The key litigated issue on appeal in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, was whether the bankruptcy court erred in holding that a non-debtor licensee can continue to use a debtor licensor's trademark even though the debtor licensor rejected the contract containing the trademark license under section 365(a) of the Bankruptcy Code.

Lakewood Engineering & Manufacturing Co. made and sold various patented consumer products under its trademarks. In 2008, Lakewood entered into a supply agreement with Chicago American Manufacturing (CAM) and authorized CAM to:

In February 2009, several of Lakewood's creditors filed an involuntary bankruptcy petition against it. Lakewood's court appointed trustee in bankruptcy sold Lakewood's business, including its patents and trademarks, to Sunbeam Products (which was doing business as Jarden Consumer Solutions). Jarden did not want the Lakewood-branded fans CAM had in inventory and did not want CAM to sell those fans in competition with Jarden's products. Lakewood's trustee rejected the executory portion of the supply agreement under section 365(a) of the Bankruptcy Code. When CAM continued to make and sell Lakewood-branded fans, Jarden filed the adversary action.

After a trial, the US Bankruptcy Court for the Northern District of Illinois, Eastern Division:

Jarden appealed the bankruptcy court's decision.

The Seventh Circuit noted that, although section 365(n) of the Bankruptcy Code allows certain non-debtor licensees to continue to use intellectual property after a debtor licensor has rejected the license under section 365(a), the Bankruptcy Code's definition of intellectual property does not include trademarks. In addition, the Seventh Circuit rejected the bankruptcy court's reliance on equity to allow CAM's continued use of Lakewood's trademarks because a judge cannot override Bankruptcy Code provisions by declaring that enforcement would be inequitable.

Despite rejecting the bankruptcy court's equity argument, the Seventh Circuit affirmed the bankruptcy court's judgment. To reach its decision, the court relied on section 365(g) of the Bankruptcy Code, which specifies that a debtor's rejection of an executory contract constitutes a breach of that contract. The court analogized to situations outside of bankruptcy in holding that the debtor party cannot eliminate the non-debtor party's rights by rejecting or breaching the contract. The Seventh Circuit reasoned that if Lakewood were not in bankruptcy, it could not have ended CAM's right to sell the box fans by failing to perform its own duties.

The court also noted that Lakewood's trustee never argued that Lakewood's contract with CAM is subject to rescission under any of the trustee's avoiding powers (11 U.S.C. §§ 544–51). Since the trustee chose to reject the contract under section 365(a) rather than rescind the contract, the debtor could not render the contract void. Instead, by rejecting the contract under section 365(a), the debtor is free from performing its obligations under the contract but cannot adversely affect the contract's continued existence.

For a more detailed discussion of how bankruptcy can affect a non-debtor licensee's access to the debtor's trademark licenses, see Practice Note, IP Licenses and Bankruptcy: Risk for Non-debtor Trademark Licensees

In the Seventh Circuit, a trademark licensee may be able to continue to use a debtor trademark licensor's trademark even after the debtor trademark licensor rejects the trademark license. However, counsel should note that this decision creates a conflict among the circuits. As a result, trademark licensees remain at substantial risk in a trademark licensor's bankruptcy because the Bankruptcy Code's protection for intellectual property licensee's does not include trademarks.

Update: On December 10, 2012, the Supreme Court issued an order denying Jarden's petition for certiorari.