Bankrupt Trump trademark licensee loses license. Quality control at issue

April 1, 2015

Donal TrumpIn In re Trump Entertainment Resorts, Inc., that company together with some of its affiliates were licensees of various trademarks of Donald and Ivanka Trump and filed for bankruptcy under Chapter 11. The Trumps’ assignee of rights in the marks, Trump AC Casino Marks LLC (“Trump AC”) filed a motion for relief from automatic stay so that it could proceed with a state court action to terminate its trademark license agreement with the debtors. In granting the licensor’s motion, the Bankruptcy Court of the District of Delaware reviewed general principles of bankruptcy law with respect to the trademark license, and concluded that under the facts of this case, the license agreement could not be assumed. This decision is consistent with the Ninth Circuit (Nevada) decision in In re N.C.P. Marketing Group, Inc. and the Seventh Circuit decision in In re XMH Corp.

Review of general intellectual property/bankruptcy provisions

In deciding the status of the trademark license agreement in view of the pending bankruptcy of the licensee, the court began by reiterating fundamental IP/bankruptcy law by citing that under 11 U.S.C.A. § 365(a), a trademark license between a licensor and Chapter 11 debtors is an “executory contract” that is generally subject to assumption. However, if the license itself prohibits assignment to a third party and the non-debtor party to the contract does not consent to assignment, as was the situation in this case, under 11 U.S.C.A. § 365(c)(1) the agreement cannot be assumed, in particular because the identity of a trademark licensee is “crucial to the contract” such that a licensor is excused from accepting performance from a third party.

The court then reviewed the factors in trademark law that make the individual licensee’s identity crucial to the performance of the contract, including:

  • the nature of a trademark as an identifier of the trademark holder and
  • the obligation of the trademark holder to ensure quality consistency of the goods/services sold under the trademark.

No assumption of executory contract in absence of a permission to assign

The parties are free to contract around the basic rule that a trademark contract is nonassignable, but the parties did not have such a contract in this case. The court held, in “It is important to note that Section 365(c)(1) limits a debtor in possession’s ability to assume an executory contract based on its ability to assign that executory contract to a third party and makes no reference to whether a debtor or debtor in possession actually intends to assign the executory contract to a third party.”

Accordingly, the court held that because the debtor-licensees could not assume the license agreement, the mark owner was entitled to a lifting of the automatic stay of the proceedings to proceed with the state court action to terminate the license agreement.

Appropriate quality control of licensed use

A fundamental requirement of trademark maintenances is that quality control over the goods/services produced under a mark is essential to avoid losing rights in the mark. One of the primary driving factors in Trump AC’s decision to terminate the license was that “the license[d] entities have allowed the casino properties to fall into an utter state of disrepair and have otherwise failed to operate and manage the casino properties in accordance with the high standards of quality and luxury required under the license agreement.”  See also the Verified Complaint/Trial Pleading discussing quality control here: (Trump AC Casino Marks, LLC, v. Trump Entertainment Resorts, Inc., et al., 2014 WL 3843844 (Aug. 5, 2014)).

Trademark owners and their counsel can utilize this case as a lesson in both license drafting (with particular attention to the assignability and the quality control clauses) and license enforcement—that is, ensuring that the quality control provisions are enforced and if necessary, licenses terminated if licensees fail to meet stated standards.