WESTERN GLOVE WORKS v. XMH CORP. (July 26, 2011)

Simply Blue, an XMH subsidiary, entered into a contract with Western Glove Works under which Western granted a sublicense to Simply Blue to sell womens' jeans with the trademark "Jag." The contract went into effect on December 17, 2002. The sublicense expired, after some extensions, on June 30, 2003. After the expiration of the sublicense, Western took over the right to sell the jeans but Simply Blue provided substantial services for a fee. In 2009, while the contract was still in effect, XMH sought bankruptcy relief for itself and some of its subsidiaries (including Simply Blue). XMH sought the approval of the bankruptcy court to sell Simply Blue's assets (including the executory contract with Western). The bankruptcy court refused, agreeing with Western that the contract was a trademark sublicense and could not be assigned without Western's permission. XMH appealed that order to the district court. The district court allowed the purchasers to substitute for XMH and reversed the bankruptcy court. Western appeals.

In their opinion, Seventh Circuit Judges Bauer, Posner, and Williams affirmed. The Court first resolved several jurisdictional issues. First, it rejected Western’s argument that the purchasers, who had not appealed the bankruptcy court order, had waived their right to prosecute the appeal. XMH did appeal and later sold the assets that involve the contract at issue. The purchasers are simply stepping into the shoes of XMH, like an assignee. Second, the Court noted that it had a bankruptcy appeal in which neither the bankrupt nor the trustee was a party. But the bankruptcy court had jurisdiction over the dispute when it was filed. Subsequent events have not deprived the courts of federal jurisdiction. Finally, the Court rejected the purchaser's argument that the district court’s order was not final. Although the district court did remand to the bankruptcy court, the bankruptcy court need only issue the order allowing the assignment. When there is a remand for a ministerial act only, the order is appealable. The Court turned to the merits. The Bankruptcy Code limits the assignment of an executory contract if "applicable law" allows the non-debtor party to the contract to refuse to accept the assignee’s performance. Here, "applicable law" is trademark law which prohibits the assignment of a license unless expressly authorized (which it is not here). If, therefore, the arrangement between Western and Simply Blue at the time of the assignment was a trademark sublicense, the assignment should not be allowed. But the sublicense expired in 2003. Western argues that the continuing contractual obligations constituted some sort of implied sublicense. The Court disagreed. The contract is clear. When the sublicense expired, the rights in a trademark reverted to Western. Notwithstanding the substantial services provided by Simply Blue, there was no longer a sublicense. The debtor's assignment is permissible.