Western Glove Works v. XMH Corp. 1 , 647 F.3d 690 ( 2011 )

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 10-2596, 10-2597, 10-2598, 10-2599
IN RE:
XMH C ORP.,
Debtor.
A PPEAL OF:
W ESTERN G LOVE W ORKS.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
Nos. 1:09-cv-05406, -05963, -05965, -06453—William J. Hibbler, Judge.
A RGUED F EBRUARY 11, 2011—D ECIDED JULY 26, 2011
Before B AUER, P OSNER, and W ILLIAMS, Circuit Judges.
P OSNER, Circuit Judge. This appeal (actually there are
multiple appeals, but only one needs to be discussed—the
others are academic in light of our decision) presents
two questions about the assignability of trademark
licenses, in the context of a bankruptcy proceeding. The
first is whether a trademark license is assignable (that
is, salable) without the licensor’s permission, in the
absence of a clause in the agreement stating that it is
assignable. The second is whether a trademark license
2 Nos. 10-2596, 10-2597, 10-2598, 10-2599
can be “implied” in an agreement that does not say it’s
a trademark license.
In 2009 a clothing firm named XMH (formerly Hartmarx)
sought relief, along with a number of its subsidiaries
including one named Simply Blue, under Chapter 11 of
the Bankruptcy Code. As debtor in possession XMH
asked the bankruptcy court for permission to sell Simply
Blue’s assets to Emerisque Brands and SKNL (we’ll
call these “the purchasers”). See 11 U.S.C. § 363. The
court gave its permission. XMH told the court that an
executory contract between Blue and Western Glove
Works, another clothing firm, would be assigned to the
purchasers because it was an asset of Blue. Western Glove
Works objected to the assignment. It argued that the
contract was a sublicense to Blue of a trademark licensed
by Western and couldn’t be assigned without its permis-
sion—which it refused to give.
The bankruptcy judge, persuaded by Western, ruled
that the contract couldn’t be assigned to the purchasers
because Western wouldn’t consent to the assignment.
XMH appealed the ruling to the district court, while
seeking to circumvent it by renegotiating its contract with
the purchasers. Under the new contract Blue would
retain title to the contract but the purchasers would
assume all the duties that Blue had owed to Western
under the contract and would receive all the fees to
which Blue had been entitled by it.
The bankruptcy judge allowed the amendment,
although it was a transparent evasion of his order for-
bidding assignment. Western appealed. Meanwhile the
Nos. 10-2596, 10-2597, 10-2598, 10-2599 3
district court, addressing XMH’s appeal to it, granted a
motion by the purchasers to be substituted for XMH and
then ruled that the bankruptcy judge’s order barring
assignment of the (original) contract between Western
and Blue was erroneous. This ruling disposed of
Western’s appeal, precipitating its appeal to us.
Western argues first that the purchasers of Blue’s assets,
who are also the assignees of Blue’s contract with
Western, waived their right to litigate the case in the
district court, and in our court as well, because they
didn’t appeal the bankruptcy court’s order forbidding
assignment. XMH was the only appellant in the district
court, and Western contends that because XMH is no
longer a party the case should be treated as having
ended with the bankruptcy court’s decision in favor
of Western.
But XMH’s interest in the contract hadn’t evaporated;
it had merely migrated to the purchasers, who now
stand in XMH’s shoes. XMH had ceased to have any
stake in the dispute with Western after it divested itself
of Blue, the assets of which included Blue’s contract
with Western. That divestment occurred while XMH’s
appeal to the district court was pending, but there is
nothing problematic about substituting a party into a
litigation because it has succeeded to the interest of the
original party. A party can lose its case in the lower court,
and then assign the claim on which its case is based to
someone else, and the assignee can take the case up on
appeal. Plumb v. Fluid Pump Service, Inc., 124 F.3d 849,
864 (7th Cir. 1997); Cordes & Co. Financial Services, Inc. v.
4 Nos. 10-2596, 10-2597, 10-2598, 10-2599
A.G. Edwards & Sons, Inc., 502 F.3d 91, 102-03 (2d Cir. 2007);
see generally 6A Charles Alan Wright et al., Federal
Practice and Procedure § 1545, pp. 346-51 (2d ed. 1990).
That is essentially what happened here.
The only oddity is that as a result of the substitution
of parties we now have a bankruptcy appeal to which
neither the bankrupt nor a trustee is a party: we have a
suit by Western against purchasers of assets from the
bankrupt estate. But it would be silly to tell the parties
to start over, in federal district court if there is diversity
of citizenship and in state court otherwise. (Suits over
assignments of trademark licenses are deemed to
arise under state rather than federal law, even when the
trademark is federally registered. International Armor &
Limousine Co. v. Moloney Coachbuilders, Inc., 272 F.3d 912,
914-17 (7th Cir. 2001); Gibraltar, P.R., Inc. v. Otoki Group,
Inc., 104 F.3d 616, 618-19 (4th Cir. 1997); cf. Gaiman
v. McFarlane, 360 F.3d 644, 652 (7th Cir. 2004); T.B.
Harms Co. v. Eliscu, 339 F.2d 823, 824, 828 (2d Cir. 1964)
(Friendly, J.).) The record was made in the bank-
ruptcy court; and anyway when a case is within federal
jurisdiction when filed, later events, which would have
precluded jurisdiction had they occurred before the
case was filed, do not (with immaterial exceptions)
deprive the federal court of jurisdiction. E.g., Mollan v.
Torrance, 22 U.S. (9 Wheat.) 537, 539-40 (1824); Cunningham
Charter Corp. v. Learjet, Inc., 592 F.3d 805, 807 (7th Cir. 2010).
There is another jurisdictional issue. The purchasers
argue that the district court’s order setting aside the
bankruptcy court’s ruling that the contract between
Blue and Western was not assignable was not a final
Nos. 10-2596, 10-2597, 10-2598, 10-2599 5
order, because the district court remanded the case to
the bankruptcy court to make a final decision regarding
whether to permit assignment. A debtor in possession
may not assume and assign an executory contract if he
has defaulted on it unless he satisfies the bankruptcy
court that he’s cured the default, 11 U.S.C. § 365(b)(1);
In re UAL Corp., 635 F.3d 312, 315 (7th Cir. 2011); and
he must also provide assurance that the assignee will
perform the contract. 11 U.S.C. § 365(f)(2).
But an order, even though not literally final, is
appealable if all that remains to be done on remand to
make it final is a “ministerial” ruling by the lower court.
In re Holland, 539 F.3d 563, 565 (7th Cir. 2008); In re
A.G. Financial Service Center, Inc., 395 F.3d 410, 413 (7th
Cir. 2005); In re Lopez, 116 F.3d 1191, 1192-93 (7th Cir. 1997);
In re Northwood Properties, LLC, 509 F.3d 15, 21 and n. 2 (1st
Cir. 2007); In re Hicks, 491 F.3d 1136, 1139 (10th Cir. 2007);
In re Cortez, 457 F.3d 448, 453-54 (5th Cir. 2006). That
means, as a practical matter, a ruling unlikely to give
rise to a controversy that would trigger a further appeal.
In Lopez we gave the example of “calculating prejudg-
ment interest when the amount of the judgment, the
interest rate, and the period over which the interest is to
be calculated are all uncontested.” 116 F.3d at 1192. We
pointed out that “in such a case, the proceedings on
remand are highly unlikely to generate a further appeal,
so deciding the issue appealed from immediately will
save time without raising the spectre of piecemeal ap-
peals.” Id. This is a serviceable test of finality—the Ninth
Circuit has created two multifactor tests, see, e.g., In re
Fowler, 394 F.3d 1208, 1211 (9th Cir. 2005), which strikes us
6 Nos. 10-2596, 10-2597, 10-2598, 10-2599
as overkill. As there are no further issues regarding the
assignment of the contract between Western and Blue—
no creditor has objected and Western has stipulated
that there was no default by Blue and that adequate
assurance of future performance has been provided—all
the bankruptcy court has to do on remand (if we affirm)
is to enter, with no further proceedings or analysis, an
order saying that the contract can be assigned to
the purchasers.
So we come at last to the merits of the appeal. Section
365(c)(1) of the Bankruptcy Code limits the assignment
of an executory contract of the debtor if “applicable
law” authorizes the other party to the contract to refuse
to accept performance from an assignee “whether or not
such contract . . . prohibits or restricts assignment.” The
other party is Western and the assignees whom Western
refuses to accept as substitute performers for Blue are
the two assignees. The contract does not prohibit or
otherwise restrict assignment—and if it did the bank-
ruptcy court could override the restriction unless “ap-
plicable law” entitles the other party to refuse to accept
the substitution of the assignee for the assignor. 11
U.S.C. § 365(f); FutureSource LLC v. Reuters Ltd., 312
F.3d 281, 286-87 (7th Cir. 2002); In re Midway Airlines, Inc.,
6 F.3d 492, 495-96 (7th Cir. 1993).
The applicable law on which Western relies is trade-
mark law. The contract with Blue recites that Western is
a licensee of the trademark “Jag Jeans.” (“Jag” is a
federally registered trademark, owned by the Jag
Licensing LLC, for “push-up pads for women’s bra-style
Nos. 10-2596, 10-2597, 10-2598, 10-2599 7
tops; sweatshirts; pants; skirts; shorts; jeans; jackets;
tops; knit tops”; we do not know whether “Jag Jeans” is
another trademark owned by that company and licensed
to Western, or a misnomer of the trademark “Jag.”) The
contract says that Western “hereby grants” Blue, which
“has been formed for the purpose of designing apparel,
sourcing apparel (that is, arranging for the manufacture
and importation of apparel), and selling apparel,” a
license (that is, a sublicense) “to sell womens’ jeanswear
bearing the Trademark . . . [until] December 31, 2002.” Blue
agreed to pay Western a license fee of 12.5 percent of
Blue’s net sales of the trademarked apparel during the
period in which the contract was in effect. Remarkably,
the period was only two weeks, for the contract had
taken effect on December 17.
The contract further provided that during the year
following the expiration of the trademark sublicense,
Western would once again “sell, for its own account, the
Trademarked Apparel,” while Blue would provide a
variety of services related to that apparel, including
“sourcing services,” “marketing and sales services,”
“merchandising services,” and “customer service.” West-
ern would “control and . . . be financially responsible for
all other aspects of the production and sale of the Trade-
marked Apparel, including, by way of example, pur-
chasing the apparel from [Blue’s] sources, setting prices,
approving the credit of prospective customers, importa-
tion, warehousing, shipping, distribution, invoicing,
and collection of accounts.” For the services that Blue
would be providing, Western would pay Blue a fee
8 Nos. 10-2596, 10-2597, 10-2598, 10-2599
equal to 30 percent of Western’s “Net Sales of Trade-
marked Apparel.”
We don’t know why the parties created a trademark
sublicense to last only two weeks; the lawyers could not
explain it at argument and no evidence was presented
in the courts below. Maybe the parties didn’t know
either, because in March 2003, three months after the
expiration of the sublicense, they agreed to extend it
(retroactively to January 1, 2003, the day after the ex-
piration of the original, two-week sublicense) to June 30
of that year and also agreed that the services provi-
sions of the contract, which were to have kicked in on
January 1, would now kick in on July 1 and run until
June 30, 2007. Blue was also given an option to renew
them for an additional four years, and it did renew them,
in April 2007, and at that time it was given two further
five-year renewal options, which allow the purchasers,
if the assignment is permitted, to extend that part of
the contract to the end of 2021.
We are guessing that the purpose of keeping the trade-
mark sublicense in force for an additional six months
was to give the parties a chance to decide that maybe
the license with a 12.5 percent royalty based on the price
of the trademarked jeans set by Blue was a superior
method of regulating the relation between the parties
than a services agreement that would give Blue 30 per-
cent of the price set by Western.
In any event, if the contract still included a trademark
sublicense when XMH attempted to assign the contract
to the purchasers, it was not assignable. The term “appli-
Nos. 10-2596, 10-2597, 10-2598, 10-2599 9
cable law” means any law applicable to a contract, other
than bankruptcy law, In re Sunterra Corp., 361 F.3d 257,
261 n. 5 (4th Cir. 2004); In re Pioneer Ford Sales, Inc., 729 F.2d
27, 28 (1st Cir. 1984); In re Wellington Vision, Inc., 364 B.R.
129, 135 (S.D. Fla. 2007), since bankruptcy law would
permit any assignment that was in the best interest of the
creditors, subject to the limitations in section 365 previ-
ously discussed. So trademark law is applicable law.
Unfortunately the parties haven’t told us whether the
applicable trademark law is federal or state, or if the
latter which state’s law is applicable (the contract
does not contain a choice of law provision)—or for that
matter which nation’s, since Western is a Canadian
firm. (Blue’s headquarters are in the State of Washing-
ton.) None of this matters, though, because as far as
we’ve been able to determine, the universal rule is that
trademark licenses are not assignable in the absence of a
clause expressly authorizing assignment. Miller v. Glenn
Miller Productions, Inc., 454 F.3d 975, 988 (9th Cir. 2006) (per
curiam); In re N.C.P. Marketing Group, Inc., 337 B.R. 230,
235-36 (D. Nev. 2005); 3 McCarthy on Trademarks § 18:43,
pp. 18-92 to 18-93 (4th ed. 2010). “The purpose of a trade-
mark, after all, is to identify a good or service to the
consumer, and identity implies consistency and a cor-
relative duty to make sure that the good or service really
is of consistent quality, i.e., really is the same good or
service. If the owner of the trademark has broken off
business relations with a licensee he cannot ensure the
continued quality of the (ex-)licensee’s operation, whose
continued use of the trademark is therefore a violation of
trademark law.” Gorenstein Enterprises, Inc. v. Quality Care-
10 Nos. 10-2596, 10-2597, 10-2598, 10-2599
USA, Inc., 874 F.2d 431, 435 (7th Cir. 1989). It is even
worse if the ex-licensee, rather than continuing to use
the trademark himself, has sublicensed it.
A trademark is a shorthand designation of a brand.
It conveys information that allows the consumer to say
to himself, “I need not investigate the attributes of the
product I am about to purchase because the trademark
is a shorthand way of telling me that the attributes are
the same as that of the like-branded product I enjoyed
earlier.” If without notice the seller reduces the quality
of his brand, the trademark becomes deceptive because
its assurance of continuity of quality is no longer truth-
ful. That is why the licensee is not permitted to sub-
license the trademark to a seller over whom the trade-
mark owner, having no contract with the sublicensee,
will have no control. It’s also the reason that transfers of
trademarks “in gross”—that is, apart from the assets used
to produce the trademarked product—are prohibited.
E.g., United Drug Co. v. Theodore Rectanus Co., 248 U.S. 90,
96-97 (1918); Green River Bottling Co. v. Green River Corp.,
997 F.2d 359, 361-62 (7th Cir. 1993); 3 McCarthy, supra,
§ 18:3, pp. 18-8 to 18-9. If as a purchase in gross implies,
the buyer doesn’t want the assets that the seller had used
to produce the trademarked good, this probably means
that they are more valuable in some other employment—or
perhaps the buyer doesn’t want them because he is plan-
ning to reduce the quality of the product so that he can use
cheaper inputs to produce it. In either case—the seller
is either leaving the market or going out of business
entirely—he is unlikely to be risking market retaliation
Nos. 10-2596, 10-2597, 10-2598, 10-2599 11
for selling a trademark that will be used by another firm
to deceive consumers.
Often the owner of a trademark will find that the most
efficient way to exploit it is to license the production of
the trademarked good to another company, which may
have lower costs of production or other advantages
over the trademark’s owner. Normally the owner who
does this will not want the licensee to be allowed to
assign the license (that is, sublicense the trademark)
without the owner’s consent, because while the owner
will have picked his licensee because of confidence that
he will not degrade the quality of the trademarked
product he can have no similar assurance with respect
to some unknown future sublicensee.
Because this is the normal reaction of a trademark
owner, it makes sense to make the rule that a trade-
mark license is not assignable without the owner’s
express permission a rule of contract law—what is
called a “default” rule because it is the rule if the parties
do not provide otherwise (as they are allowed to do).
Default rules economize on the costs of contracts by
saving the parties the bother of negotiating a provision
that most of them want—the members of the minority
that does not want such a provision are free to con-
tract around it but the majority is saved that bother and
expense. E.g., Wal-Mart Stores, Inc. Associates’ Health &
Welfare Plan v. Wells, 213 F.3d 398, 402 (7th Cir. 2000).
The “best efforts” duty of an exclusive distributor is a
familiar example of a contract default rule: the assump-
tion is that a seller would not grant an exclusive distribu-
12 Nos. 10-2596, 10-2597, 10-2598, 10-2599
torship without requiring the distributor to use his best
efforts to promote the seller’s brand, so in the absence of
an express provision to the contrary a best-efforts require-
ment is read into every exclusive distributorship. E.g.,
Classic Cheesecake Co. v. JPMorgan Chase Bank, N.A., 546
F.3d 839, 845-46 (7th Cir. 2008); Wood v. Lucy, Lady Duff-
Gordon, 118 N.E. 214, 214-15 (N.Y. 1917) (Cardozo, J.). The
rule that trademark licenses are not assignable in the
absence of a provision authorizing assignment is a simi-
larly sensible default rule.
Since there is no such provision in the contract
between Western and Blue, Blue could not have
assigned the contract without Western’s permission
before July 1, 2003, when the trademark sublicense
that Western had given Blue expired. But the assign-
ment of the contract, of which the sublicense was a provi-
sion, to the purchasers came years later. Western, how-
ever, argues that the sublicense did not expire
when it appeared to—that the services provisions of
the contract, which survived the expiration of the
sublicense, were actually a continuation of the trade-
mark sublicense—maybe just an “implied” sublicense
but that, Western argues, should be good enough.
We don’t agree that those provisions constituted any
sort of trademark license. The contract is explicit that
after the expiration of the sublicense to Blue to sell Jag
Jeans and pay a license fee to Western the rights in the
trademark revert to Western; all the trademarked
apparel held by Blue has to be returned to Western; Jag
Jeans would henceforth be priced and sold by Western;
Nos. 10-2596, 10-2597, 10-2598, 10-2599 13
and the license fee would be replaced by a fee for specific
services rendered by Blue. The services were extensive,
but Western retained control over “all other aspects of
the production and sale of the Trademarked Apparel,” and
these were, as our quotations from the contract should
have made clear, also extensive.
A trademark owner (or, in this case, a trademark li-
censee) might delegate so much responsibility to the
service provider as to lose the right or power to assure
the quality of the trademarked brand, and then he
would lose the trademark (or his license). Eva’s Bridal
Ltd. v. Halanick Enterprises, Inc., 639 F.3d 788, 790-91 (7th
Cir. 2011); Draeger Oil Co. v. Uno-Ven Co., 314 F.3d 299, 300-
01 (7th Cir. 2002); Twentieth Century Fox Film Corp. v. Marvel
Enterprises, Inc., 277 F.3d 253, 259 (2d Cir. 2002); Tumblebus,
Inc. v. Cranmer, 399 F.3d 754, 764-65 (6th Cir. 2005). He
would have granted, as some cases say, a “naked license,”
or in this case a naked sublicense, which would be the
equivalent of a trademark owner’s selling his trade-
mark in gross. “Trademark law requires that ‘decision-
making authority over quality remains with the owner
of the mark.’ Restatement [(Third) of Unfair Competition] § 33
comment c [(1995)]. How much authority is enough
can’t be answered generally; the nature of the business,
and customers’ expectations, both matter. Ours is the
extreme case: plaintiffs had, and exercised, no authority
over the appearance and operations of defendants’ busi-
ness, or even over what inventory to carry or avoid. That
is the paradigm of a naked license.” Eva’s Bridal Ltd. v.
Halanick Enterprises, Inc., supra, 639 F.3d at 791 (emphasis
in original).
14 Nos. 10-2596, 10-2597, 10-2598, 10-2599
But of course Western is not arguing that it lost its
license by delegating too much responsibility for the
product to Blue in the service agreement (no longer
services provisions, because after the sublicense ex-
pired all that was left was a contract for services); it
is arguing that it retained the license and merely sub-
licensed it, and it professes to be fearful that the
“sublicensees” (as it deems them)—the purchasers of
Blue’s assets, who are the assignees of the service agree-
ment—won’t keep up the quality of the trademarked
product; consumers will be deceived and eventually
will retaliate against Western, which may forfeit its
license for failing to maintain consistent quality. (As to
what the consequences might be for Jag Licensing
LLC, the trademark’s owner, we needn’t speculate.)
But if the service agreement is really a trademark
license, why did the contract distinguish between a
trademark license and a service agreement and make
the former expire in 2003? Western has been unable to
answer that question. Maybe a contract regarding a
trademark could be a trademark license for some
purposes but not others, but this is not argued and we
are reluctant to go down that dark path. There is no
good reason for courts to wrestle with classification
issues in contract cases when it is easy for the con-
tracting parties to resolve the issues themselves. If
Western wanted to prevent Blue from assigning the
service contract to another firm without Western’s per-
mission, all it had to do was get Blue to agree to
designate the contract as a trademark sublicense, thus
triggering the default rule that we have discussed and
Nos. 10-2596, 10-2597, 10-2598, 10-2599 15
endorsed. That would have headed off a legal dispute
that courts are in a poor position to resolve. It would
have been more effective than a clause forbidding assign-
ment because it would have survived bankruptcy;
anyway there was no such clause either.
A FFIRMED.
7-26-11