Intellectual Property Issues in Retail Bankruptcies

With the large number of retail bankruptcy filings over the last few years, issues relating to the intellectual property (IP) of retailers have frequently emerged, especially due to the large number of liquidations and Section 363 bankruptcy sales that have occurred.

The IP of a bankrupt retailer typically include the retailer’s name, in-house brands or trademarks, copyrights, patents, trade secrets and customer lists.  In a Section 363 asset sale, the IP assets are generally included as part of the sale.  However, if a retailer is being liquidated, in order to maximize recoveries for its creditors, the liquidating retailer will likely auction off all of its licensed and/or owned IP to ensure that it receives the highest and best price.

In addition to the IP owned by the retailer, the ability of a retailer to assign a trademark license to a third party can be an issue in bankruptcy.  These trademark licenses typically relate to a name, phrase, logo, symbol, design, image or a combination of these elements that identifies the quality and value of the trademarked goods for sale.

For example, a retailer carrying a trademarked product typically enters into licensing and trademark agreements with the licensor that controls not only the pricing of the product, but also how the product may be displayed in the retailer’s stores.  If the retailer subsequently files for bankruptcy, it may sell inventory at auction or conduct going-out-of-business sales in its stores, including the licensed products at issue.  In the rush to liquidate assets, the bankruptcy court will likely allow the retailer to sell the assets at less than the prices required by the trademark licensing agreement.

In bankruptcy, a retailer/licensee can assume and assign executory contracts.  However, the courts have been split over whether a retailer can assign trademark licenses, with some courts ruling that they are assignable and others ruling that trademark licenses are not assignable.

For example, in the recent bankruptcy involving Blockbuster, a dispute arose involving the continued licensing of the Blockbuster name for movie rental kiosks by NCR.  Dish Network purchased all of Blockbusters’ assets in April 2011 for $320 million and NCR contends the “Blockbuster Express” name, design and related trademarks were not sold to Dish Network.  As such, NCR is arguing that Dish Network has no authority to remove the Blockbuster trademark from the NCR movie rental kiosks.

As more retailers file bankruptcy and seek to assign their IP licenses or liquidate their inventory, trademark licensors may find that they have limited ability to stop a liquidating retailer from selling the licensed products at prices below the contracted retail price or prevent the retailer from assigning the trademark license to a third party.

Have you been a creditor in a retail bankruptcy where your only recovery hinged on the sale of the retailer’s intellectual property?