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Bankruptcy: What Happens to the Royalty Payments?
In a decision interpreting for the first time certain provisions in the Bankruptcy Code, the Third Circuit Court of Appeals concluded that royalty payments belonged to the estate of the bankrupt debtor/licensor rather than to the new owner by assignment of the underlying intellectual property covered by the licenses. In re CellNet Data Systems, Inc., 327 F.3d 242 (3d Cir. 2003). The Third Circuit held that the debtor/licensor was permitted to sever the right to receive the remaining royalty payments due on the license from the transfer of the underlying intellectual property rights.
CellNet Data Systems and Bechtel Enterprises, Inc. formed a joint venture called BCN Data Systems LLC. CellNet granted BCN exclusive licenses to use CellNet's intellectual property outside the United States and promised technological support to BCN.
When CellNet later became insolvent, it entered into an asset purchase proposal with Schlumberger Resource Management Services, Inc., under which CellNet was to transfer all or substantially all of its assets and business operation to Schlumberger, including the intellectual property licensed to BCN. However, in the proposal Schlumberger reserved the right to exclude certain later-defined assets from the asset purchase agreement to be negotiated. That agreement was signed shortly after CellNet filed for bankruptcy. Schlumberger specifically excluded the BCN licenses from the assets purchased from CellNet. However, CellNet and Schlumberger disagreed about who would receive the royalties from the BCN licenses. They provided in their agreement that the Bankruptcy Court would resolve the dispute. CellNet agreed that it would reject the licenses in the bankruptcy as executory contracts that it could not fulfill, under '365(a) of the Bankruptcy Code.
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