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Fifth Circuit Holds Asset Purchaser Unable to Acquire Rejected License Agreement
A license agreement "deemed rejected by operation of law" could not be acquired under a court-approved asset purchase agreement, held the U.S. Court of Appeals for the Fifth Circuit on Oct. 29, 2018. In re Provider Meds, LLC, 2018 WL 5317445, 2 (5th Cir. Oct. 29, 2018). Although the acquirer claimed "that it purchased a patent license from [the] debtors in bankruptcy sales of their estates," the court explained that "a rejected executory contract … could not have been transferred by the bankruptcy sales in question …." Id., at 1. The court also declined to "approve of the use of a" bankruptcy court sale order "to avoid the requirement that an executory contract be assumed and assigned under" Bankruptcy Code (Code) §365. Id., at 9.
Relevance
The Fifth Circuit first resolved "whether the License Agreement was an executory contract" because the Code "does not define the term …." Id., at 3. Second, the court dealt with the novel issue of whether the Code imposed a notice requirement on a Chapter 7 bankruptcy trustee's time to assume or reject a contract. Finally, the court addressed the consequences of contract rejection, an issue about which the circuits are presently split in another context. In fact, to resolve a circuit split, the U.S. Supreme Court just granted a petition for certiorari to address the effect of rejection on a trademark license. In re Tempnology, LLC, 879 F.3d 389 (1st Cir. 2018) (2-1), cert. granted, _____ U.S. ____ (Oct. 26, 2018) (after licensor-debtor rejects agreement, non-debtor licensee "left with only a pre-petition damages claim …."); contra, Sunbeam Products, Inc. v. Chicago Am. Mfg., LLC, 686 F.3d 372, 377 (7th Cir. 2012) (non-debtor's right to use debtor's trademark continues post-rejection). See, Michael L. Cook, "Split First Circuit Prevents Non-Debtor Licensee from Using Rejected Trademark License." Pratt's J. Bankr., L. 142 (April/May 2018).
Facts
Five corporate affiliates used remote pharmaceutical dispensing machines in violation of T's patent. T sued the entities for patent infringement in a Texas federal court, but the parties later settled, with the defendants gaining a "non-exclusive perpetual license" to use T's patent in exchange for "a one-time licensing fee of $4,000 for each … machine placed into operation after the execution of the agreement …." 2018 WL 5317445, at 1. The defendants also had "to provide [T with] quarterly reports reflecting all new machines placed in service. The parties exchanged releases "except for the obligations specifically called for under" their settlement agreement. Due to the settlement, the federal court dismissed T's patent infringement suit in 2010. Id.
The defendants filed separate Chapter 11 petitions in 2012 and 2013, but each case was later converted to a Chapter 7 liquidation. Five debtors were "parties" to the license agreement, but never "listed the License Agreement or [T] on their schedules" of assets and liabilities. Id.
A lender, R, had a security interest in all of the debtors' assets, but, more than 60 days after the conversion of the cases to Chapter 7, R agreed to purchase that collateral from three of the debtors' estates instead of litigating its liens. Id., at 2. The bankruptcy court approved the asset sale in a separate sale order. No asset purchase agreement "explicitly referenced [T's] License; instead, each [agreement] covered certain categories of subject property." The sale orders entered by the bankruptcy court provided "that to the extent that any of the subject property was an executory contract it was 'hereby ASSUMED by the Estate and immediately ASSIGNED to [R] under the applicable provisions of … the … Code.'" R believed that it "had purchased the License under the terms of the" sale orders. Id., at 2.
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