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IP Licenses In Bankruptcy

BY Timothy W. Walsh, Gregory Kopacz
January 31, 2015

Legal uncertainty abounds for intellectual property licensees and licensors when their license counterparties enter the murky waters of bankruptcy. When a licensor hits the skids, a licensee's two primary concerns should include: 1) whether the protections afforded by Bankruptcy Code section 365(n) are available if the debtor-licensor rejects the license; and 2) protecting its rights if the debtor-licensor seeks to sell the intellectual property. By contrast, when a licensee considers filing for bankruptcy, it must consider whether it can assume or assign the license.

Assuming, Rejecting, and Assigning IP Licenses

A key decision for any debtor is whether to reject, or assume and assign its “executory contracts.” By assuming a contract, a debtor reaffirms the contract and agrees to honor its obligations going forward. To assume a contract, the debtor must cure or provide “adequate assurance” that all defaults will be cured, and provide adequate assurance of future performance. By rejecting a contract, the debtor disavows the contract and refuses to continue performing thereunder. A rejection is treated as a prepetition breach of the contract, and the counterparty is entitled to a general unsecured claim, which may be paid only cents on the dollar. Last, the debtor may assign a contract to such party, notwithstanding any contractual provision prohibiting assignment, so long as a debtor provides adequate assurance that the assignee can perform the contractual obligations.

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