Vol 10 (2013) - Issue 1

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The Treatment of Intellectual Property Licenses under U.S. Bankruptcy Law

Intellectual property assets have characteristics that set them apart from other classes of assets. They consist of rights of exclusive use that exist by virtue of the laws of particular jurisdictions, making them territorial, but these rights are the subject of international conventions that allow their extension to other jurisdictions, giving them potentially international scope. They are intangible and therefore inherently portable but their value derives from their physical embodiment in patented inventions or processes, copyrighted works (including software), and trademarked products, all of which are commercialized in particular jurisdictions. Finally, they come into existence as exclusive rights, but their owners may exploit them by licensing them to others without losing their right to control how they are used.
Taken together, these features of intellectual property tend to confound the process of marshaling assets in bankruptcy, since licensed intellectual property can be viewed as an asset of both the licensor and the licensee. Where the debtor is a licensor of intellectual property, it will want to maximize the value of the intellectual property by terminating unprofitable licenses, if this course of action is legally available, in order to enable it to enter into licenses on more profitable terms or to exploit the intellectual property itself. Where the debtor is a licensee, it will want to retain rights under any profitable licenses, either to continue its own exploitation or to assign them to a purchaser. The question is how these two related assets – the owner’s right to control the intellectual property and the licensee’s right to exploit it – are treated in bankruptcy. The question becomes even more complicated when the license and the bankruptcy are international in scope.

1. The legal landscape in the United States

Under U.S. law, the filing of a voluntary petition for bankruptcy creates a bankruptcy estate consisting of all of the debtor’s interests in property as of the filing, any proceeds of such property, and any additional interests in property that the debtor acquires in the case. It also triggers an automatic stay, which prevents other parties from bringing actions to collect money from the debtor or to take possession or control over property of the estate. Furthermore, clauses that purport to modify or terminate either contracts or the debtor’s interest in property upon bankruptcy, so-called 'ipso facto clauses', are not enforceable.
In addition to protecting the debtor from actions by others, the filing of a voluntary petition relieves the debtor-in-possession of the obligation of performance under executory contracts entered into prior to the filing, allowing the trustee or debtor-in-possession to formulate a plan of reorganization. The trustee or debtor-in-possession may reject burdensome executory contracts and may generally assume and assign executory contracts despite anti-assignment clauses in them. In order to (i) assume or (ii) assume and assign a contract, the debtor must cure its defaults, compensate the other party for its actual losses, and provide adequate assurances of future performance. An executory contract must be either assumed or rejected in its entirety unless it contains separate agreements that are severable under applicable non-bankruptcy law.9 Severability is 'primarily a question of intention of the parties'.