Davidoff SA v. CVS

Corp., 571 F.3d 238, 246 (2d Cir. 2009) (“The mark

holder is entitled to protection against acts that

subvert its ability to protect the reputation of its

marks by exercising quality controls.”).

B. The Significance of Trademark

Licenses to the U.S. Economy.

This Court has repeatedly recognized the

significance of trademarks and trademark licenses to

the United States economy. See, e.g., Am. Needle,

Inc. v. Nat'l Football League, 560 U.S. 183 (2010)

(addressing antitrust issues concerning trademark

licensing by the National Football League); K Mart

Corp. v. Cartier, Inc., 486 U.S. 281 (1988)

(addressing validity of Customs Service regulation

concerning importation of foreign-made goods where

United States trademark owner authorized use of

the mark); U.S. v. Sealy, Inc., 388 U.S. 350 (1967)

(addressing antitrust issues concerning trademark

licensing for mattresses). Given that recognition,

this case has particular importance because the

Court can establish a sound rule that both confirms

the stability of the trademark regime in the context

of a bankruptcy and harmonizes trademark interests

with the goals of the Bankruptcy Code.

Trademark licenses are implicated in a variety of

litigation contexts that illustrate the myriad ways in

which trademarks are critical to both licensors and

licensees. To cite just a few examples, both recent

and historic:

Me Renee LLC v. Elite World, S.A., 674 F.

App’x 620 (9th Cir. 2016) (company in the

business of licensing trademarks for use in

high-fashion modeling granted to licensee

right to act as a “Master Licensee” of the

trademarks for the purpose of sublicensing

to third parties the right to create, open

and operate fashion academies);

State of Idaho Potato Comm'n v. G & T

Terminal Packaging, Inc., 425 F.3d 708

(9th Cir. 2005) (statutorily created agency

of the State of Idaho formed for the

purpose of promoting Idaho potatoes

licensed several certification marks for

Idaho potatoes including “Idaho” and

“Grown in Idaho” to potato growers and

distributors);

Pannell Kerr Forster Int'l Ass'n v. Quek, 5

F. App’x 574 (9th Cir. 2001) (accounting

firm licensed trademarks to consulting

groups related to accounting firm’s name

and style); and

« Huber Baking Co. v. Stroehmann Bros. Co.,

252 F.2d 945 (2d Cir. 1958) (non-profit

cooperative organized under New York law

to help promote business of baker-

members located throughout the United

States licensed, as part of a cohesive

branding and quality control program, a

tradename and associated mark to

manufacturer-members of the cooperative).

Further examples are legion. Trademark licenses

undoubtedly are omnipresent; the rights they convey

Rock Cafe Int'l, (USA), Inc. v. Hard Rock Hotel .

808 F. Supp. 2d 552 (S.D.N.Y. 2011) (addressing an exclusive

license “to use and exploit the Hard Rock Hotel and Hard Rock

to licensees are of enormous economic significance;

and substantial investments are made in reliance on

these rights.

In 2014, trademarks accounted for $6.1 trillion in

value added to the U.S. gross domestic product.

Economics and Statistics Administration & United

States Patent and Trademark Office, INTELLECTUAL

PROPERTY AND THE U.S. ECONOMY: 2016 UPDATE 22

(2016). In the United States alone, trademark

licensors generated $7.3 billion in royalty revenue

from the licensing of goods and services in 2014.

Licensing Industry Merchandisers’ Association,

Casino trademarks in areas west of the Mississippi River,

solely in connection with development, operation, ownership,

management, operation of and promotion of Hard Rock

Hotel/Casinos and Hard Rock Casinos"); Trace Minerals

Research, L.C. v. Mineral Res. Int'l, Inc., 505 F. Supp. 2d 1233

(D. Utah 2007) (marketing arm of companies granted a license

to manufacturing arm to use trademarks as part of a supply

agreement); McGraw-Hill Cos., Inc. v. Vanguard Index Tr., 139

F. Supp. 2d 544 (S.D.N.Y.), affd sub nom. McGraw Hill Cos.,

Inc. v. Vanguard Index Tr., 27 ¥. Appx 23 (2d Cir. 2001)

(licensing the rights to use the data that comprised the

Standard & Poor's index and to use the Standard & Poor's

trademarks to financial services companies, analysts and

investors); Superior Bedding Co. v. Serta Assocs., Inc., 353 F.

Supp. 1143 (N.D. Il. 1972) (addressing a license that granted

independent bedding manufacturers the exclusive right to

manufacture and sel! Serta patented, trademarked and trade-

named products in prescribed territories); Helpful Hound,

L.L.C. v. New Orleans Bldg. Corp., No. CV 18-3500, 2018 WL

3743817 (E.D. La. Aug. 7, 2018) (city and building corporation

licensed the name of a food hall and market to the lessee

renting the space).

LIMA GLOBAL LICENSING INDUSTRY SURVEY 2015

REPORT 15 (2015). This translates into an estimated

$133.3 billion in retail sales of licensed goods and

services. /d. at 14.

Licensing provides a_ significant stream of

revenue for trademark licensors, and extensive

commercial opportunities. See Irene Calboli, The

Sunset of “Quality Control” in Modern Trademark

Licensing, 57 Am. U. L. REV. 341, 343 (2007).

Licenses are granted in myriad circumstances, from

the sale of a business (where the purchase price

includes an up-front payment for the license) to

distribution and manufacturing arrangements

(where the licensed mark is central to the success of

the licensees’ business). By, for example, allowing

trademark licensors to outsource the manufacturing

or distribution of a product to specialized licensees

who can do so more cheaply or effectively, licensors

can distribute workloads efficiently and enjoy the

benefits of economies of scale. See David J. Franklyn,

The Apparent Manufacturer Doctrine, Trademark

Licensors and the Third Restatement of Torts, 49

CASE W. Res. L. REV. 671, 681 (1999). Licenses also

enable licensors to increase brand recognition and to

reach new markets.

Just as trademarks are the most widely used

form of registered intellectual property (see p. 5

supra), trademark licenses play an important role in

bankruptcies where intellectual property is included

in the assets of the debtor. “[S]ince 1988, out of 1100

bankruptcy filings concerning intellectual property,

over 600 involve trademarks.” Kayvan Ghaffari, The

ind to an Era of Neglect: The Need for Effective

Protection of Trademark Licenses, 87 S. CAL. L. REV.

1053, 1054 (2014).

ll. The Sunbeam Rule Best Promotes the

Strength and Stability of the Trademark

System.

This Court should reverse the First Circuit's

decision and adopt the Sunbeam rule, which treats a

licensor’s rejection of a trademark license agreement

as a breach but not a termination. Adoption of this

uniform, nationwide rule would promote the overall

health of the trademark system and is fully

consistent with the Bankruptcy Code.

A. The Sunbeam Rule Furthers the

Interests of Trademark Licensors,

Licensees, and Consumers.

The market for trademark licenses will function

best under the Sunbeam rule. By contrast, the

Tempnology/Lubrizol approach would mean that

neither a trademark owner nor its licensee—at the

time that they are negotiating a trademark license —

could be certain whether the licensed rights would

survive the licensor’s possible future bankruptcy.

This uncertainty is to the detriment of licensors,

licensees, and consumers. That would be even more

true of an approach that would allow bankruptcy

judges to decide, on a case-by-case basis, which rule

to apply; that would create additional uncertainty as

to the effect of a possible rejection of a trademark

license in a future bankruptcy. Any uncertainty

diminishes the economic incentives for the parties to

license and use trademarks, and considerably

increases the financial risks to both parties. See

Peter S. Menell, Bankruptcy Treatment of

Intellectual Property Assets: An Economic Analysis,

22 BERKELEY TECH. L.J. 733, 769 (2007) (explaining

that the “particularly harsh results” of license

rejection make it less likely a party invests in

trademarks, and the inability to contract around

that risk further erodes these incentives). If the

parties’ incentives to enter into stable trademark

licensing arrangements are to be strengthened, it is

crucial to preserve for the licensee “[t|]he essential

element in any trademark license is the continuing

obligation of the licensor to permit the licensee’s use

of the trademark in connection with the sale of the

licensee’s goods.” David M. Jenkins, Licenses,

Trademarks, and Bankruptcy, Oh My: Trademark

Licensing and the Perils of Licensor Bankruptcy, 25

J. MARSHALL L. REV. 143, 156-57 (1991) (hereinafter

“Jenkins”.

In negotiating trademark license agreements,

licensors have a _ strong interest in obtaining

maximum value for their licensed assets. The

Tempnology/Lubrizol approach undercuts the

licensor’s ability to do so. A potential licensee will

pay less to a licensor for rights that carry the risk of

impairment in the event of a licensor’s bankruptcy.

In assessing the potential rights that the

Tempnology/Lubrizol rule confers on a licensor that

might become bankrupt, a rational licensee will

insist on paying a discounted price for a trademark

license, knowing it will be at the mercy of the

licensor as to whether it can continue to use the

mark if the licensor files for or is put into

bankruptcy. See Nicholas W. Quesenberry, Risky

Business: How the Economic Impact of the Risk of

Debtor Default Mandates Application of the

Presumptive-Contract Interest Rate in the Case of a

Cramdown Plan against a Secured Creditor with a

Lien on Personal Property in Chapter 13, 22 J.

BANKR. L. & PRAC. 2 Art. 5. (2013) (‘It is manifest

that any disinterested buyer |i.e., the licensee] would

be willing to pay less for a riskier, less stable income

stream |i.e., from its rights to exploit the rights it

has licensed] and more for a more stable and reliable

one.”).

In Tempnology, rather than considering the

parties’ respective incentives at the time of licensing

or their existing rights under the trademark license

agreement, the First Circuit apparently was more

concerned with the price a purchaser would pay for

the debtors trademarks if the licensee were

permitted to continue to use the licensed marks post-

rejection. See Tempnology, 879 F.3d at 403. The First

Circuit’s approach improperly prioritized the resale

value of the trademark over the rights of the current

licensee, without recognizing the amount that it had

paid up front or in royalties to utilize the license.

Licensees, too, are harmed under the

Tempnology/Lubrizol rule. Loss of a_ trademark

license can severely injure or even destroy a

business, with the licensee itself possibly forced into

bankruptcy if denied use of the mark. See Jenkins,

25 J. MARSHALL L. REV. at 175 (when a licensor

rejects a trademark license, “|a] trademark licensee

risks the total abrogation of its right to use a

trademark, a valuable property right .. . [and]

licensees must continue to bear the economic burden

of trademark owners’ mismanagement and thus

needlessly risk the loss of their investments”).

Accordingly, a licensee whose license is subject to

termination in bankruptcy will be less willing to

invest capital in the sort of resources—personnel,

machinery or other production capacity, advertising

and promotion—that would enable it to maximize

sales and fully profit from its license. In turn, if it

does not maximize its sales of products and services

bearing the licensed trademark, that will reduce

royalties to the trademark licensor, thus rendering

the licensing transaction less economically beneficial

for both parties. Stated differently, a debtor itself is

harmed by the Tempnology/Lubrizol rule because its

pre-rejection revenue stream under the licensing

agreement would be less than what it would

otherwise receive from the licensee.

To avoid the potential application of the Lubrizol

rule in any particular case, INTA’s members,

whether acting as licensors or licensees, have had to

negotiate provisions that attempt to minimize the

bankruptcy risks. Parties may ultimately agree that

the licensor must establish a bankruptcy-remote

vehicle, perhaps offshore, to hold and license the

trademarks. The hope is that the “remote” licensor

can try to avoid being swept into a bankruptcy of the

operating company, so that the license agreement

will then not be subject to rejection. Alternatively,

the licensee might negotiate stringent financial

covenants that the licensor must meet in order to

have some advanced warning of potential financial

distress of the licensor, with a potential assignment

of the trademark from the licensor to the licensee if

the covenants are not met. These negotiations can

add to the expense and time of negotiating the

trademark license, draining resources from more

productive activity and, potentially, resulting in

lower prices to be paid to the licensor.

The licensee of trademark rights should not be

forced to live in fear that the licensor, having

licensed these rights for consideration, may be

entitled, years later, to claw them back in a

bankruptcy. The grant of a license conveys to the

licensee certain rights in the trademark (as distinct

from title in the trademark). See, e.g., 3 MCCARTHY

ON TRADEMARKS AND UNFAIR COMPETITION § 18:40

(5th ed.) (“Every license carries with it a waiver of

the right of the trademark owner to sue for

infringement arising out of acts that fall within the

scope of the license.”). The First Circuit disregarded

the licensee’s property’ interest when it

inappropriately advanced its own “equities analysis

that weighs reorganization objectives more heavily

in the balance than protections for commerce in

intellectual property.” In re SIMA, 2018 WL

2293705, at *7 n.25. As with other rejected executory

agreements, while the debtor-licensor is able to avoid

its contractual obligations, it should not be entitled

to terminate the rejected agreements in order to

avoid its statutory obligations and the licensee’s

state law rights.

In sum, Sunbeam’s approach is more equitable

because it takes into account the interests of both

parties to a trademark license and, through them,

the consumers that both parties serve.

B. The Sunbeam Rule is Consistent with

the Lanham Act’s Quality Control

Obligations.

If the debtor-licensor rejects a trademark license

agreement under the Sunbeam rule, it is relieved of

any contractual obligations (other than the grant of

the license) it might have under that agreement. The

licensee’s right to continue to use the licensed mark

would remain intact, as would its own contractual

obligation to continue to comply with the license,

including any provisions requiring it to maintain

quality control over the licensed product. The

licensor may continue to enforce quality control in

accordance with its statutory obligations and its own

self-interest, if it so chooses, inasmuch as failure to

enforce quality control could result in invalidation of

the trademark itself, thereby potentially

impoverishing the estate.

Concerns that the Sunbeam rule is inconsistent

with the debtor-licensor’s obligations to maintain

quality control are unfounded. Those obligations are

statutory, deriving entirely from the Act. See 15

U.S.C. § 1055. They serve a public purpose that

Congress itself recognized at the time of its

enactment. See Gorenstein Enters., Inc. v. Quality

Care-USA, Inc., 874 F.2d 431, 435 (7th Cir. 1989)

(“The purpose of a trademark, after all, is to identify

a good or service to the consumer, and identity

implies consistency and a correlative duty to make

sure that the good or service really is of consistent

quality.”); Star-Kist Foods, Inc. v. P.J. Rhodes & Co.,

769 F.2d 1393, 1396 (9th Cir. 1985) (“The purpose of

the rule is to protect the public from deception.”

(citation omitted)); Dawn Donut Co. v. Hart’s Food

Stores, Inc., 267 F.2d 358, 367 (2d Cir. 1959)

(“Without the requirement of control, the right of a

trademark owner to license his mark separately

from the business in connection with which it has

been used would create the danger that products

bearing the same trademark might be of diverse

qualities.”).

The trademark owner's statutory obligations are

wholly independent of any contractual undertakings

by a licensor or licensee, whether in a rejected

agreement or otherwise. That the licensor is in

bankruptcy, or that quality control obligations may

be set out in a trademark license agreement, is

beside the point. The licenscer’s failure to maintain

quality control will result in the loss of trademark

rights under any circumstance, whether or not a

licensor is a debtor and without regard to whether it

decides to reject the trademark license agreement.

See, e.g., Ritchie v. Williams, 395 F.3d 283, 290 (6th

Cir. 2005) (noting a trademark licensor’s duty under

§ 1055 to control the quality of both its license and

licensee in finding that the licensor abandoned its

mark (citation omitted)). A debtor-licensor cannot

reject a statutory requirement; it may only reject its

contractual obligations.

In other words, the obligations that the Act

imposes on a trademark owner-licensor are not

overridd n by the debtor-licensor’s rights under the

Bankruptcy Code. That principle is_ entirely

consistent with the rule that “[p]roperty interests

are created and defined by [applicable non-

bankruptcy] law [ujnless some federal interest

requires a different result.” Butner v. U.S., 440 US

48, 55 (1979). In other words, a trademark licensee’s

rights should be the same whether the licensor

breaches the license agreement outside of

bankruptcy or breaches (by means of a rejection) the

agreement in the course of a bankruptcy. See

Sunbeam, 686 F.3d at 377 (“What § 365(g) does by

classifying rejection as breach is establish that in

bankruptcy, as outside of it, the other party’s rights

remain in place.”); In re Columbia Gas Sys. Inc., 50

F.3d 233, 239 n.8 (3d Cir. 1995) (“Rejection ... is

equivalent to a nonbankruptcy breach.”); In re Ortiz,

400 B.R. 755, 769 (C.D. Cal. 2009) (“Section 365

simply does not speak to which obligations may and

may not be enforced post-bankruptcy against the

debtor’; rather, state law would determine whether

any provisions of a contract remained enforceable

against the debtor post-rejection).6 A_ licensor’s

breach outside of bankruptcy would not

automatically result in termination of the license

agreement; termination should not, therefore, be the

inevitable consequence of breach (in the form of a

rejection of the contract) in the bankruptcy context.

6 See also Thompkins v. Lil’ Joe Records, Inc., 476 F.3d 1294,

1306 (11th Cir. 2007) (“[rjejection has absolutely no effect upon

the contract's continued existence; the contract is not cancelled,

repudiated, rescinded, or in any other fashion terminated”)

(quoting Cohen v. Drexel Burnham Lambert Grp. (In re Drexel

Burnham Lambert Grp., Inc.), 138 B.R. 687, 703 (Bankr.

S.D.N.Y. 1992)); infra at p. 34.

Affirming the First Circuit's decision would

“make[] bankruptcy more a sword than a shield,

putting debtor-licensors in a catbird seat they often

do not deserve.” In re Exide, 607 F.3d 957, 967-68 (3d

Cir. 2010) (Ambro, J., concurring); see also In re

Crumbs Bake Shop, Inc., 522 B.R. 766, 772 (Bankr.

D.N.J. 2014) (noting the inequity in stripping a

licensee of rights the debtor had already bargained

away).

The ability of the parties to a trademark license

agreement to allocate quality control obligations

between themselves means that the Sunbeam rule

will not lead to an unduly harsh result for the

debtor-licensor. Similarly, any concerns that the

Sunbeam rule would be inconsistent with the

Bankruptcy Code’s interests in relieving the debtor

of burdens that would impair reorganization are

unfounded.

First, the Act’s statutory obligation that the

licensor maintain the quality of its trademarks is

substantially mitigated by the inherent legal

presumption that any level of quality control will be

sufficient. See, e.g., TMT N. Am., 124 F.3d at 885-86

(burden to establish lack of reasonable quality

contre! is “heavy”; no loss of trademark rights absent

evide.ce of “significant deviation” from licensor’s

quality standards). Notably, in this regard, “the

standards for sufficient quality control have become

more and more lenient in recent years.” Laura

Jelinek, Equity for Brand Equity: The Case for

Protecting Trademark Licensees in _ Licensor

Bankruptcies, 40 AIPLA Q.J. 365, 389-90 (2012).

Furthermore, deference to the parties’ arrangement

is strong. See RESTATEMENT (Third) of Unfair

Competition § 33, comment c (Am. Law Inst. 1995)

(“RESTATEMENT”) (“[a]s a general matter, courts are

reluctant to interfere with the marketing

arrangements adopted by trademark owners, and

minimal control over the quality of a licensee’s goods

or services is often sufficient”); see also Amscan Inc.

v. Shutter Shades, Inc., No. 13-cv-1112, 2015 U.S.

Dist. LEXIS 180647, at *13 (S.D.N.Y. Apr. 30, 2015)

(citing Warner Bros., Inc. v. Gay Toys, Inc., 724 F.2d

327, 334 (2d Cir. 1983) (“Because an assertion of

insufficient control can lead to a forfeiture of rights,

the party arguing for it must meet a ‘high burden of

proof.” (citation omitted))); Monster, Inc. v. Dolby

Labs. Licensing Corp., 920 F. Supp. 2d 1066, 1076

(N.D.Cal. 2013) (standard of proof required of the

challenger to void the trademark on the basis of

naked licensing is “stringent”).

Second, any burden on the debtor-licensor to

ensure that its licensee maintains quality—including

post-rejection—is lessened by the licensee's

contractual obligations to itself maintain quality.

Those obligations would continue in the bankruptcy

context. See In re Crumbs, 522 B.R. at 773. In many

cases, quality control is delegated almost entirely to

the licensee. As the Ninth Circuit observed in

Barcamerica Intl, 289 F.3d at 596, “courts have

upheld licensing agreements where the licensor is

familiar with and relies upon the licensee’s own

efforts to control quality.” (citations omitted). The

Restatement similarly notes that “the trademark

owner is justified in relying on the reputation and

expertise of the licensee and not exercising a

contractual right to control if there is an absence of

standards of procedures.” RESTATEMENT § 33.

Third, it is not inappropriate for the licensor to

exercise its quality control obligations under the Act

by relying on its licensee to maintain quality of its

use of the mark in accordance with the trademark

license agreement. Licensees will want to protect the

mark in which they have made an investment.

Absent their maintaining quality with respect to

licensed marks, others could begin to use the mark

or, in some cases, they could themselves be liable for

trademark infringement or unfair competition. See

In re Crumbs, 522 B.R. at 773 (citing Jenkins, 25 J.

MARSHALL L. REV. at 162-64); see also Warner-

Lambert Co. v. Northside Dev. Corp., 86 F.3d 3, 6 (2d

Cir. 1996) (wholesaler’s distribution of

nonconforming product constitutes trademark

infringement under the Lanham Act if it tarnishes

the trademark owner's image); Joseph Bancroft &

Sons Co. v. Shelley Knitting Mills, Inc., 212 F. Supp.

715 (E.D. Pa. 1962) (licensee’s sale of goods at a

quality standard below that of licensor constituted

unfair competition and trademark infringement). Cf.

Franchised Stores of N.Y., Inc. v. Winter, 394 F.2d

664 (2d Cir. 1968) (sale of non-authorized goods by

sublicensee held to be trademark infringement).

Relying on the licensee to maintain quality is not a

material burden on the licensor. That is because the

licensee already has the contractual obligation to

maintain quality, and any breach may give the

licensor additional righis (including, depending on

the terms of the agreement, the right to terminate

the license on its own terms).

Further, general market forces and anti-fraud

laws will keep the licensee fully accountable to the

public with respect to the quality of the marks. See

In re Crumbs, 522 B.R. at 773 (producing a good

under a trademark is a warrant “to the public that

its goods are of the same level of quality that the

trademark signifies”).

Accordingly, any concerns that the Sunbeam rule

does not recognize the importance of quality control

under the Act and would allow licensees to use

trademarks without ensuring quality control are

without foundation.

C. The Sunbeam Rule is Consistent with

the Text and Purpose of the

Bankruptcy Code.

The Sunbeam rule squares not just with

trademark law and policy, but also with the

Bankruptcy Code. In 1987, Congress expressly

abrogated Lubrizol’s result with respect to licenses of

“intellectual property,” which it defined to include

patents, copyrights, and trade secrets. See 11 U.S.C.

§ 365(m). At the time, it explicitly left open the

question of the impact of rejection on trademark

licenses. The legislative history of section 365(n)

makes clear that Congress did so not to enable a

debtor to use rejection to cancel a pre-bankruptcy

grant of intellectual property license rights:

“[Section] 365 was |njever intended to be a

mechanism for stripping innocent licensee|s] of

rights.” S. Rep. No. 100-505, at 4 (1988), as reprinted

in 1988 U.S.C.C.A.N. 3200, 3203. “Congress never

anticipated that . . . the licensee would lose not only

any future affirmative performance required of the

licensor under the license, but also any right of the

licensee to continue to use the intellectual property

as originally agreed in the license agreement.” /d. at

3, as reprinted in 1988 U.S.C.C.A.N. 3200, 3201.

Although Congress did not include trademarks in

section 365(n), that choice did not reflect any view

that the Lubrizol rule was correct. Nor is there

anything in the text of section 365(n) itself, or in the

accompanying legislative history, that supports the

argument that rejection of trademark license

agreements should ever result in termination of the

licensee’s rights. Rather, Congress stated that its

intent in omitting trademarks from section 365(n)

was to have courts consider and “equitably”

determine the effect of the statutory rights of a

debtor to reject a trademark license agreement that

confers rights on a licensee:

In particular, trademark, trade name and

service mark licensing relationships

depend to a large extent on control of the

quality of the products or services sold by

the licensee. Since these matters could

not be addressed without more extensive

study, it was determined to postpone

congressional action in this area and to

allow the development of equitable

treatment of this situation by

bankruptcy courts.

S. Rep. No. 100-505, at 5 (1988), as reprinted in 1988

U.S.C.C.A.N. 3200, 3204 (emphasis added).’ Thirty

years of license negotiation and litigation experience

’ Moreover, “an omission is just an omiasion,” and the “limited

definition [of ‘intellectual property’] in §101(35A) means that

§365(n) does not affect trademarks one way or the other.”

Sunbeam, 686 F.3d at 375. Congress noted that, although “such

rejection [of trademark agreements] is of concern,” section

365(n) does not “address or intend any inference to be drawn

concerning the treatment of executory contracts which are

unrelated to intellectual property [as defined in the statute].” S.

Rep. No. 100-505, at 5 (1988), as reprinted in 1988

U.S.C.C.A.N. 3200, 3204. Furthermore, because Lubrizol did

not involve trademarks, Congress was not required to act

promptly to confirm the impact of rejection on trademark

license agreements and it was, therefore, able to defer to the

bankruptcy courts.

has shown that the most equitable way to treat

rejection of trademark license agreements in

bankruptcy is uniform adoption of the Sunbeam rule,

as it most fairly harmonizes the interests of

trademark licensors and licensees.

Congress’ reference to bankruptcy courts

developing “equitable treatment” of the handling of

pre-petition trademark license agreements granted

by a debtor-licensor is entirely consistent with the

basic equitable’ principles underpinning the

Bankruptcy Code. See Young v. U.S., 535 U.S. 43, 50

(2002) (bankruptcy courts “are courts of equity and

‘appl{y] the principles and rules of equity

jurisprudence” (quoting Pepper v. Litton, 308 U.S.

295, 304 (1939))). These equitable principles have

been cited by courts that have embraced the

Sunbeam approach. See, e.g., In re Exide, 607 F.3d at

967 (“Rather than reasoning from negative inference

to apply another Circuit’s holding to this dispute, the

Courts here should have used . . . their equitable

powers to give [the debtor] a fresh start without

stripping [the licensee] of its fairly procured

trademark rights”) (Ambro, J., concurring).

The Sunbeam rule also is consistent with the

general principle of bankruptcy law that rejection of

an executory contract does not terminate the

contract, but, instead, is a breach by the debtor. The

purpose of section 365 is not “to be the functional

equivalent of a _ rescission, rendering void the

contract and requiring that the parties be put back

in the positions they occupied before the contract

was formed.” Thompkins, 476 F.3d at 1306

(“[rjejection has absolutely no effect upon the

contract's continued existence; the contract is not

cancelled, repudiated, rescinded, or in any other

fashion terminated” (quoting Jn re Drexel Burnham

Lambert Grp., Inc., 138 B.R. at 703)); Med.

Malpractice Ins. Ass’n. v. Hirsch, 114 F.3d 379, 386-

87 (2d Cir. 1997) (‘while rejection is treated as a

breach, it does not completely terminate the

contract”); O’Neil v. Cont Airlines, Inc., 981 F.2d

1450, 1459 (5th Cir. 1993) (“[t]lo assert that a

contract effectively does not exist as of the date of

rejection is inconsistent with deeming the same

contract breached”); Kopolow v. P.M. Holding Corp.,

900 F.2d 1184, 1191 (8th Cir. 1990); Leasing Serv.

Corp. v. First Tenn. Bank Nat’ Ass’n, 826 F.2d 434,

436-37 (6th Cir. 1987); Eastover Bank for Sav. v.

Sowashee Venture, 19 F.3d 1077, 1082 (5th Cir.

1994). As noted by Judge Torruella in the decision

below, the appropriate focus should be to view the

impact of rejection of trademark license agreements

in the context of section 365 in general, which is a

breach, but not termination, of the agreement. See

Tempnology, 879 F.3d at 406 (concurring in part,

dissenting in part).

Significantly, Congress specifically placed a

debtor's ability to reject an executory contract in

chapter 3 of the Bankruptcy Code, which governs

administrative powers—i.e., the trustee’s power to

breach or perform a contract—and not in chapter 5,

which governs a debtor's ability to avoid or recover

certain assets. See also Sunbeam, 686 F.3d at 377

(noting the distinction between a debtor who seeks to

reject a license agreement under section 365 and a

debtor who seeks to avoid a pre-petition transaction

under chapter 5 of the Bankruptcy Code); 2 Norton

Bankruptcy Law and Practice § 46:57 (3d ed. 2008)

(“The Bankruptcy Code instructs us that rejection is

a breach of the executory contract. It is not

avoidance, rescission, or termination.”). Congress’

placement of the rejection power in chapter 3 is

presumed to be intentional, and signals its intent

that rejection is not intended to avoid or rescind a

pre-petition transfer of trademark rights, which

would allow the debtor to recover the trademark. See

Russello v. U.S., 464 U.S. 16, 23 (1983) (‘Where

Congress includes particular language in one section

of a statute but omits it in another section of the

same Act, it is generally presumed that Congress

acts intentionally and purposely in the disparate

inclusion or exclusion.” (quoting U.S. v. Wong Kim

Bo, 472 F.2d 720, 722 (5th Cir. 1972))).*

* Unlike preferential or fraudulent transfers under chapter 5,

which a debtor could avoid and recover in furtherance of

certain bankruptcy policies, there is no policy argument in

favor of allowing a debtor in chapter 7 or chapter 11 to reject a

contract and rescind rights that were validly transferred away

to a good faith licensee.

Section 365 also expressly states that the debtor

is able to free itself from burdensome contractual

obligations that would impede its ability to obtain a

fresh start by treating such rejection as a pre-

petition “breach.” 11 U.S.C. § 365(g) (providing that

“rejection ... constitutes a breach of such contract ...

immediately before the date of the filing of the

petition”). For example, a debtor-lessee can reject a

non-residential property lease that requires it to pay

above-market rents or a lease for equipment. In both

cases the creditor-lessor would lose the benefit of the

payment stream (and would become a creditor with a

claim for damages against the debtor), but would

retain ownership of its property. See generally NLRB

v. Bildisco & Bildisco, 465 U.S. 513, 528 (1984)

(“authority to reject an executory contract is vital to

the basic purpose of a Chapter 11 reorganization,

because rejection can release the debtor’s estate from

burdensome obligations that can impede a successful

reorganization”); Orion Pictures Corp. v. Showtime

Networks, Inc., 4 F.3d 1095, 1098 (2d Cir. 1993)

(“§ 365 permits the trustee or debtor-in-possession,

subject to the approval of the bankruptcy court, to go

through the inventory of executory contracts of the

debtor and decide which ones it would be beneficial

to adhere to and which ones it would be beneficial to

reject”). The rejection rule adopted by the First

Circuit would have a very different result; it would

allow the debtor to claw back property rights that it

had already contracted away.

Properly applied, Section 365 permits a debtor-

licensor to reject a trademark license agreement to

allow it to avoid some of the agreement's

burdensome contractual obligations. These might

include, for example, the pursuit or maintenance of

trademark registrations in multiple jurisdictions or

undertaking or funding enforcement actions against

third parties who are infringing the licensed mark.

The other primary objective of enabling the rejection

of executory contracts is that any claims of the

licensee for damages resulting from breach-by-

rejection would constitute unsecured pre-petition

claims. 11 U.S.C. § 365(g). This is a timing issue for

the breach, but it has no impact on the existence of

the contract or the counterpartys rights post-

rejection under applicable non-bankruptcy law, such

as the law of contracts or trademark law, as set out

in the Act. If, therefore, the licensor post-rejection

breaches its obligations under the trademark license

agreement, the licensee might be compelled to

expend its own funds on maintenance or

enforcement because it can not compel the licensor to

comply with the agreement; in such case, the

licensee would only have a pre-petition claim for

damages. The Bankruptcy Code does not, however,

support the view that rejection and breach of an

executory contract, including a trademark license

agreement, should permit a debtor to revoke and

reclaim rights that it had previously granted to third

parties. See S. Rep. No. 100-505, at 4 (1988), as

reprinted in 1988 U.S.C.C.A.N. 3200, 3203 (“[section]

365 was [nlever intended to be a mechanism for

stripping innocent licensee[s] of rights”).

D. The Force of the Sunbeam Rule is

Shown by the Other Courts That Have

Followed It.

Numerous lower courts have recognized that the

Sunbeam rule is correct because it equitably

balances the interests of trademark licensors and

licensees in bankruptcy. In In re Exide Tech., 607

F.3d 957, Judge Ambro’s concurring opinion

advocated the Sunbeam approach. There, the

licensee, whose trademark license had been

terminated by the debtor-licensor, had argued

(1) that the license was not executory, and (2) that

the court below had erred in determining that the

rejection terminated the licensee’s rights. The

majority in Exide did not reach the second issue

because it concluded that that license was not

executory. Jd. at 964. In his concurrence, Judge

Ambro did address that issue, stating that “a

trademark licensors rejection of a trademark

agreement under 11 U.S.C. § 365 does not

necessarily deprive the trademark licensee of its

rights in the licensed mark.” Jd. at 965 (Ambro, J.,

concurring). He emphasized that the bankruptcy

laws should not allow a licensor to take back rights

that it had bargained away. Jd. at 967.

Bankruptcy courts also have followed the

approach in Sunbeam. See, e.g., In re SIMA, 2018

WL 2293705, at *8 (criticizing the Tempnology

majority: it “strains to resurrect Lubrizol, [and] is

plainly contrary to Congress’ explicit efforts to

rebalance affected rights on intellectual property

and leave Section 365(g) to answer otherwise

unresolved trademark issues”); Banning Lewis

Ranch Co. v. City of Colo. Springs, 532 B.R. 335, 345

(Bankr. D. Co. 2015) (“rejection of a contract does not

work a rescission of the contract and is not, itself, an

avoiding power’; holding that licensees under

rejected contract could continue to use trademark

rights granted under licenses (citing Sunbeam, 686

F.3d at 377)); In re Crumbs, 522 B.R. at 770 (“This

Court is not persuaded by the decision in Lubrizol

and is not alone in finding that its reasoning has

been discredited.”). In fact, despite the split in the

courts, the recent trend has been to follow Sunbeam

and not Lubrizol. See Order at 8, Aerogroup Int'l,

LLC v. Wiesner Prods., Inc., No. 17-51889 (K.JC)

(Bankr. D. Del. Jan. 2, 2018), ECF No. 25 (“Few

courts, including me, followed Lubrizol, cutting off

licensing rights, but the current legal landscape has

changed and it points in the favor of continuing the

licensee’s rights, post-rejection...”).

In adopting section 365(n), Congress made clear

that it intended to “allow the development of

equitable treatment of this situation [involving the

treatment of trademark licenses in bankruptcy] [to

the] courts.” S. Rep. No. 100-505, at 5 (1988), as

reprinted in 1988 U.S.C.C.A.N. 3200, 3204. Courts

have adhered to that command, and have not

interpreted Congress’ decision to omit trademarks

from the protections of that section as an

endorsement of the Lubrizol rule. Rather, in

weighing the equitable considerations set out above,

they have wisely adopted the Sunbeam rule.

CONCLUSION

The Court should reverse the decision below and

adopt the rule articulated by the Seventh Circuit in

Sunbeam with respect to the effect of a debtor-

licensor’s rejection of a trademark license agreement

in bankruptcy.

December 17, 2018

Respectfully submitted,

DAVID H. BERNSTEIN

Counsel of Record

JEFFREY P. CUNARD*

JEREMY FEIGELSON

HENRY LEBOWITZ

JASMINE BALL

JARED I. KAGAN

ELIE J. WORENKLEIN

DEBEVOISE & PLIMPTON LLP

919 Third Avenue

New York, NY 10022

(212) 909-6696

dhbernstein@debevoise.com

*Resident in Washington, D.C.

Office

ELEANOR M. LACKMAN

COWAN, DeBAETS,

ABRAHAMS & SHEPPARD LLP

41 Madison Avenue

New York, NY 10010

(212) 974-7474

COUNSEL FOR AMICUS CURIAE

THE INTERNATIONAL TRADEMARK ASSOCIATION

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.