Delaware Bankruptcy Court Trumps an Automatic Stay by Allowing Suit to Terminate a Trademark Licensing Agreement

(Excerpt) Trademark licensees that file for bankruptcy protection may encounter difficulties and uncertainties regarding their continued use of trademarks that are critical for their businesses. An issue that remains unsettled with courts is whether a licensee can assume a trademark license without the licensor’s consent. Circuits are divided on whether Section 365(c)(1) of title 11 of the United States Code (the “Bankruptcy Code”) prohibits a debtor from assuming an intellectual property license without the consent of the licensor. Courts on one side of the issue apply the “actual test,” which permits a debtor to assume a license as long as the debtor does not intend to assign it. On the other side, courts apply the “hypothetical test,” which prohibits a debtor from assuming a license regardless of the debtor’s intent to assign it. In In re Trump Entertainment Resorts, Inc., the United States Bankruptcy Court for the District of Delaware held that trademark licenses are not assignable by a debtor licensee without the consent of the licensor. Section 365(c)(1) of the Bankruptcy Code limits a debtor’s ability to assume or assign a contract where “applicable law” excuses a non-debtor counterparty from accepting performance from a third party. In interpreting applicable federal trademark law, the Trump court noted that exclusive or non-exclusive trademark licenses are precluded from assignment by a licensee without the licensor’s consent, even if the original license agreement did not expressly prohibit such an assignment. The Court held that, under Section 365(c)(1) of the Bankruptcy Code, trademark license agreements are not assumable or assignable by a debtor licensee without the trademark owner\u27s consent because they are not assignable under federal trademark law. The court in Trump Entertainment also discusses in detail what type of “applicable law” is relevant in the 365(c)(1) analysis