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Volume 258—No. 59 moNday, September 25, 2017

By AdAm C. Rogoff, ERiCA d. KlEin And mARshA suKACh

A s consumer preferences con-tinue to evolve with the growth of electronic and mobile com-

merce, retailers are facing many new challenges, often struggling to survive. To withstand today’s retail environment, some retailers need to evaluate an operational and/or financial restructuring, review and adjust their business models, and to improve liquidity, deleverage their balance sheets to reduce overall debt.

Various debt-burdened retailers are looking to their intellectual property assets as a source of untapped value for refinancing transactions. While it remains to be seen which strate-gies will be most successful, IP assets will play a key role in future retail restructurings. As the value of brick-and-mortar “hard” assets stores

becomes tapped out, a retailer’s brands, licenses, and associated IP rights may present reliable sources of value.

J. Crew: A Bellwether For IP-Driven Refinancing

Companies and investors alike are keeping an eye on recent high-profile IP-driven refinancing transactions, most particularly by J. Crew, whose restructuring and corresponding IP

transfers are the subject of pending litigation. See Eaton Vance Mgmt. v. Wilmington Sav. Fund, No. 654397/2017 (N.Y. Sup. Ct. complaint filed June 22, 2017). In December 2016, the clothing company assigned rights in certain of its trademarks—including its quint-essential J.CREW mark—to an unre-stricted subsidiary, effectively elim-inating an upcoming maturity. The transferred marks were subsequently pledged by the unrestricted sub to

Fashion Forward Financing: Looking To Banks and IP for the Next Trend

adam C. rogoff is a partner in Kramer Levin Naftalis & Frankel’s corporate restructuring and bankruptcy department, and eriCa d. KleiN is a partner in the firm’s fashion and consumer brands practice. marSha SuKaCh is an associate in the corporate restructuring and bankruptcy department.

Corporate Restructuring & Bankruptcy

N E W Y O R K L A W J O U R N A L S P E C I A L R E P O R T

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back new notes issued as part of a restructuring transaction.

The J. Crew operating companies then entered royalty-bearing license agreements in favor of the unrestrict-ed sub, which provided for use by the restricted sub of the trademarks it had initially owned and pledged, though transferred as part of this restructuring. Certain term loan holders under the original term loan sued the company, alleging that the company’s asset transfer violates their term loan agreement, under which the transferred trademarks were pledged.

The parties’ dispute turns in part on the valuation of the transferred trademarks, with the lenders assert-ing that their value exceeds the cap permitted by, and J. Crew arguing that its actions were expressly con-templated by, the term loan agree-ment. Regardless of the outcome, the takeaway is clear: IP assets reflect a source of value for retailers to enhance the lending value from inventory, accounts receivables, and FF&E. As such, lenders and borrowers alike would benefit from paying close attention to all opera-tive provisions in loan documents, understanding what investment bas-kets exist and what types of transac-tions and transfers are governed by restrictive covenants.

Using Unencumbered Assets To Obtain New Financing

Unencumbered IP assets can offer a great source of new value. Pledging unencumbered IP assets as collat-eral for new debt can enable a com-pany to secure financing on more

favorable terms, which in turn can potentially reduce a company’s over-all debt load, and/or permit refinanc-ing of debt with upcoming maturities.

As J. Crew highlights, however, undertaking transactions that result

in the decollaterization of IP assets is not without potential pitfalls. Retail-ers and their counsel will want to evaluate the likelihood that such transactions might trigger litiga-tion, and consider potential costs and publicity associated therewith. To limit dispute, retailers and lenders could identify a prescribed IP asset valuation method in their loan docu-ments, and otherwise implement pro-tocols to address anticipated sources of disagreement between the parties.

Strategic Advance Trademark Filings

Aligning a retailer’s trademark port-folio with its current—and a poten-tial acquiror’s foreseeable—business plans offers another avenue for maxi-mizing IP asset value. Trademark reg-istrations cover specific goods and/or services. As trademark applications are typically filed in advance of prod-uct development, it’s not uncommon for there to be divergence between a retailer’s product line at market, and its trademark registrations intended to cover that line. While pivoting from brick-and-mortar to e-com-merce, or adopting differentiated

product or service lines, could be a viable solution for addressing a company’s suffering sales, exercis-ing these options may be foreclosed if one or more third parties own similar trademarks within previously unchar-tered expanded areas. By anticipating fields of growth, and making strategic advanced trademark filings, retailers facing insolvency could significant-ly increase the value of their brand positioning in the eyes of potential acquirors. Although wisdom would typically dictate to avoid non-criti-cal expenses in the face of financial uncertainty, from a cost-benefit analysis, allocating limited resourc-es toward trademark protection in advance of insolvency—and even securing additional debt to do so—may support otherwise unavailable opportunities and unlock significant value.

Licensing as a Source of Value

A retailer can also derive value through outbound licensing (which efforts would also benefit from a robust trademark registration port-folio as discussed above). Be aware, however, that trademark law requires licensors to maintain control over the quality of goods and/or services offered by a licensee under the licen-sor’s mark(s). Although the protocols for exercising such quality control may differ, the absence of such con-trol could lead to a licensor’s loss of rights in the licensed mark(s). Retail-ers will want to keep this require-ment in mind when considering the viability of a licensing program, and assess whether they have suf-ficient resources to dedicate toward

moNday, September 25, 2017

Intellectual property assets offer substantial opportunity to enhance liquidity and value for a struggling or debt-laden retailer.

exercising quality control over one or more domestic or foreign licensees. Retailers should also ensure that any license agreements include quality control standards, and impose such standards in practice.

Licensing in Insolvency Context

The value paradigm with regard to a retailer’s IP assets in the bank-ruptcy context will vary significantly, depending on whether the retailer’s IP rights are predominantly owned or licensed, and if owned, whether they are licensed out. Section 365(n) of the Bankruptcy Code protects non-debtor licensees of “intellectual property” from losing their rights in the event of rejection in bankruptcy by the debtor-licensor. While §365(n) does not, by its terms, apply to trade-mark licenses because trademarks are excluded from the Bankruptcy Code’s definition of “intellectual property” under §101(35A), certain courts (including within the First, Third, Seventh and Eighth Circuits) have been trending toward extend-ing varying degrees of protection to trademark licensees under §365(n), while other courts (including within the Second and Fourth Circuits) have held fast to a doctrinal interpreta-tion of the Code’s statutory exclusion of trademarks, thereby offering no protection to non-debtor trademark licensees. A retailer contemplating bankruptcy that licenses out its trademarks should thus be aware of the extent to which courts in its jurisdiction have limited a debtor licensor’s ability to terminate a trademark license via rejection, or have alternatively protected the

rights of trademark licensees. For example, a retailer may have licensed out its brand marks when its core business was store-based. As part of the transformation to an e-commerce platform, the retailer may want to regain control over how its products are sold outside of its stores (espe-cially if those stores are closed). The same goal could exist with a buyer of a debtor’s assets under §363 of the Bankruptcy Code looking to tap into a new e-commence market. This flexibility can be impacted by how §365(n) is interpreted. In any event, the transitional state of the law on this issue might offer debtor licensors leverage for renegotiation of more favorable license terms in advance of a contemplated rejection.

The Bankruptcy Code also lim-its the ability of debtor trademark licensees to assume, or assume and assign, a trademark license in bankruptcy. Section 365(c)(1) pro-vides that the debtor/trustee may not assume or assign any executory contract if applicable law prohibits the assignment of a contract with-out the other party’s permission. Because the non-debtor owner of a trademark has an interest in the identity of the party to whom the trademark is licensed in order to maintain the goodwill, quality, and value of its products and the licensed trademark, non-exclusive trademark licenses are considered personal and non-assignable under applicable federal trademark law. Accordingly, unlike other types of agreements that a debtor-licensee can monetize by assignment to a third party in connection with a sale,

a debtor-licensee cannot unilaterally assign its rights under a trademark license. Moreover, circuits remain divided over whether a non-exclu-sive trademark license may be assumed by a debtor-in-possession, even without assignment to a third party. Retailers who are trademark licensees should therefore think carefully about the potential impli-cations of filing for bankruptcy on their ability to continue using key trademarks and brand names.

Knowledge Begets Opportunity

Intellectual property assets offer substantial opportunity to enhance liquidity and value for a struggling or debt-laden retailer. To structure refinancing transactions success-fully, retailers and investors would be well-served to achieve a thorough understanding of both the debt doc-uments at issue and the potential treatment of any IP-related agree-ments in bankruptcy. Having a firm grasp of relevant brand assets, and taking steps to maintain and grow the value of those assets, can cre-ate opportunities for new business and support diverse financing strat-egies, thereby positioning retailers with means of shelter against the current retail storm.

moNday, September 25, 2017

Reprinted with permission from the September 25, 2017 edition of the NEW YORK LAW JOURNAL © 2017 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382 or reprints@alm.com. # 070-09-17-46