Trademark License Was Executory, And Debtor's Rejection Was Supported By Business Judgment
In re Exide Techs., 340 B.R. 222 (Bankr. D. Del. 2006 (Judge Kevin J. Carey)
The debtor sought to reject a trademark agreement and the other party to the agreement argued that the agreement was not executory and, if the agreement was executory, the debtor did not exercise proper business judgment in rejecting the agreement. The Court held that the agreement was executory and approved the debtor’s decision to reject the agreement holding that the debtor exercised proper business judgment.
In 1991, Exide sold substantially all the assets of its industrial battery division to EnerSys. An agreement was reached between the parties which included a provision to allow Exide to continue to use a trademark in connection with its transportation battery business and allow EnerSys to use the Exide mark in the industrial battery division. Exide granted EnerSys a perpetual, exclusive, royalty-free license to use the Exide mark in the industrial battery business, which could be terminated under certain conditions. Exide and EnerSys agreed to terminate a non-competition agreement in 2000 and Exide re-entered the industrial battery business. Exide wanted to unify its corporate image and made several attempts to persuade EnerSys to return the mark, but EnerSys refused. After Exide filed bankruptcy, Exide moved to reject the trademark agreement with EnerSys and EnerSys objected.The Court reviewed the trademark agreement to determine whether it was executory, and thus, subject to rejection. The Court based its analysis of whether the agreement was executory upon whether any material unperformed obligations existed on both sides of the agreement as of the petition date under New York law, the designated choice of law governing the agreement.
Exide argued that the following were material obligations, the breach of which would result in termination, and which supported the executory nature of the agreement:
1. Exide cannot sue EnerSys for trademark infringement;
2. EnerSys cannot use the mark outside the industrial battery business;
3. Exide cannot use the mark within the industrial battery business;
4. EnerSys must maintain quality standards for products using the Exide mark;
5. Exide had to fund pension plan payments for certain employees who had moved to EnerSys;
6. Exide had to maintain the registration of the trademark;
7. Both parties had certain indemnification obligations; and
8. Both parties had to cooperate (further assurances) to effectuate the agreement.
EnerSys argued that because the agreement limited Exide’s remedies to indemnification or equitable relief when monetary damages were insufficient, Exide could not terminate its performance upon default. The Court disagreed, noting that the agreement included a separate termination provision from that found in the indemnity provision.
Turning to the termination provision, the Court found that the EnerSys use restriction and quality standards were material and necessary because they protect Exide’s and EnerSys’ interests in the mark which remained in place as of the petition date.
EnerSys also contended that the use restriction and quality standards were conditions and not obligations. A breach of a condition would not be a material breach and, thus, the agreement would not be executory.
The Court found that both the EnerSys use restrictions and quality standards were obligations. The use restrictions were held to be an affirmative undertaking that Exide had monitored on site at EnerSys and by requesting technical data from EnerSys. EnerSys had also complied with the quality requirements. Likewise the Court found that EnerSys was obligated to observe the restrictions on the use of the mark and that this was also an affirmative undertaking.
EnerSys further argued that even if the obligations existed, they were not material. The Court held that the EnerSys use grant obligated Exide to prosecute any infringement cases and oppose all other attacks on the mark and that this was a material obligation. The Exide use restriction also obligated Exide to refrain from granting any license which was inconsistent with EnerSys' use of the license. The Court further noted that it believed the EnerSys use restrictions and quality standards were also material based on the analysis it completed to determine these actions were obligations and not conditions.
Exide showed it had been paying into the Exide Hourly Employees’ Pension Plan and would continue to pay until all pension plan participants were no longer in the plan. The Court found that payment into pension plans was a material, ongoing obligation.
The Court similarly found that, because failure to maintain and protect the mark could deprive EnerSys of the benefit of its bargain, this was an ongoing, material obligation of Exide. Also, EnerSys was held to have an ongoing material obligation to refrain from registering the Exide mark in the U.S. or in a foreign jurisdiction, unless required by law, and to execute and obtain registered user agreements for countries requiring a license.
Finally, the Court also found that the obligation to indemnify is material since unperformed obligations remain under the agreement for both parties and, even though further assurances were seldom invoked, these were necessary to maintain the intellectual property-related rights as required by the agreement.
EnerSys argued that the parties had substantially performed all the duties under the agreement and left no material obligations to be performed as of the petition date. The Court disagreed, finding that there were several ongoing obligations, but at a minimum EnerSys remained obligated to use the mark pursuant to the agreement and the license in the agreement imposed a number of ongoing performance obligations on the part of the parties.
EnerSys also argued that the agreement was a closed sale and not a license, so the agreement could not be executory. The Court disagreed and held that the agreement, while selling most of the assets of Exide’s industrial battery division, did not sell the trademark, it only licensed the mark. The Court found it persuasive that EnerSys could have sought an assignment of the mark, instead of a license, and had obtained assignments of other Exide marks as part of the sale. The Court held that the agreement was a license in regard to the Exide mark and that a license is an executory contract under the Bankruptcy Code.
The Court then addressed EnerSys’ argument that Exide had not exercised business judgment by rejecting the agreement.
The Court found ample evidence that Exide had diligently studied the decision to reject the mark as part of its efforts to unify its corporate image to better compete within the marketplace.
The Court further found that the qualitative effects alone, i.e., brand unification and elimination of confusion in the marketplace, were sufficient to support the Debtor’s decision to reject. Brand unification would alleviate problems with customer relations and increase the customer base and market share. Unification of the brand would demonstrate to customers that Exide had global capacity. These increases in Exide’s competitive advantage were a benefit to the estate. Turning to elimination of confusion in the marketplace, the court held this benefited the estate because Exide had been expending funds and resources to reduce the confusion with customers over how and why it did not produce industrial batteries, despite the fact that such batteries carried its name. Recovery of the mark eliminated those costs and improved customer relations.
There were also quantitative benefits to the rejection, including a reduction of operating costs due to fewer maintenance costs for the various existing industrial battery marks in use. Reduction in expenses is a benefit to the estate. In addition, rejection of the agreement would result in some increase in revenue as Exide would be entering a market that it had not been able to previously access under its own existing brand.
The Court also dismissed arguments that the sales forecasts filed as evidence did not meet the requirements of the business records exception to the hearsay rule. The forecasts had not been created solely for the litigation and that they were part of the ongoing process to determine whether to reject the agreement or not. The testimony submitted by EnerSys representatives regarding the exhibits did not require that foundation evidence be provided by the actual custodian of the records. Some “other qualified witness” was permitted to lay a foundation and such witness would need only a familiarity with the record keeping practices and the declarant’s qualification and adherence to the established practices.
Having established a benefit to the estate, the Court addressed EnerSys’ argument that the rejection damages outweighed the benefits of the rejection and thus, did not provide a benefit to the estate. The Court held that it only needed to review whether or not there would be such a large rejection damages claim that it would be unreasonable to reject the agreement, not the exact amount of the damages.
The Court found that EnerSys did not take into account the effect of mitigation by measures such as a transition period when determining it would suffer more than $67 million in damages. The damages claim was speculative and for the purpose of reviewing the proposed rejection, EnerSys’ eventual unsecured damage claim was substantially less than $67 million. In the context of $900 million in claims, allowance of the $67 million claim would not be enough to diminish the distribution to unsecured creditors and make the rejection unreasonable.
The Committee supported the rejection which the Court held to be important.
Finally, EnerSys argued that the rejection would not result in a reversion of the mark to Exide because title passed to EnerSys at the time of the sale agreement. EnerSys also argued that the rejection would not terminate the agreement because the agreement was an executory contract which involved intellectual property. The Court rejected the argument that title had passed for the mark to EnerSys, citing to its earlier finding that the mark was licensed and not assigned to EnerSys. Furthermore, the Court held 11 U.S.C. §365(n), which provides for the protection of non-debtor parties to a rejected intellectual property license, was not applicable to trademarks, which are excluded from the definition of intellectual property under the United States Bankruptcy Code.
For these reasons, the Court approved the Debtors motion.
