In a bankruptcy court case involving Crumbs Bake Shop, Inc., a New Jersey federal judge found that trademark licensees have certain legal protections already afforded to licensees of other forms of intellectual property.

Background

According to the Wall Street Journal, Crumbs entered bankruptcy in July, days after it shut it stores and laid off hundreds of employees. The company began in 2003 with one store on the Upper West Side of Manhattan, founded by a husband and wife team.  The store sold large cupcakes in exotic flavors (such as caramel macchiato) for as much as $4.50 each. The chain grew to 65 stores in 12 states and Washington, DC. The company went public in 2011, but according to the New York Times it was a victim of the decline of the cupcake craze. Before it was delisted, the company’s stock fell from 13 to 23 cents.

Crumbs entered into trademark license agreements with licensees, allowing them to use the “Crumbs trademarks and trade secrets and sell products under the Crumbs brand.”

During the bankruptcy proceeding, Crumbs sold its assets to a buyer in exchange for the cancellation of a $6.5 million debt.

After the court approved the sale, Crumbs filed a motion to reject the license agreements.

The court found that “it would be inequitable to strip the within Licensees of their rights,” that Crumbs could not sell its assets free and clear of the license obligations, and that future royalties from the trademark licenses belonged to the Crumbs estate.

The court cited with approval the case of In re Exide Technologies, which held:

Courts may use [Bankruptcy Code] § 365 to free a bankrupt trademark licensor from burdensome duties that hinder its reorganization. They should not . . . use it to let a licensor take back trademark rights it bargained away. This makes bankruptcy more a sword than a shield, putting debtor-licensors in a catbird seat they often do not deserve.

Questions?

If you are a trademark licensor or licensee, or a potential purchaser of a company in bankruptcy, and you have questions about how a sale of a bankrupt company affects intellectual property rights, contact our office for a free initial consultation with one of our IP attorneys. please contact our office at 626-796-4000 or toll-free at 855-UR-IDEAS (855-874-3327) for a free initial consultation with one of our intellectual property attorneys. Please also visit our website at http://leechtishman.com/practices/intellectual-property/ for more information about us.

Photo Attribution:  “Chocolate Cupcakes with Raspberry Buttercream” by Whitney – Licensed under Creative Commons Attribution 2.0.

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