Alert: Eighth Circuit Holds Prepaid, Perpetual Exclusive Trademark License an Executory Contract Subject to Rejection in Bankruptcy

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October 5, 2012

The Eighth Circuit Court of Appeals recently held in Lewis Brothers Bakeries Incorporated and Chicago Baking Company v. Interstate Brands Corporation (In re Interstate Bakeries Corporation), 690 F.3d 1069 (8th Cir. Aug. 30, 2012), that an exclusive prepaid perpetual trademark license is an executory contract that may be rejected by a debtor in bankruptcy. Prepaid trademark licenses are often used in asset purchases to allocate rights to use consumer brands and other trademarks in different markets. In the wake of this decision, purchasers now face the possibility of being stripped of the right to use key trademarks long after an asset acquisition has closed if the seller eventually files bankruptcy.

In 1995, Interstate Bakeries announced its acquisition of Continental Baking Company, which owned the Wonder Bread and Hostess brand trademarks. The acquisition was challenged in an antitrust action by the United States Department of Justice and Interstate was required to divest itself of certain rights and assets before the acquisition could be consummated. In 1996, an Interstate subsidiary, Interstate Brands Corporation (IBC), entered into an asset purchase agreement and separate license agreement with Lewis Brothers Bakeries, under which IBC sold to Lewis Brothers various businesses and assets in certain Illinois territories. The license agreement granted Lewis Brothers a “perpetual, royalty-free, assignable, transferable, exclusive” license to use the licensed brands and trademarks in the respective areas.

Eight years later, in 2004, Interstate and its subsidiaries and affiliates filed Chapter 11 bankruptcy petitions. In 2008, Interstate filed an amended plan that contended that its licensing agreement with Lewis Brothers Bakeries was an executory contract, subject to assumption or rejection under 11 U.S.C. § 365.  Lewis Brothers filed an adversary proceeding seeking a declaration that the license was not executory. The bankruptcy court and district court, however, both found that the license agreement was an executory contract subject to assumption or rejected by the debtor because continuing obligations related to the trademarks remained.

The Eighth Circuit affirmed in a two-to-one decision, holding that both parties maintain at least one remaining material obligation. The licensee had a continuing obligation to maintain quality standards in using the trademarks, and the licensor had a continuing obligation to refrain from use of trademarks in the exclusive territory of the licensee. The majority found that these were material obligations that made the contract executory and subject to rejection in bankruptcy. The court also distinguished the Third Circuit’s decision in In re Exide Technologies, 607 F.3d 957 (3d Cir. 2010), wherein the court held that an agreement between two companies for the sale of an industrial battery business, which also provided for an exclusive prepaid perpetual trademark license, was not executory.  The Eighth Circuit found that the remaining obligations in the Exide agreement were minor or conditional, in contrast to the remaining material obligation in this case.

The dissent noted that the majority wrongly focused on the license agreement alone, when the relevant contract is an integrated agreement that included the license agreement and the asset purchase agreement. It stated that the integrated agreement was not executory because IBC had substantially performed all of its obligations, and that since only one party owed a material obligation, the contract was not executory.

For more information, please contact Briggs and Morgan attorneys John McDonald or Ben Gurstelle.