Be Aware of IP Licenses During COVID-19 Uncertainty

Given the uncertainty many companies are facing during the COVID-19 pandemic and its adverse economic impacts, it is unsurprising that companies are considering restructuring options as they adjust to a new “normal.”  It is important that companies be aware of how filing for bankruptcy may affect their contractual rights in certain intangible assets such as intellectual property (“IP”) licenses. 

After filing for bankruptcy under Chapter 11 of the Bankruptcy Code (“Code”), a debtor can, with court approval, sell substantially all of its assets.  In connection with such a sale, the debtor can assume and assign, or reject any of the debtor’s “executory contracts.”^[1]  See 11 U.S.C. Section 365.  IP licenses^[2] are generally considered an “executory contract” if there is an ongoing obligation to account for and pay royalties.  Other considerations include material ongoing licensee obligations such as sharing of technology with the licensor, reporting problems with the technology, and marking all products sold under the license with proper statutory notice.

Typically, anti-assignment provisions in contracts are not enforceable to prevent an executory contract from being assumed and assigned by a debtor or trustee.  The Code, however, expressly does prohibit the assignment of a license without the consent of the counterparty if “applicable law” permits the non-debtor party to refuse performance from—or render performance to—an entity or person other than the debtor.  This can be very important particularly where the debtor is the licensee.  If an IP licensor fails to object to the assumption and assignment of an IP license, the licensor could end up having an unwanted licensee of its IP.

Whether “applicable law” permits the licensor to prevent the assumption or assignment of the license depends on the type of IP at issue and terms of the license.  For example, whether patent licenses are assignable depends on whether they are non-exclusive or exclusive.  Federal law has long held that non-exclusive patent license agreements are personal to the licensor and are not assignable unless expressly made so in the agreement.  Accordingly, courts have unanimously applied Code section 365(c) to prohibit the assignment of non-exclusive patent licenses absent consent of the non-debtor licensor.  In contrast, because patent law specifically regards exclusive licenses as conferring property and not merely personal rights, Code section 365(c) generally has been held not to preclude assumption and assignment of an exclusive patent license by the debtor-licensee. 

Different considerations must be taken into account when a non-debtor licensee is faced with the bankruptcy of the debtor licensor.  The most significant concern for non-debtor licensees is their continued rights to the licensed IP should the debtor licensor reject the license.  Code Section 365(n) provides IP licensees with special protections if a IP license is rejected.  The licensee can elect to retain its rights to the licensed intellectual property, provided that the licensee continues to make any required royalty payments.  However, the debtor licensor is likely under no obligation to perform any new services with respect to the licensed IP, such as software updates.

It is important to note that different bankruptcy courts may treat IP licenses differently.  Companies should review their current IP portfolio and take proactive measures in protecting its IP licenses particularly during these uncertain times.  While non-debtor licensors/licensees are required to receive notice of the debtor licensor/licensee’s bankruptcy, as well as notice of any motion to assume, assume and assign, or reject a license, it may be prudent to put an affirmative obligation in the license agreement requiring immediate notice to certain individuals of any filed bankruptcy.

The Workouts & Restructuring Group at KMK Law is here to provide you with advice and guidance in connection with these IP bankruptcy issues.

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[1] “Executory contracts” are contracts where the obligations of both the bankruptcy filer and the other party are “so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.”  See O'Brien v. Ravenswood Apartments, Ltd. (In re Ravenswood Apartments, Ltd.), 338 B.R. 307 (B.A.P. 6th Cir. 2006). 

[2] The Code explicitly defines IP to include trade secrets, inventions, patents, patent applications, copyrights, plant varieties and mask works. Notably, branding identifiers, such as trademarks, trade names, and service marks, are not expressly included on this list.

Stephanie M. Scott
513.579.65982
sscott@kmklaw.com