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Bankruptcy Impact on Trademarks, Distribution Rights
It's not uncommon for rights licensees in the entertainment industry to find themselves in a rights dispute when a licensor files for bankruptcy. Section 365(a) of the Bankruptcy Code allows a Chapter 11 debtor, subject to court approval, to assume or reject any executory contract. While a rejected contract leaves the non-debtor party with a pre-petition damages claim for breach of contract under §365(g), it does not allow it to compel the debtor to continue performing. However, under §365(n), if the contract at issue is one “under which the debtor is a licensor of a right to intellectual property,” the licensee may elect to “retain its rights … to such intellectual property,” thereby preserving its ability to continue using the licensed IP.
This IP exception was Congress's reaction to a decision by the U.S. Court of Appeals for the Fourth Circuit in which the court held that the term “executory contract” encompassed IP licenses and that, under §365(g), the effect of rejection was to terminate an IP license altogether. See, Lubrizol Enterprises v. Richmond Metal Finishers, 756 F.2d 1043 (4th Cir. 1985).
In conjunction with the enactment of §365(n)'s IP exception, Congress also amended §101(35A) to define intellectual property to include, among other things, trade secrets, designs, patent applications and protected works of authorship. Trademarks were purposefully left out, in order “to allow the development of equitable treatment of this situation by bankruptcy courts.” See, S. Rep. 100-505, 5.
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