Di Santo LLP – Attorneys at Law

In a recent case (In re Exide Technologies, 3d Cir., No. 08-1872, June 1, 2010) involving a debtor who entered into a license agreement providing for the use of its trademark, the Third Circuit Court of Appeals rendered a decision explaining that once a party has performed its obligation by transferring the right to use a trademark it cannot later revoke that transfer if it happens to begin a reorganization process under the Bankruptcy Code.  The debtor in this case had previously granted an exclusive and perpetual license to another company for the use of its trademark.  After the transfer, the debtor more than once tried to buy back the trademark right, but the transferee refused (for obvious economic reasons).  Upon filing its petition for bankruptcy reorganization, the debtor sought to recover the trademark by invoking its statutory right to “reject” an executory contract.  Although not specifically defined in the Bankruptcy Code, an executory contract is understood by the courts–including those in the Second and Third Circuits–to be a contract with “unperformed obligations that would constitute a material breach if not performed.”  Applying this definition, the Third Circuit explained that once the right to use the trademark had passed to another party, all obligations were essentially performed.  A debtor cannot thereafter use the executory contract provision of the Bankruptcy Code to “take back trademark rights it bargained away.”  This is an important point to consider when a trademark-holding party is considering a permanent transfer of its intellectual property rights.