Best of 2014: Bakeries, bankruptcy, BUTTERNET and … bleh!

Originally posted on July 14, 2014.BUTTERNUT trademark

If the tone of my the title of this post sounds dismissive, it’s not quite that.  It is, rather, just an admission that there are some things in trademark law that are complicated in a pretty untrademark-law-like way.  Usually I manage to avoid them completely … and then along comes Pamela Chestek, who makes us sit up and take notice no matter how intellectually lazy July in New York makes me want to be.

It’s like this:

The legal significance of a “license” to the BUTTERNUT trademark has been in dispute for ten years now. I put “license” in quotes because while the document in question is called a license, it’s not your typical trademark license.

In 1996, in settlement of an antitrust suit brought by the Justice Department, defendant Interstate Bakeries Corporation (IBC) had to divest itself of some Bread Assets (land, buildings, fixtures, equipment, vehicles, customer lists, etc.) and Labels, which included “all legal rights associated with a brand’s trademarks, trade names, copyrights, designs and trade dress.”

Plaintiff Lewis Brothers Bakeries (LBB) was the company that acquired the rights Interstate Brands had to sell. The judgment was reduced a transaction that had both an Asset Purchase Agreement and a License Agreement. One of the assets being transferred in the APA was . .  . “the perpetual, royalty-free, assignable, transferable exclusive license to use the trademarks as described in Schedule 1.2(e)(the “Trademarks”) pursuant to the terms of the License Agreement (as described in Section 3.6) …” Section 3.6 described a “trademark license agreement substantially in the form of Exhibit G hereto ….”

So we have what is a very unusual trademark license agreement. Most trademark license agreements aren’t assignable, transferable or perpetual, and when you add in “exclusive” you get an agreement that looks much more like a transfer of all rights rather than a license.

Bad enough.  Then comes the other B:  Bankruptcy, under Chapter 11 of the Code of which Interstate Bakeries ends up filing in 2004.  “As part of its reorganization plan,” Pamela explains, the debtor “identified the license agreement as an executory contract that it was going to assume.”  Which is one of the things you get to do — if the contract you, the debtor, have identified is really indeed an executory contract, which in this case would be an executory licensing agreement.

But — another famous B — as Pamela noted, this business didn’t look so much like a license.  It looked like a transfer of all rights, i.e., an asset sale.

Well, which is it?  Because when you’re evaluating the value of assets of a bankruptcy estate, you need to know whether you’ve got a contract is executory, and which can be assumed, or if you’ve got something else:

If it is [an executory licensing contract], Interstate Bakeries can assume the agreement, perhaps assigning it to someone else—which it did, assigning it to Flowers Foods during the pendency of the case. A decision that the agreement is not executory, as explained by the court, “would affect the value of LBB’s exclusive, perpetual, royalty-free license by removing uncertainty about the status of the License Agreement. A judgment in favor of LBB also would allow the company to plan its ongoing business without the potential that Flowers Foods or any other successor or assign of IBC could reject the License Agreement in a later bankruptcy proceeding.”

In short, there’s money riding on this.  Which is probably how the question managed to get, not just to the U.S. Court of Appeals for the Eighth Circuit, but to that august court sitting en banc.  And here’s how it ends:

[L]ooking at the two agreements as the whole instead of the license agreement alone, the court found that the license agreement was not executory because the transaction, the asset purchase, was substantially performed . . .

In the bankruptcy court there was testimony from the former GC of Interstate that Interstate’s intent was to sell the BUTTERNUT trademark to LBB within LBB’s territory. The vehicle of a trademark license was used because Interstate continued to own the trademark in other territories. So fundamentally, there shouldn’t have been a license at all, but instead a territorial division of ownership. Which is what the Court of Appeals for the 8th Circuit has effectively now accomplished.

Trademark lawyer Ron ColemanWhat did I learn from this that could be relevant to my practice, which seldom involves quite such interesting issues?  It’s in the penultimate sentence of Pamela’s post, in which she posits a distinction I, who do little licensing work, had not considered in the way she frames it  — the one between a license and “a territorial division of ownership” — i.e., a prospective division of territory.

That’s opposed to the “territorial exception” in §15 and §33(b)(5) of the Lanham Act by which a senior user is permitted to continue use in the areas where he has established trademark rights even after a junior user achieves a presumptive right to 50-state exclusivity by registering the same mark.  (Nice piece on just how that might or might not work in the Internet age here.)  The topic of prospective divisions — i.e., spin-offs that implicate a trademark “license” — is treated at length in this law review article, which states in its introduction:

This article explains that the “perpetual and exclusive” trademark transaction is a type of transaction that allows the seller to rid itself totally from a struggling division by selling all the property required for the operation of the division to a willing buyer. It is a transaction that permits the seller to divide up the trademark so the buyer can use the trademark forever with the acquired division and the seller can also use the trademark outside the division. This article also argues that the misunderstanding of corporate trademark transactions will lead to uncertainty, discouraging similar future transactions to occur. Companies will be reluctant to acquire a corporate division, along with the perpetual and exclusive right to use a trademark that is also the trademark used in the seller’s remaining businesses. The threat of termination of the trademark right when the seller is bankrupt some years later in the future will force potential acquirers to negotiate for much lower prices, to the detriment of the seller at the front end of the transaction.

You’d think, right?  All this reminds me, in fact, of one of the other riffs I did off one of Pamela’s corporate licensing spaghetti pieces, the DEL MONTE trademark dustup, discussed here by her and here by me.  That involved, as the article I linked in seems more focused on as well, more of a corporate or business-line division of trademark use than a geographical split.  They all seem potentially equal in their potential to confuse, however — or their potential likelihood.  To confuse.

Got it?

I don’t see a lot of literature “out there” about territorial divisions of trademark use within the US.  In Section 26 of “McCarthy,” the master appears to address the topic of territorial limits along the lines of retrospective assessment of the scope of one’s rights, i.e., along the lines of the territorial exception in a dispute context.  Elsewhere McCarthy discusses the division of territories in an antitrust context.  Ultimately, however, in Section 16 he appears to nail it, to wit:

Multiple or Fragmented Ownership is in Conflict with the Single Source Function of a Trademark or Service mark.  It is fundamental that a trademark or service mark identifies a single, albeit anonymous, source. Legal recognition of more than one owner of a single mark is contrary to the basic definition of a mark as identifying and distinguishing a single seller’s goods or services.2.30 When there is a dispute over who owns a trademark, the worst possible solution is to allow mark ownership to be shared among the warring parties. Fragmentation of ownership is to be avoided, both by contract and by judicial fiat.

Splitting a Trademark is Different from Splitting Other Types of Intellectual Property. On the other hand, every other property right is capable of joint ownership by discrete entities. The law has developed elaborate rules to define the nature of joint control of property, but a trademark is unlike other property rights in that a trademark is a symbol to identify and distinguish a single commercial source. If more than one unrelated person is selling goods under the same mark, such multiple, fragmented use can lead to customer confusion and deception. When several persons claim ownership of the same mark for the same goods sold in the same territory, the situation is ripe for litigation to determine the true, single owner. When parties are co-owners of a mark, one party cannot sue the other for infringement. A co-owner cannot infringe the mark it owns.

Of course, corporations, partnerships, joint ventures and marriages are combinations of individual persons. But when such an entity sells trademarked [sic] goods or services, control over quality and consistency is centralized. Someone is in control. A single decision results from internal study and discussion. Similarly, when a mark is licensed or franchised, the licensor or franchisor is a single entity controlling quality. A licensed mark indicates uniform quality. Uniform quality is produced by a single source of control.

. . .

Dissolution of a Jointly Held Entity. Problems of joint ownership generally will arise after dissolution of a jointly held entity. During the pre-dissolution period when a joint entity is operating smoothly, no direct confusion or image fragmentation is created so long as the reality symbolized by the mark is controlled in fact by one legally responsible entity; e.g., majority vote of partners or parents of a joint venture. This is the situation presented when ongoing joint owners collectively seek registration of a mark.

However, when an entity is dissolved and the business symbolized by the mark is divided among the separate participants, the potential arises for multiple and fragmented ownership of the trademark property. Under the “Customer Protection” policy, good will symbolized by a mark should be an indivisible asset. If upon dissolution, good will and its trademark symbol is apportioned among owners of the dissolved entity, the ensuing fragmented use can lead to customer confusion. Such confusion can lead to destruction of the mark’s ability to identify and distinguish a single source. Fragmentation after dissolution is closely analogous to the situation after an “assignment in gross” where the reality of good will goes on a path separate from the trademark. When many use a trademark purporting to symbolize one source, the trademark property itself may be destroyed. At best, there may be a break in the chain of priority; at worst, an abandonment or forfeiture of the mark.

So, like I said.  Division of territory, or anything else, involving one trademark?  Good luck with that.  Just more work for the litigation “division,” ultimately — guaranteed.

By Ron Coleman

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