Monday, August 2, 2010

When Can You Go To Court Naked?

Apparently, if you are a trademark licensee it is okay to be naked in the Third Circuit Court of Appeals, but only if you've gone bankrupt. Not physically naked, but legally naked ... no problem. :-> I'm being sarcastic, of course, but I was rereading In re Exide, 607 F.3d 975 (June 1, 2010) the other day (yeah, I know, I should get out more) and I notice something that I hadn't before and thought I'd share it.

Exide was decided a couple of months ago and made a minor splash in the trademark licensing world for being one of a few cases to prevent a trademark licensor from rejecting a trademark license as an executory contract in a bankruptcy proceeding. In short, Exide Technologies sold its battery business to Enersys Delaware, Inc. back in 1991. As part of the deal, instead of selling the trademark, Exide granted a perpetual license to the trademark to Enersys. Here is what the trademark looks like:

In 2002, Exide went bankrupt. In the bankruptcy, Exide sought to reject the license as an executory contract to get the trademark back. In bankruptcy, a contract is considered "executory" (and therefore rejectable or "cancellable" by the debtor) if either party has substantial unperformed material obligations at the time the bankruptcy is filed. Exide argued that the license was executory because in contained three material unperformed obligations:

1) Use Restriction - Under the license, Enersys could not use the trademark outside the battery industry.

2) Quality Standards Requirements - Under the license, Enersys was apparently obligated to meet certain standards for battery products provided by Exide.

3) Indemnity & Further Assurances - Under the asset sale documents, Enersys had some indemnity obligations to Exide (which had expired in 1994) and had some "further assurances" obligations. "Further assurances" generally refers to savings clauses in a contract that, essentially requires the parties to do anything additional (that the parties may have overlooked or find out later that they need) in order to transfer the assets or otherwise complete the deal.

The court found that none of these were material and did not allow Exide to reject the license. But what got my attention was the quality standards requirement.

According to Enersys, under the license, Enersys was obligated to abide by the quality requirements set by Exide before the closing. Yet, no such standards were ever provided by Exide either before or after the closing and Exide never requested and Enersys never supplied samples. In its brief, Enersys argued that the this meant that Exide had waived the quality control requirement.

So here's the rub. Why didn't the court find that the license by Exide to Enersys was a naked license and deem the trademark abandoned? There is plenty of law on this point. The failure of a licensor to impose quality control requirements under a trademark license will result in a forfeiture of the trademark. Clearly, in this case, no such quality standards were actually imposed, either under the written agreement or in practice.

My guess is that the court did not deem the license "naked" and the trademark forfeited merely because that issue had not been presented by the litigants. Rather, the issue before the court was whether the license was executory, not whether it was naked. Nonetheless, with this ruling, it seems to me that Enersys could possibly cancel Exide's registration due to the naked license by asserting that Exide had thereby abandoned its rights in the mark altogether, not merely waived its quality control rights.

Although I'm sure its not that simple, and there are probably other facts, however, if I were Enersys, I'd be thinking about filing a cancellation action and a trademark application right about now.