Under section 365(n) of the US Bankruptcy Code, a licensee’s right to continued use of intellectual property in the event that a licensor files for bankruptcy is protected. However, this protection does not extend to trademark rights, due to concern about potential quality control issues in industries such as franchising. This means that licensees whose licensors become insolvent often have little recourse.

“If you’re a licensee and your licensor has declared bankruptcy, it can raise a lot of issues,” said panelist Jeff Porter of Reed Smith at yesterday's session entitled An Ethical Odd Couple? Trademarks and Bankruptcy. “If the debtor assumes the license agreement, you can continue to use the trademark. But if the licensor rejects the license, you’re in jeopardy of losing your right to use the marks. You would have an unsecured claim for breach of contract, but you’d only get pennies on the dollar.”

For this reason, panelists warned attendees to take steps such as investigating the financial stability of the licensor long before putting pen to paper, negotiating provisions that will ensure the continued use of the marks in the event of default and bundling trademark licenses with other IP rights that are protected under the bankruptcy laws.