• Trademark License or Trademark Assignment?

    by  • June 24, 2010 • trademark

    In suit is what’s styled as a license to use the mark BUTTERNUT for bread in parts of Illinois.  Interstate Bakeries (IBC) is the record owner of the BUTTERNUT mark and Plaintiffs Lewis Brothers Bakeries Inc. and Chicago Baking Company (LBB/CBC) use the BUTTERNUT mark.  Interstate is currently in bankruptcy, which means it can reject executory contracts, but Interstate’s rejection would be no small matter for LBB/CBC.  As described in their brief

    27.    If IBC rejects the License and LBB/CBC lose the ability to use the Butternut trademark and the other trademarks under the License, LBB/CBC’s sales volume would shrink substantially, the companies would lose trademarks having a potential value of $100 million, and CBC itself “would not be able to continue to operate as an ongoing company.”

    28.    LBB/CBC’s expert confirms that the loss of the Butternut and other trademarks would have dire effects on LBB/CBC beyond the loss of more than $21.3 million in annual net sales – it would cause the collapse of CBC’s Chicago store delivery system, the insolvency of CBC and its affiliate, North Baking Company (which makes private label bread for Jewel grocery stores, the largest grocery chain in the Chicago area, thus leaving Jewel without its private label bread supplier), the closure of at least one bakery owned by Holsum of Fort Wayne Incorporated (another affiliate), and the loss of more than 500 jobs.

    29.    Rejection and LBB/CBC’s loss of the Butternut and other trademarks would even jeopardize the solvency and viability of LBB itself – and the jobs of its 2,100 employees – because LBB would lose 23 percent of its sales and directly incur $23.3 million of additional liabilities, including more than $13 million in severance pay and under-funded union pension liabilities, and $7.1 million in truck lease guaranty liabilities.

    LBB/CBC also claims that Interstate Bakeries has reason to reject the contract:

    30.    Richard Seban, IBC’s chief marketing officer and executive vice president, acknowledges that LBB/CBC are competitors of IBC in the Upper Midwestern area, and that IBC’s sole intent in rejecting the License is to take back and use the trademarks it relinquished pursuant to the Judgment (including those in the Central Illinois Territory that IBC itself was a licensee of and the rights to which it has already surrendered) in order to gain market share in Chicago.

    After LBB/CBC filed its motion, Interstate withdrew its own motion to reject the contract. The bankruptcy court characterized the question remaining as whether the trademark license was executory.  But it doesn’t look like that was the real question; instead LBB/CBC had fundamentally argued that the original transaction was really an assignment, not a license.  Indeed, it looks about as clear as mud.

    The license-in-suit dated from 1996.  In that year, Interstate and LBB/CBC entered into an Asset Purchase Agreement with a number of related documents.  The transaction was by court order: Interstate was acquiring Continental Baking Company and Interstate had to divest itself of certain assets to avoid antitrust problems.  Interstate was ordered to “grant to one or more purchasers a perpetual, royalty-free, assignable, transferable, exclusive license to use the Relevant Labels . . . .”  “Label” was defined as “all legal rights associated with a brand’s trademarks, trade names, copyrights, designs, and trade dress; the brand’s trade secrets; the brand’s production knowhow, including, but not limited to, recipes and formulas used to produce bread sold under the brand; and packaging, marketing and distribution knowhow and documentation, such as customer lists and route maps, associated with the brand.”  U.S. v. Interstate Bakeries Corp., Civ. A. No. 95 C 4194, 1995 WL 803559, 1996-1 Trade Cases P 71,271 (N.D.Ill. Aug. 7, 1995).

    The APA describes the trademarks as “assets purchased,” but it also said that Interstate would grant a “perpetual, royalty-free, assignable, transferable exclusive license” to use the Butternut trademark and other trademarks. (This is the opinion’s description; I wonder if instead the APA recites the court’s language about a license to the “Labels,” a definition considerably broader than the trademarks.)   A trademark license was executed at the same time, granting a “perpetual, royalty-free, assignable, transferable, exclusive . . . license” for BUTTERNUT and other marks.

    The trademark license had a number of typical provisions: Interstate reserved its rights to the marks outside of the territory; the license was not sublicensable; LBB/CBC could not register the marks and all goodwill inured to Interstate’s benefit; and a recitation for of quality control (“Goods sold or otherwise distributed by Licensee under the Trademark shall be substantially of the same character and quality as the goods currently sold by IBC under the Trademarks. . . .  Licensee shall use raw materials, ingredients and packaging supplies of a quality at least as high and consistent with the quality previously used by IBC in connection with the same or similar products.”).

    But for tax purposes, Interstate had internally accounted for the transaction as a sale of trademarks.  The plaintiff’s brief also claimed that Interstate’s former general counsel testified that Interstate was required to sell the trademarks by the Justice Department, Interstate’s intent was to sell the BUTTERNUT trademark to LBB/CBC, and that’s what it did.  His testimony was that Interstate divested itself of the Butternut and other trademarks by means of a perpetual, exclusive, royalty-free license to LBB and CBC because Interstate used the Butternut and other trademarks it owned in other territories.

    The bankruptcy court made easy work of the fact that this was an executory contract, as an ordinary trademark license would be.  But the plaintiff’s story (some of it parol evidence) rings true.  How many trademark licenses have you seen that are perpetual, royalty-free, assignable, transferable, and exclusive?  Interstate had to fully divest itself of everything needed to make the bread as sold at the time of the Continental acquisition.  With a federal registration for BUTTERNUT but a geographically limited divestiture, and a number of types of intangible property interests in addition to trademarks (copyrights, trade secrets, recipes, know how), perhaps everyone assumed the only thing that would work was a license.  But it would be interesting to see who acted more like the trademark owner in the territory.

    LBB/CBC have appealed.

    Update 3/27/11:  Appeal denied.

    In re Interstate Bakeries Corp., Bankr. No. 04-45814, Adv. No. 08-4238 (Bankr. W.D. Mo. June 4, 2010).  Plaintiff’s brief here.

    More information on the effect of a licensor’s bankruptcy at the Licensing Law Blog.

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