What Happens to a Trademark When a Company Goes Bankrupt?

This is where the legal complexity increases significantly. When a company that has granted trademark licenses goes bankrupt, the fate of those licenses creates major uncertainty for the licensees.

Under Section 365 of the Bankruptcy Code, a bankrupt company can assume or reject executory contracts, which are contracts with ongoing obligations on both sides, including trademark license agreements. If the debtor rejects the license, the licensee loses their right to continue using the trademark.

There is an important exception for trademark licensees. Section 365(n) of the Bankruptcy Code provides that if an intellectual property licensor rejects a license agreement, the licensee can elect to retain their rights to use the IP for the duration of the license term. Lawmakers added this provision specifically to protect licensees from losing their trademark rights when a licensor declares bankruptcy.

However, Section 365(n) applies only to intellectual property as defined by the Bankruptcy Code. Several circuit courts have reached different conclusions, creating uncertainty for trademark licensees whose licensors have filed for bankruptcy. The safe advice for any trademark licensee is to consult with bankruptcy counsel as soon as a licensor files.

The trustee’s role in trademark assets

In a Chapter 7 bankruptcy, a court-appointed trustee takes control of the estate and has the authority to sell, license, or otherwise administer trademark assets. The trustee’s obligation is to maximize value for creditors, not to preserve the brand or its legacy.

In a Chapter 11 reorganization, the debtor company typically continues to operate as a debtor-in-possession and retains control of its trademark assets under court supervision. Major decisions about trademark assets, including sales or major licensing changes, require court approval.

Trademarks present a particular maintenance challenge in bankruptcy. A trademark must be used in commerce to remain valid. If a company ceases operations entirely during bankruptcy proceedings and stops using its trademarks in commerce, the marks begin accumulating non-use time that could eventually support an abandonment claim by third parties.

How trademarks are valued in bankruptcy proceedings?

Valuing a trademark for bankruptcy purposes is not a precise science. Courts and creditors use several methodologies.

Investment banking firms and IP valuation specialists typically handle major consumer brand valuations. Smaller brands often rely on less formal valuation methods. The output of the valuation process sets the floor price for any bankruptcy sale.

Famous trademark sales from bankruptcy proceedings

Toys R Us

The Toys ‘R’ Us brand and its associated intellectual property, including the Geoffrey the Giraffe trademark, came out of the bankruptcy estate after a buyer acquired them and later relaunched the business.
The brand now operates through a partnership with Macy’s stores and has an online retail presence.

Blockbuster

Dish Network acquired Blockbuster’s assets, including the trademark, from its 2010 bankruptcy. A single Blockbuster franchise location in Bend, Oregon operated under license for years after the bankruptcy and became famous as the last remaining location.

RadioShack

RadioShack went through multiple bankruptcy proceedings. The brand name and intellectual property changed hands multiple times. The new owners eventually licensed it to franchised retail locations and used it for online electronics retail.

Lord and Taylor

The Lord and Taylor brand was acquired from its bankruptcy estate and has been operated as a digital-first retail brand.

In all of these cases, the trademark registration survived the company’s bankruptcy. The name and brand identity, backed by registered trademark rights, had value that persisted beyond the operational failure of the original business.

Buying a trademark out of bankruptcy: what to know?

Trademark assets sold through bankruptcy proceedings are typically sold through a court-supervised auction process. Buyers should prepare for several practical realities before investing.

How to protect your trademark if your licensor goes bankrupt?

If you are a trademark licensee and your licensor files for bankruptcy, there are several steps you can take to protect your position.

1. Contact a bankruptcy attorney immediately. The timeline for making elections under Section 365(n) is specific and missing it can be costly.
2. Review your license agreement. The specific terms of your license, including duration, termination provisions, and assignment clauses, determine your options under the bankruptcy code.
3. Become a creditor in the proceeding if appropriate. Licensees with claims against the debtor can register as creditors and participate in the proceeding.
4. You should first determine whether the trademark is being sold. If the mark forms part of a bankruptcy estate sale, you may be able to bid for it or negotiate continued licensing rights with the new owner.

Frequently asked questions

Does a trademark registration survive a company’s bankruptcy?

The registration itself is not affected by the bankruptcy filing. The trademark remains registered with the USPTO unless the company stops using it in commerce for three or more years, which could support an abandonment claim, or fails to file required maintenance documents.

Can a trademark be abandoned during bankruptcy?

Yes. If the company ceases operations and stops using the trademark in commerce, non-use can accumulate. If the company or trustee fails to file the required Section 8 maintenance declarations, the United States Patent and Trademark Office can cancel the registration. Third parties can also file cancellation petitions against registrations that appear abandoned.

What happens to trademark rights in a Chapter 11 reorganization vs Chapter 7?

In Chapter 11, the company typically continues to operate and maintain its trademarks as part of the restructuring. In Chapter 7 bankruptcy, the trustee sells all assets to pay creditors. The trustee sells the trademark to the highest bidder or abandons it if no buyer meets the minimum valuation.

Can creditors use a company’s trademark to satisfy debts?

Creditors can claim trademark assets like any other business assets. The Bankruptcy Code then determines how they distribute the proceeds from those sales based on claim priority.

If I buy a famous brand name from bankruptcy, do I automatically get all its goodwill?

You get whatever goodwill transfers with the mark based on the assignment terms, the prior use history, and the current state of consumer association with the mark. Goodwill is not automatic. A brand name that has been inactive for years may have substantially diminished consumer goodwill regardless of the registration. Due diligence on consumer recognition and recent commercial use is essential.