## Facts

- Lakewood Engineering manufactured box fans and held related patents and trademarks.
- Lakewood outsourced fan production to Chicago American Manufacturing, LLC (CAM) under an agreement authorizing CAM to practice Lakewood’s patents and affix Lakewood’s trademarks to fans.
- Lakewood solicited retailer orders, and CAM shipped fans directly to retailers at Lakewood’s direction.
- Because CAM invested to prepare for a large 2009 production run, Lakewood agreed CAM could sell the 2009 inventory for CAM’s own account if Lakewood did not purchase it.
- Creditors filed an involuntary Chapter 7 petition against Lakewood; a trustee was appointed.
- Sunbeam Products, Inc. purchased Lakewood’s assets (including patents and trademarks) but did not want CAM’s Lakewood-branded inventory sold in competition with Sunbeam.
- The trustee rejected the executory portion of the Lakewood–CAM agreement under 11 U.S.C. § 365(a).
- CAM continued to manufacture and sell Lakewood-branded fans for the 2009 season, asserting continuing contractual authorization.
- Sunbeam filed an adversary proceeding alleging patent and trademark infringement and seeking to stop CAM’s sales.

## Issues

1. Whether rejection of an executory contract under 11 U.S.C. § 365(a) terminates a non-debtor licensee’s rights to use the debtor’s patents and trademarks, or instead operates only as a breach.
2. Whether, after rejection, CAM retained the contractual right to manufacture and sell Lakewood-branded fans for the 2009 season as contemplated by the parties’ agreement.

## Decision

- The Seventh Circuit affirmed judgment for CAM.
- Rejection under § 365(a) “constitutes a breach” and is not rescission; it does not revoke rights previously granted to the non-debtor counterparty.
- Because the contract granted CAM the right to make and sell the agreed 2009 run bearing Lakewood’s marks, Sunbeam was not entitled to an injunction preventing CAM from doing what the contract allowed.
- The court declined to follow Lubrizol’s approach treating rejection as terminating a licensee’s continuing use rights.

## Legal Principles

- Rejection of an executory contract under 11 U.S.C. § 365(a) is a breach; it relieves the estate from future performance but does not unwind or terminate the counterparty’s pre-existing contractual rights.
- Bankruptcy rejection does not function as rescission and does not allow the debtor or its successor to reclaim transferred use rights “free and clear” of the license.
- The fact that trademarks are not covered by § 365(n) does not, by itself, mean trademark-use rights are extinguished upon rejection; the baseline contract rule (rejection as breach) governs absent a specific Code provision to the contrary.
- A purchaser of the debtor’s assets acquires them subject to existing contractual limitations created by the debtor’s prepetition grants of use rights, to the extent those rights survive as a matter of contract law after rejection.

## Conclusion

The Seventh Circuit held that a trustee’s rejection of a license-containing executory contract is treated as a breach rather than rescission, so the licensee may continue exercising the contract’s granted rights (including trademark and patent use) for the contractually authorized scope, with the estate’s remedies limited to those available for breach rather than termination.


Sunbeam Prods., Inc. v. Chi. Am. Mfg., LLC, 686 F.3d 372 (7th Cir. 2012)