The Reliability of the FLCAS

(a) The Debtors’ Administrative Power of Rejection and its Effect 37. Section 365(a) of the Bankruptcy Code provides debtors the administrative power to release their estates from burdensome obligations by rejecting executory contracts. 11 U.S.C. § 365(a); see In re TWA, 261 B.R. 103, 114 (Bankr. D. Del. 2001). This authority is vital to a successful reorganization and maximizing returns to creditors. TWA, 261 B.R. at 114, 117 (“. . . the ability to reject an executory contract is rooted in the principle of maximizing the return to creditors by permitting a debtor in possession to renounce title to and abandon burdensome property if such action is in the best interests of the estate.”); see also NLRB v. Bildisco &

Bildisco, 465 U.S. 513, 528 (1984) (“[T]he authority to reject an executory contract is vital to the basic purpose of a Chapter 11 reorganization, because rejection can release the debtor's estate from burdensome obligations that can impede a successful reorganization.”). “A debtor's

determination to reject an executory contract is governed by the business judgment standard” and should not be questioned unless it is “the product of ‘bad faith, or whim or caprice.’” TWA, 261 B.R. at 120, 122.

38. A debtor has no obligation to perform under an executory contract following rejection. See id.. at 114; NLRB, 465 U.S. at 528. The rejection of an executory contract constitutes a breach that is effective immediately before the petition date, giving rise to a claim for damages. 11 U.S.C. §§ 365(g) & 502(g).

39. Here, AQ Textiles has not questioned the Debtors’ power or business judgment in determining to reject the License Agreement. AQ Textiles’ objection pertains to the effect of the rejection. AQ Textiles seeks to shirk the effect mandated by sections 365(g) and 502(g) of the

protection provided for in section 365(n). As detailed below, however, such protection is not and should not be available to AQ Textiles.

(b) Section 365(n) and its Limits

40. Section 365(n) of the Bankruptcy Code “provides an exception from section 365(a)’s broad rejection authority by limiting the debtor-in-possession’s ability to terminate intellectual property licenses it has granted to other parties.” Mission Prod. Holdings, Inc. v.

Tempnology, LLC (In re Tempnology, LLC), 879 F.3d 389, 394 (1st Cir. 2018) cert. granted 139 S. Ct. 397 (2018). Section 365(n) provides that a licensee of intellectual property owned by a debtor pursuant to an executory contract may, upon rejection of that contract, either treat the contract as terminated under its own terms or applicable nonbankruptcy law, or retain its rights to the subject intellectual property for the duration of the contract, plus any extensions exercisable by the licensee. 11 U.S.C. § 365(n). The latter option includes the right to enforce exclusivity and requires the licensee to make royalty payments. Id. § 365(n)(1)(B)(i) & 365(n)(2)(B).

Additionally, in the event of such election, the debtor or trustee is obliged to cooperate with the licensee in certain respects. Id. § 365(n)(3)-(4).

41. By virtue of the Bankruptcy Code’s definition of “intellectual property,” which excludes trademarks, trademark licensees are not entitled the protections of 365(n). See 11 U.S.C.

§ 101(35A); but see In re Crumbs Bake Shop, Inc., 522 B.R. 766, 770 (Bankr. D.N.J. 2014). A Senate Report regarding section 365(n) stated that Congress “‘postpone[d]’ action on trademark licenses ‘to allow the development of equitable treatment of this situation by bankruptcy courts.’”

See In re Tempnology, 879 F.3d at 401 (discussing S. Rep. No. 100-505, 5 (1988)).

42. Some courts have crafted rulings protecting trademark licensees’ rights to use licensed marks following rejection of their license agreements. See Sunbeam Prods. v. Chi. Am.

Mfg., LLC, 686 F.3d 372, 377 (7th Cir. 2012) (holding that rejection merely frees the debtor-licensor’s obligation to perform and does not vaporize trademark licensees’ rights); Crumbs Bake Shop, Inc., 522 B.R. at 770 (finding trademark licensees were protected by section 365(n)

“notwithstanding the omission of ‘trademarks’ from the Bankruptcy Code definition of

‘intellectual property’”). A concurring opinion Judge Thomas Ambro penned in In re Exide Techs. influenced these line of authorities. 607 F.3d 957, 965-68 (3d Cir. 2010) (concluding that bankruptcy courts should use their equitable powers to give debtors a fresh start without stripping trademark licensees of rights the debtor “bargained away”). But, as the First Circuit recently pointed out, allowing trademark licensees to retain rights in accordance with decisions like those in Sunbeam or Crumbs fails to reconcile concrete trademark and bankruptcy law and policy. In re Tempnology, 879 F.3d at 395-401.

(c) Section 365(n) Does not Apply to AQ Textiles

43. Under a plain reading of sections 365(n) and 101(35A), trademark licensees are not afforded the special protections Congress bestowed upon other types of intellectual property licensees. 11 U.S.C. §§ 365(n) & 105(35A). This is a well-established, although not entirely uncontroversial, reality. In re Tempnology, 879 F.3d at 401; In re Exide Techs., 607 F.3d at 966-67.

44. Since section 365(n) does not apply to trademark licensees, AQ Textiles cannot simply “elect” to take cover under the protections of that statute as a licensee of a patent, copyright, or mask work. An order that grants AQ Textiles those protections outright would directly contradict the plain language of section 365(n).

45. The relief that AQ Textiles truly seeks, as it alludes to but does not fully articulate in its Objection, is an equitable remedy: i.e., it seeks authorization to continue using the

Purchased Marks on the ground that rejection does not rescind or vaporize an executory contract, and a counterparty equitably should be permitted by this Court to waive the breach effected by rejection and carry on under the agreement. Objection ¶ 16.

46. Under much different facts than those that are currently before this Court, the Seventh Circuit adopted this approach in Sunbeam. Sunbeam, 686 F.3d at 377. But, neither the Sunbeam holding nor any other precedential alternative to the “negative inference” that rejection damages are limited to monetary relief has been adopted by the Third Circuit. As discussed below, these well-meaning, compromise-like approaches that are not the law of this Circuit fail to serve adequately the interests of both bankruptcy and trademark law generally. Given the

juncture at which the issues are before the Court and the specific circumstances in this matter (e.g., AQ Textiles’ repeated breaches of the License Agreement), it would be especially inequitable for the Court to fashion similar relief here.

(d) Permitting AQ Textiles to Retain Rights under the License Agreement Would Be Irreconcilable with Bankruptcy and Trademark Law and Policy, and Therefore Inequitable

(i) Trademark Law Concerns

47. Congress enacted section 365(n) directly in response to the Fourth Circuit’s decision in Lubrizol Enters. v. Richmond Metal Finishers, Inc., which held that licensees had no right to continue using licensed intellectual property pursuant to license agreements rejected by debtor-licensors. 756 F.2d 1043, 1048 (4th Cir. 1985); S. Rep. No. 100-505, 5 (1988). The statute’s legislative history reveals that Congress excluded trademarks from the protections of section 365(n) out of acknowledgement that trademarks are different and should not receive the same protections against the effects of rejection as other types of intellectual property. It states, in relevant part:

. . . [executory trademark, trade name, or service mark licenses]

raise issues beyond the scope of this legislation. In particular, trademark, trade name and service mark licensing relationships depend to a large extent on control of the quality of the products or services sold by the licensee. Since these matters could not be addressed without more extensive study, it was determined to postpone congressional action in this area and to allow the development of equitable treatment of this situation by bankruptcy courts. . .

S. Rep. No. 100-505, at 5. In other words, Congress intended to avoid creating, or even encouraging, a bright line rule when it comes to the effect of rejection on trademark licenses.

48. Congress’s concerns are well justified. Trademarks are “public-facing messages to consumers about the relationship between the goods and the trademark owner.” Mission, 879 F.3d at 402. Trademark law requires trademark owners to exercise control over the quality of goods bearing their marks. See id. Monitoring and control are necessary to prevent confusion regarding the nature and quality of goods. See id. Unchecked use of a trademark results in a

“naked license” that jeopardizes the validity of the trademark and imperils its value. See id.

49. For this Court, or any other bankruptcy court, to grant any licensee that seeks the same protections awarded to other licensees of intellectual property that is expressly afforded the rights set forth in section 365(n) would disregard core tenets of trademark law, as well as

Congress’ rationale in deliberately excluding trademark licensees from the protections of section 365(n).

(ii) Bankruptcy Law Concerns

50. Liberal adoption of 365(n)-like solutions for trademark licensees under a notion of equity also conflicts with blackletter bankruptcy law, and the use of equity cannot be allowed to circumvent or contradict statutory edicts. See In re Phila. Newspapers, LLC, 599 F.3d 298, 306 (3d Cir. 2010) (the broad equitable authority granted to bankruptcy courts by § 105(a) “could not

be used to circumvent” express provisions of the Bankruptcy Code). Permitting trademark licensees like AQ Textiles to retain rights to use licensed marks contravenes the plain language of section 365(a) of the Bankruptcy Code, which enables debtors to free themselves of burdensome executory obligations. See Mission, 879 F.3d at 403.

51. There is no language in section 365 or elsewhere in the Bankruptcy Code

supporting the deviation AQ Textiles endorses, or preventing courts from saving other categories of rights, i.e., distribution rights, from rejection in the name of equity. Id. Additionally, there are no safeguards in the Bankruptcy Code or Rules preventing a deluge of trademark licensees or other counterparties from coming forward to claim protection after assets to which their agreements relate have been administered in accordance with bankruptcy law and applicable orders, forcing stakeholders and the Court to reevaluate matters previously deemed complete, as AQ Textiles has done here. In short, there is simply no place in the Bankruptcy Code’s

framework – let alone its clear and unambiguous language to the contrary – to provide for trademark licensees to retain their rights following rejection of their license agreements.

(iii) Concerns Specific to the Present Dispute

52. As trademark licensees are clearly excluded from the protections of section 365(n), and no decision binds this Court to order the same or similar protections for AQ Textiles, it is left advocating that the Court should grant it protections solely as a matter of equity. For the reasons stated above, granting AQ Textiles the protections it requests would actually be inequitable because it would contravene overarching bankruptcy and trademark law and principles that are unambiguously set forth in various federal statutes.

53. But, even if equity were an available remedy because it did not circumvent clear rights at law – which as discussed above, is not the case here – the same denial of AQ Textiles’

request would achieve an equitable result under the specific facts and circumstances at issue here.

54. Indeed, permitting AQ Textiles to retain trademark rights under the License Agreement would unfairly and inequitably burden BKST, as the owner of the Purchased Marks, as well as the Debtors’ estates. First, this outcome would deprive BKST of the benefit of its bargain in acquiring the Purchased Assets free and clear of liens, claims and encumbrances, because with AQ Textiles’ products in the market, BKST could not exclusively manufacture and sell goods bearing the Purchased Marks for the duration of the License Agreement.

55. In fact, AQ Textiles would be competing with BKST using the Purchased Marks that BKST owns outright. Since AQ Textiles did not seek an order determining that AQ Textiles can retain rights under the License Agreement until it objected to the Rejection Motion – six weeks after the Sale closed – BKST had no opportunity to craft a business plan and conduct diligence under the scenario AQ Textiles asks the Court to endorse.

56. Second, permitting AQ Textiles to use the Purchased Marks imperils their validity and enforceability. Under the Lanham Act, a trademark owner’s failure to control the quality of goods bearing its trademarks and supervise licensees risks abandonment of the trademark, and thereby loss of value. See Doeblers’ Pennsylvania Hybrids, Inc. v. Doebler, 442 F.3d 812, 823–

24 (3d Cir. 2006) (“Failure to provide quality control may constitute naked licensing, leading to abandonment of the mark.”); Ditri v. Coldwell Banker Residential Affiliates, Inc., 954 F.2d 869, 873 (3d Cir.1992) (same); Dawn Donut Co. v. Hart's Food Stores, Inc., 267 F.2d 358, 367 (2d Cir.1959) (“[T]he only effective way to protect the public where a trademark is used by licensees is to place on the licensor the affirmative duty of policing in a reasonable manner the activities of

his licensees.”). If the Court grants AQ Textiles the relief it seeks, BKST must somehow monitor and control AQ Textiles’ use of the Purchased Marks to protect their value. In order to do this, BKST would be forced to assume effectively the Licensor’s obligations under the License Agreement, notwithstanding that the Agreement was never assigned to BKST, as this Court already approved and so ordered. This result would be incompatible with sections 365(a) and 363(f) of the Bankruptcy Code, as well as the Sale Order.

57. Third, if AQ Textiles has its way, the Debtors’ estates would be burdened with the administrative challenges of communicating with and providing information to BKST regarding Licensor’s and AQ Textiles’ performance under the License Agreement. In the same vein, BKST has been forced to wade through and contend with the details of AQ Textiles’ use of the

Purchased Marks when it anticipated having unfettered ownership of and ability to capitalize on the Purchased Marks. In monitoring and controlling use of the Purchased Marks, BKST must understand the parties’ course of dealing, historical approvals, past sales, projected sales, AQ Textiles’ suppliers and purchasers, and more. AQ Textiles’ use of the Purchased Marks beyond the effective date of rejection designated by the Debtors has layered the estates with the very burden section 365(a) is intended to eliminate, and at a stage when Debtors should be focused on completing their reorganization.

58. Finally, AQ Textiles’ continued manufacture and sale of Licensed Products will generate confusion among wholesale retail purchasers and consumers. Consumer protection is the “‘foremost purpose of trademark law.’” Citizens Fin. Grp., Inc. v. Citizens Nat'l Bank of Evans City, 383 F.3d 110, 130, 131 (3d Cir. 2004) (also stating, “‘The concurrent use of a

trademark where a likelihood of confusion exists damages the public interest.’”). As noted above, retailers and consumers alike stand to encounter goods of dissimilar consistency and quality

bearing the Purchased Marks. Even sophisticated retailers will have to keep track of and choose between goods offered by each of AQ Textiles and BKST or a licensee of BKST, and the representatives with whom they deal. The marketplace confusion that would ensue from permitting AQ Textiles to continue using the Purchased Marks is a result that trademark law is designed to avoid. Indeed, the leading treatise on trademark law, McCarthy on Trademarks and Unfair Competition (“McCarthy”) specifically states that “A trademark identifies a single source,” id., § 3:8, but the marketplace AQ Textiles envisions would have two separate parties using the same Purchased Trademarks for the same or related goods.

59. For all these reasons, BKST is likely to prevail on Count I of the Complaint for declaratory judgment that AQ Textiles has no remaining rights pursuant to section 365(n) of the Bankruptcy Code or otherwise to use the Purchased Marks following the Debtors’ rejection of the License Agreement.

2. AQ Textiles’ Asserted Interest in the Purchased Marks is Not a