Alleged Trademark Sublicense Assignable in Bankruptcy

Considering the fate to befall certain trademarks upon an owner’s bankruptcy, the U.S. Court of Appeals for the Seventh Circuit Court determined that a trademark license is not assignable without the owner’s express permission or in the absence of a clause explicitly authorizing assignment and a trademark license cannot be implied from a contract for services.  In re XMH Corp., Case No. 10-2596 (7th Cir. August 2, 2011) (Posner, J.).

XMH and its subsidiaries, including one called Simply Blue, filed for Chapter 11 bankruptcy relief.  XMH sought to sell Blue’s assets, including a contract for services between Simply Blue and Western Glove Works.  The contract included a sublicense from Western Glove Works to Simply Blue of the trademark JAG JEANS used in connection with various items of apparel.  The sublicense as originally executed only lasted for two weeks.  The parties also executed a contract for services to be performed during the year after the expiration of the trademark sublicense, under which Simply Blue agreed to provide a variety of services related to the apparel sold under the JAG JEANS mark.  Three months after the expiration of the sublicense, the parties extended it retroactively to last six months and also extended the services contract.  Later the parties opted to renew the services portion of the contract for an additional four years and provide for further renewal options which, if exercised, would extend to 2021. 

Whether or not the contract could be assigned during bankruptcy turned on whether the contract was a trademark license.  Western Glove Works objected to the assignment of the contract under bankruptcy, arguing the contract was a sublicense to Simply Blue of the JAG JEANS mark, which Western Glove Works itself had licensed from another company and which could not be assigned without its permission.

Judge Posner, writing for the court, recognized the “universal rule” that “a trademark license is not assignable without the owner’s express permission,” i.e., “in the absence of a provision authorizing assignment.”  This is because a trademark owner must exercise control over the quality of the trademarked goods.  If a licensee were permitted to sublicense the trademark to a seller over whom the trademark owner, having no contract with the sublicense, has no control, the quality of the trademarked product could be degraded without notice, making the trademark deceptive.  Because no provision in the Simply Blue-Western Glove Works contract authorized assignment, Simply Blue could not have assigned the trademark sublicense when it was in force.

Western Glove Works argued that the services provision of the contract which survived the expiration of the trademark sublicense was an implied sublicense, and therefore Simply Blue could not assign that portion of the contract either.  The court disagreed, stating none of the provisions of the contract constituted “any sort of trademark license.”  Further, the court instructed “[i]f Western wanted to prevent Blue from assigning the service contract to another firm without Western’s permission, all it had to do was get Blue to agree to designate the contract as a trademark sublicense, thus triggering the default rule.”  Therefore, the 7th Circuit affirmed the district court’s reversal order, thus permitting assignment of the alleged trademark sublicense without the licensor’s consent.