Trademark licensing is a driving force in business relationships. One common example is where one business owns a trademark, which it licenses out to other companies who manufacture and sell the products bearing the mark. But, what happens if the trademark owner goes bankrupt? Bankruptcy law gives a debtor the right to “reject” contracts to

When businesses pay for goods and services, they generally like to receive them. Unfortunately, as any bankruptcy lawyer will tell you, this consistent desire is not matched by uniform experience.

Most recently, the bankruptcy of KSL Media again illustrated the risks and concerns when an advertiser entrusts significant funds to an entity that is too thinly capitalized or, as some allege, guilty of diverting funds that were to be passed through and in breach of a fiduciary duty to its clients. KSL’s bankruptcy, of course, was also noteworthy not because KSL was a start-up, but because it was not. We might expect capitalization risks with start-ups. But KSL was an established media company that failed. So the question remains: how can advertisers protect funds entrusted to suppliers, particularly those that are earmarked for payments to third parties?
Continue Reading Is There a Bankruptcy Lawyer in the House?

This Alert compares the current recession to prior cycles, and summarizes precautions and protections that advertisers, agencies and media can employ to reduce their exposure to today’s risks.

Background of the Credit Crunch

It is generally understood that the ongoing credit crunch has led to a shortage of financial liquidity. We now seem to be entering a new phase as businesses and consumers retrench.

  • Loss of Confidence. One of the cornerstones of business is the confidence we have in the ability of those we contract with to pay us what they owe. For most, that means having the ability to pay debts as they come due and be financially solvent on a balance sheet basis. The model for our major financial institutions is quite different. As long as confidence prevails, their business continues as usual; but if there is a sudden loss of confidence in an institution’s ability to repay or return its customers’ deposits and assets, then a run on the firm ensues and, absent intervention, a financial failure quickly follows.
  • Government Backstop. The Federal Reserve, the FDIC and the U.S. financial regulatory scheme were created to provide a backstop and capacity for intervention in order to forestall the possibility of a systemic financial breakdown. It appears, however, that financial engineering and the growing complexity of the financial system may have outstripped our backstop.
  • The Bankruptcy Process. Bankruptcy does not work well for financial service companies because of the confidence factor—an insolvency proceeding will not stem a run on a bank but only exacerbate it. Bankruptcy historically has worked well outside of the financial sector, particularly in manufacturing, distribution, retail, and many entertainment and other service businesses; entire industries such as steel and the airlines have been restructured in bankruptcy in past recessions. There appears, however, to have been an erosion of confidence in the effectiveness of the bankruptcy process, as reflected in the widespread view that bankruptcy is not a good idea for the U.S. auto industry.

Continue Reading Managing Bankruptcy Risks in a Recession