Fate of Trademark licenses in companies facing financial difficulties
Many companies develop their business activities through trademark licenses, which constitute crucial intangible assets that enable market presence and generate revenue. When a company experiences financial difficulties, the fate of these licensing contracts becomes a critical concern for all parties involved. This article provides a comprehensive overview of the maintenance of contractual relationships for companies placed under safeguard proceedings and judicial receivership, examining the legal framework and practical implications for trademark licenses.
The principle of continuity of current contracts
Articles L.622-13 and following of the French Commercial Code establish rules imposing a principle of public policy: the continuation of contractual relationships of companies in difficulty. Any contrary clause is deemed null and void. This mandatory provision reflects the legislature’s intention to prevent a cascade of contract terminations that would otherwise destroy any possibility of business recovery.
Without this protection, numerous cocontractors would seek to terminate their contracts with the distressed inevitably leading to liquidation. The sudden withdrawal of essential suppliers, licensors, customers, and service providers would cripple the business, eliminating any chance of restructuring and recovery. By prohibiting opportunistic contract terminations, the law preserves the going-concern value of distressed businesses.
The legislator authorizes the organs of the procedure to require continuation of current contracts during the opening judgment, independent of any prior non-performance of the debtor’s obligations. This provision overrides ordinary contract law principles that would typically allow termination for breach. The policy rationale prioritizes business preservation and creditor recovery over strict enforcement of pre-insolvency defaults.
Legal doctrine defines the notion of current contracts based on relevant case law. Any contract concluded before the opening judgment that has not been annulled, rescinded, terminated, or resolved prior to this judgment can be integrated into this category. This includes all trademark license agreements, regardless of their terms, duration, or whether they are exclusive or non-exclusive arrangements.
In cases where the contract contains an automatic termination clause and the conditions are fulfilled before the opening judgment, it is not considered as current. However, courts interpret such clauses strictly, particularly those triggered by insolvency itself, which may be deemed contrary to public policy and therefore unenforceable. Only termination clauses based on substantive breaches unrelated to the insolvency proceedings are likely to be upheld.
Decision-making authority over contract continuation
The company in difficulty, or the judicial administrator where applicable, has the authority to decide whether to maintain or terminate current contracts, including trademark license agreements. This authority represents a powerful tool for restructuring the business, allowing the debtor or administrator to retain valuable relationships while shedding burdensome obligations.
However, the exercise of the option by the representative of the company in difficulty is subject to the conforming opinion of the judicial representative. This requirement ensures that decisions regarding contract continuation consider both interests and the debtor’s restructuring objectives. The judicial representative serves as a check against decisions that could favor the debtor at the expense of creditor recovery.
Procedures for contract continuation
If the company is in the observation phase, the judicial administrator must maintain all contracts necessary for the survival of the business. The administrator assesses the ‘necessary’ character under a posteriori judicial review. Trademark license agreements linked to necessary activities are therefore included in this category, as they often constitute essential elements of the business model and market presence.
The cocontractor may serve formal notice on the holder to communicate their decision, avoiding prolonged uncertainty. Following the expiration of a one-month period, failure to respond results in automatic termination of the contract since the 1994 reform. This provision protects cocontractors from indefinite uncertainty but also creates risks for the debtor if administrative delays or oversights result in unintended contract losses.
The intention to continue the contract must be expressly stated. The simple fact of continuing to provide the service is not sufficient, as confirmed by the Court of Cassation in its February 20, 1996 judgment. This requirement ensures clarity and prevents disputes about whether particular actions constitute acceptance of contract continuation. Written confirmation from the administrator or debtor is essential to preserve valuable contractual relationships.
Consequences of choosing not to continue contracts
If the holder of the option right does not wish to continue executing the contract, automatic termination does not occur. The creditor of the obligation may petition the court to have termination judicially pronounced. In this case, the option holder’s failure to perform of their obligations may give rise to damages, which are added to the company’s liabilities as post-petition claims that may receive priority treatment.
This asymmetry introduces strategic considerations for both parties. The debtor may strategically delay decisions regarding certain contracts, while cocontractors must actively pursue judicial if the debtor neither continues nor formally refuses the contract. Consequently, some contracts may remain in limbo during the restructuring period.
Performance obligations under continued contracts
If the holder exercises the option to maintain the contract, they must execute their obligations. The terms of the trademark license agreement remain in effect and must be fulfilled. This includes payment of royalties, maintenance of quality standards, proper use of the trademark, and compliance with all contractual terms.
In safeguard proceedings, payment of monetary obligations follows contractual terms. Thus, the debtor may benefit from supplier payment terms, maintaining normal commercial credit relationships. This provision facilitates business continuity by preserving working capital and avoiding the cash flow pressures that would arise from requiring immediate payment.
In cases of judicial receivership, the principle is that the debtor must pay cash for monetary obligations, except with the creditor consents to payment terms. This stricter requirement reflects the more severe financial condition of companies in receivership compared to those in safeguard proceedings. The immediate payment requirement protects creditors but may strain the debtor’s limited resources.
Failure to pay at maturity results in automatic termination of the contract, as established by the supervising judge. This provision strongly incentivizes the debtor to prioritize continued contracts and meet payment obligations. For trademark licenses, which often involve ongoing royalty payments, maintaining current payments becomes critical to preserving market presence and revenue streams.
Special considerations for Trademark licenses
Trademark license agreements present unique considerations in insolvency proceedings. Unlike some commercial contracts that can be replaced with alternative suppliers or customers, trademark licenses often involve distinctive assets that cannot be easily substituted. The licensed mark may be central to the debtor’s market identity, customer relationships, and revenue generation.
Licensors face particular concerns when their licensees enter insolvency proceedings. The licensor must balance the desire to protect their trademark’s reputation and value against the legitimate interests of creditors and the possibility that the licensee may successfully restructure. Quality control provisions in license agreements become especially important, as the licensor wants to ensure that any continued use of the mark maintains brand standards.
For licensees, maintaining trademark licenses during restructuring may be essential to business survival. Loss of key brand rights could eliminate market presence and make recovery impossible. However, licensees must carefully evaluate their capacity to meet ongoing royalty obligations and quality requirements given financial constraints. Strategic decisions about which licenses to maintain require careful analysis of each trademark’s contribution to business recovery prospects.
The DE BAECQUE BELLEC firm provides expert guidance to both licensors and licensees navigating these complex situations. Our experience in trademark law and insolvency proceedings enables us to protect clients’ interests while working toward solutions that maximize value for all stakeholders. Whether representing licensors concerned about brand protection or licensees seeking to preserve essential intellectual property rights, we offer strategic counsel tailored to the unique circumstances of each case.
Stéphane Bellec, Partner
Intellectual Property Attorney
Email: sbellec@debaecque-avocats.com
Tel: +33 (0) 1 53 29 90 00