The Application of 365(n) to Cross-License Agreements

Moreover, once industry participants have engaged in patent cross-licenses, they may make substantial investments in reliance on the enforceability of those cross-license agreements. For example, the costs of creating a state-of-the-art semiconductor fabrication facility exceed $1 billion. See Heck, Kaza, and Pinner, Creating Value in the Semiconductor Industry at 9, McKinsey on Semiconductors (Autumn 2011) (“The cost of building leading-edge fabs continues to increase as well; for example, the average 8-inch fab costs $1.6 billion to build, while a state-of-the-art 12-inch fab costs $3 billion to $4 billion.”); Brief for the Semiconductor Industry Association, Chamber of Commerce of the United States of America, National Association of Manufacturers, and Business Software Alliance as Amici Curiae in Support of Appellees at 11, Jaffe v. Samsung Electronics Co., Ltd., 737 F.3d 14 (4th Cir. 2013) (No. 12-1802), ECF 42-1 (“The average semiconductor fabrication facility costs $4 to $5 billion dollars to construct”).

The Fourth Circuit Court of Appeals's recent decision in Jaffe v. Samsung Electronics Co., Ltd., 737 F.3d 14 (4th Cir. 2013) has drawn attention to the integral role section 365(n) of the Bankruptcy Code plays in protecting the rights of non-debtor counterparties to patent cross-license agreements. Designed to protect non-debtor counterparties from opportunistic debtors, section 365(n) may leave debtors vulnerable to opportunistic behavior of cross-licensees. Depending on the jurisdiction, debtors may be prohibited from assuming, let alone assigning, their patent cross license agreements, but compelled to honor the rights of their counterparties as licensee. In effect, section 365(n) provides for the division of reciprocal licenses that the parties never intended to be separate.