Property, intangible

a blog about ownership of intellectual property rights and its licensing

Trick Question

A debtor-in-possession had a contract it wanted to assign. The contract included a trademark license, but it was somewhat unusual in structure. For starters, it was a trademark sublicense, not a direct license, for the mark “Jag Jeans”:

There is no registered trademark for “Jag Jeans,” although there are several for “Jag” owned by Jag Licensing LLC. Not that it mattered; trademark owner Jag Licensing wasn’t a player in the suit and the actual mark was academic. The original trademark license agreement is here, though, if you’re interested.

Western Glove Works (WGW), a Canadian partnership, was the sublicensor and Seymour J. Blue, LLC (SJB) was the sublicensee. The agreement in dispute described two different sets of rights and responsibilities, a first set for 2002 and a second set for 2003 and subsequent years. In 2002, SJB was granted a non-exclusive license to

sell womens’ jeanswear bearing the Trademark (“Trademarked Apparel”) in the United States commencing on the date of this Agreement and ending on December 31, 2002.
December 31, 2002 was only two weeks after the effective date of the agreement. SJB  was to pay WGW a 12.5% royalty on net sales. At the end of 2002, WGW was to purchase all of the Trademarked Apparel inventory at cost and assume all outstanding orders and contracts.

In 2003,

[WGW] shall sell, for its own account, the Trademarked Apparel and in connection therewith SJB shall provide the following (the “SJB Services”): (1) the right to use product designs and specifications developed by SJB for this purpose; (2) sourcing services; (3) marketing and sales services (for U.S.A. customers only); (4) merchandising services; and (5) customer service (for U.S.A. customers only.

SJB was to get 30% of of WGW’s net sales for its services.

A January 1, 2003 amendment extended the 2002 terms of the agreement until June, 2003 and the 2003 terms would kick in on July 1, 2003 instead of January 1, 2003. A September, 2003 second amendment changed some financial terms.  SJB assigned the contract to successor Simply Blue Apparel, Inc. with WGW’s consent, and an April, 2007 letter of intent extended the original agreement, as amended, until June 30, 2011 and provided for two additional five-year extension terms.

In 2009, Hartmarx Corp. (at some point the name was changed to XMH Corp. 1) and 50 of its subsidiaries and affiliates, including Simply Blue, declared bankruptcy under Chapter 11. The bankruptcy court allowed the WGW-SJB agreement to be sold, along with many other assets. The district court affirmed and WGW appealed to the Seventh Circuit.

Neither the court nor the parties arguing the matter could explain exactly why the contract was written this way, but it made all the difference. First, the court noted that, while the WGW-SJB license didn’t have a “no assignments” clause, the default rule is that a trademark license may not be assigned.

But it turns out that the contract wasn’t a trademark license, at least not in 2009.  The trademark license was in 2002, extended to June 2003, but ended then. WGW argued that the contract for “SJB Services” beginning in 2003 was a continuation of the trademark license but the court didn’t buy it:

We don’t agree that those provisions constituted any sort of trademark license. The contract is explicit that after the expiration of the sublicense to Blue to sell Jag Jeans and pay a license fee to Western the rights in the trademark revert to Western; all the trademarked apparel held by Blue has to be returned to Western; Jag Jeans would henceforth be priced and sold by Western; and the license fee would be replaced by a fee for specific services rendered by Blue. The services were extensive, but Western retained control over “all other aspects of the production and sale of the Trademarked Apparel,” and these were, as our quotations from the contract should have made clear, also extensive.

. . . .

But if the service agreement is really a trademark license, why did the contract distinguish between a trademark license and a service agreement and make the former expire in 2003? Western has been unable to answer that question. Maybe a contract regarding a trademark could be a trademark license for some purposes but not others, but this is not argued and we are reluctant to go down that dark path. There is no good reason for courts to wrestle with classification issues in contract cases when it is easy for the contracting parties to resolve the issues themselves. If Western wanted to prevent Blue from assigning the service contract to another firm without Western’s permission, all it had to do was get Blue to agree to designate the contract as a trademark sublicense, thus triggering the default rule that we have discussed and endorsed. That would have headed off a legal dispute that courts are in a poor position to resolve. It would have been more effective than a clause forbidding assignment because it would have survived bankruptcy; anyway there was no such clause either.

It is a curious agreement. Whenever I see inexplicable things like this I always blame the tax department.

In re XMH Corp., Nos. 10-2596, 10-2597, 10-2598, 10-2599 (7th Cir. July 26, 2011).

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