Two Circuits Conclude that Automatic Bankruptcy Stay Does Not Prevent Continuation of an Infringement Action of Trademarks
In the first decision, the U.S. Court of Appeals for the Sixth Circuit affirmed the district court decision, concluding that a defendant’s bankruptcy filing does not prevent the district court from ruling on a contempt motion for violation of a temporary restraining order protecting plaintiff’s trademarks. Dominic’s Restaurant of Dayton, Inc. v. Mantia, Case Nos. 10-3376; -3377 (6th Circuit July 5, 2012) (Batchelder, C.J.; McKeague, J.; Quist, D.J., sitting by designation).
The defendants owned a restaurant not affiliated with Dominic’s but used the plaintiffs’ trademarks in connection with its restaurant services. Dominic’s brought an infringement action claiming that the defendants used its trademarks in its operation and promotion of its restaurant services and subsequently obtained numerous injunctions, as well as contempt citations for violations of those injunctions.
During the course of this litigation, one of the defendants filed for bankruptcy and argued that the automatic stay prevented continuation of the infringement action against him. The district court disagreed and held that the automatic bankruptcy stay does not apply to the defendant’s infringing use of plaintiff’s trademarks. The district court explained that while the bankruptcy stay effectively stays the assessment of damages, it does not bar injunctive relief against the defendant. Mantia appealed.
The 6th Circuit affirmed, concluding that while the bankruptcy code stays judicial proceedings that were commenced against the debtor prior to a bankruptcy action, it does not apply to infringing use of trademarks and service marks. Were it obvious, application of automatic stay would permit the defendant to continue to commit trademark and service mark infringement, and the bankruptcy laws should not protect that.
In the second case, the U.S. Court of Appeals for the Seventh Circuit held that a trademark licensee can continue using licensed trademarks even after the license is rejected in bankruptcy. Sunbeam Products Inc. v. Chicago American Mfg. LLC, Case No. 11-3920 (7th Cir., July 3, 2011) (Easterbrook, C.J.).
Chicago American, a manufacturing company, licensed (from an entity known as Lakewood Engineering and Mfg.) the right to produce branded fans. Lakewood was in financial distress, and, three months into the contract, several of its creditors filed an involuntary bankruptcy petition against it. The appointed trustee rejected the license and sold the Lakewood assets to a third party, Sunbeam, which sued to stop the licensee from continuing to produce the branded fans and use Lakewood’s trademarks.
The 7th Circuit held that Chicago American was entitled to continue using the trademarks, even though the license had been rejected, explaining that since a licensor’s simple breach outside of bankruptcy typically would not cause the licensee to lose the use of the licensed property under non-bankruptcy law, there is no reason why the non-debtor licensee should lose that right in a licensor bankruptcy. Sunbeam appealed.
On appeal, the 7th Circuit rejected the rule of Lubrizol Enterprises v. Richmond Metal Finishers, (4th Cir., 1985) which holds that when an intellectual property license is rejected in bankruptcy, the licensee loses the ability to use licensed copyrights, trademarks and patents. The court noted that no other circuit has adopted the Lubrizol rule and explained, as the rationale for its decision, that bankruptcy law is only designed to eliminate certain rights under some contracts. Here the trustee used § 365 (a) to reject the contract—the equivalent of a breach that ended the debtor's obligations but did not affect the rights of the licensee.
Practice Note: The 7th Circuit’s decision means that trademark licensees are not subject to losing their rights just because the licensor files for bankruptcy and the license is rejected by the trustee. This decision will budget intellectual property licensees against loss of license rights when the licensor is in bankruptcy proceedings.