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July 28, 2014

Broad Reading of Executory Contract when Trademark License Obligations Are Unfulfilled

In a case originating out of bankruptcy court, the U.S. Court of Appeals for the Eighth Circuit affirmed the bankruptcy court’s finding that a perpetual, royalty free, assignable, transferable, exclusive license granted as part of the sale of the business operations, assets and intellectual property associated with two bread baking brands was an executory contract.  Lewis Bros. Bakeries Inc. v. Interstate Brands Corp., Case No. 11-1850 (8th Cir., Aug. 30, 2012) (Bye, J.).

In 1996, Interstate Brands sold its Butternut Bread baking business operations and assets in the Chicago area and its Sunbeam Bread baking business operations and assets in the Central Illinois territory to Lewis Brothers Bakeries.  The parties entered into a license agreement, granting Lewis Brothers a perpetual, royalty-free, assignable, transferable, exclusive license to the brands and trademarks in certain parts of Illinois. In 2004, Interstate Brands filed for bankruptcy protection and later asserted that the license that was included with the sale of the two baking businesses was an executory contract because there were performance obligations on both sides, which if not performed, would excuse performance by the other side.  Interstate Brands also asserted it would have the power to maintain or reject the deal in bankruptcy court.  Lewis Brothers had previously agreed that it would be a material breach if it failed to maintain the character and quality of the goods sold under the trademarks in the license agreement and Interstate Brands had the standard obligations of notice, forbearance of licensing, and defense of the marks. 

Lewis Brothers filed an adversary proceeding within the bankruptcy case for a declaratory judgment that the license agreement was not an executory contract.  The bankruptcy court disagreed, holding that Lewis Brothers maintained obligations to, among other things, defend the trademarks and control the quality of the goods under the license agreement.  The district court affirmed the bankruptcy court’s decision.

The 8th Circuit affirmed, holding that the license agreement was an executory contract because the parties maintained at least one remaining material obligation. The court followed Countryman for analyzing executory contracts, that is, the court analyzed whether obligations remain on both sides so underperformed that the failure of either party to complete performance of those obligations would constitute a material breach excusing the performance of the other.  The 8th Circuit found that the obligations remaining on a license agreement entered into as part of the sale of a business was an executory contract. The court distinguished precedent from the U.S. Court of Appeals for the Third Circuit, Exide Technologies, on the grounds that Lewis Brothers, the non-debtor, maintained the obligation of the non-debtor to maintain quality standards.

© 2014 McDermott Will & Emery

About the Author

Associate

Ulrika E. Mattsson is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.  She focuses her practice on intellectual property litigation, counseling and prosecution.

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