Section 365(n) And Licensee Rights. I have discussed in the past how Section 365(n) was added to the Bankruptcy Code to protect licensees of intellectual property in the event the licensor files bankruptcy.
- Under Section 365(n), if the debtor or trustee rejects a license, a licensee can elect to retain its rights to the licensed intellectual property, including a right to enforce an exclusivity provision. In return, the licensee must continue to make any required royalty payment.
- The licensee also can retain rights under any agreement supplementary to the license, which should include source code or other forms of technology escrow agreements.
- Taken together, these provisions protect a licensee from being stripped of its rights to continue to use the licensed intellectual property.
- To read more about Section 365(n)’s benefits and protections, follow the link in this sentence.
Limits Of Section 365(n). These protections, however, have their limits. One limitation comes from the fact that the Bankruptcy Code’s special definition of "intellectual property" excludes trademarks from the scope of Section 365(n)’s protections. Another major limitation is that since Section 365(n) is a U.S. Bankruptcy Code provision, it only applies in a U.S. bankruptcy case.
What Happens To Section 365(n) In Chapter 15 Cases? One issue that was less clear was what would happen if a foreign licensor were the subject of a case under Chapter 15 of the U.S. Bankruptcy Code. Would Section 365(n) apply to protect licensees in a Chapter 15 proceeding?
- Chapter 15 allows an entity’s foreign representative to obtain U.S. bankruptcy protection for assets and interests in the United States. It was was added to the Bankruptcy Code a few years ago to implement certain cross-border insolvency procedures when corporations had assets and interests in more than one country. To read more on Chapter 15 bankruptcy, follow the link in this sentence.
- Section 365(n) and Chapter 15 recently collided in the Chapter 15 case of Qimonda AG, and led to a decision by Judge Robert G. Mayer of the United States Bankruptcy Court for the Eastern District of Virginia on that very issue.
- The Bankruptcy Court’s decision, discussed below, is available by following the link in this sentence.
The Qimonda Chapter 15 Case. In the Qimonda AG Chapter 15 case, the Bankruptcy Court had previously recognized the pending German insolvency proceeding as a "foreign main proceeding" under Chapter 15 of the U.S. Bankruptcy Code. As part of the Chapter 15 proceeding, the Bankruptcy Court had entered a supplemental order providing, among other things, that Section 365 of the U.S. Bankruptcy Code would apply to the Chapter 15 case.
U.S. Licensees Invoke Section 365(n). Following the Bankruptcy Court’s supplemental order, certain U.S. licensees asserted Section 365(n) rights in an attempt to retain their rights to intellectual property that Qimonda AG had licensed them.
- In response, Qimonda AG’s foreign representative, who had brought the Chapter 15 case in the first place, filed a motion in the U.S. Bankruptcy Court for an order that Section 365(n) not apply in the Chapter 15 case and that instead Section 103 of the German Insolvency Code, which governs executory contracts under German law, be left to control the licenses and any rights of the licensees.
- Certain licensees objected to the motion, arguing that they should have the benefit of Section 365(n)’s protections in the Chapter 15 case, having in some cases paid millions of dollars to obtain those licenses.
The Bankruptcy Court’s Decision. After considering the motion and opposition, Judge Mayer issued a decision agreeing with Qimonda AG’s foreign representative and he modified the prior supplemental order to exclude the effect of Section 365(n) by providing that it would apply only if the foreign representative "rejects an executory contract pursuant to Section 365 (rather than simply exercising the rights granted to the Foreign Representative pursuant to the German Insolvency Code)." In reaching this decision, the Bankruptcy Court considered the effect of its recognition of the German insolvency proceeding given the purpose of Chapter 15:
The principal idea behind chapter 15 is that the bankruptcy proceeding be governed in accordance with the bankruptcy laws of the nation in which the main case is pending. In this case, that would be the German Insolvency Code. Ancillary proceedings such as the chapter 15 proceeding pending in this court should supplement, but not supplant, the German proceeding.
That objective is particularly relevant in this case where there are many international patents. The patents themselves are issued under the laws of various nations. While there may be multiple international patents, the multiple international patents protect the same idea, process or invention in the country that issued the patent. If the patents and patent licenses are dealt with in accordance with the bankruptcy laws of the various nations in which the licensees or licensors may be located or operating, there will be many inconsistent results. In fact, the same idea, process or invention may be dealt with differently depending on which country the particular ancillary proceeding is brought. Rather than having a coherent resolution to Qimonda’s patent portfolio, the portfolio may be shattered into many pieces that can never be reconstructed. In this case, Qimonda licensed its patents to companies that are operating in various nations. It is clear that the patent rights are not being exploited solely, and even possibly principally, in the United States. In fact, they are being utilized throughout the world. If the laws of the various nations in which the patents are being used would be applicable, there will be many different treatments of the patents that have been licensed by Qimonda AG and many different and inconsistent results throughout the world. This is detrimental to a systematic bankruptcy proceeding and detrimental to the resolution of the German bankruptcy proceeding itself. It diminishes the value of these assets. It results in an inefficient insolvency administration. It may well be detrimental to parties who are or wish to license the patents. It is not difficult to envision that if the patent portfolio is splintered without overall administration or control, some parties may be left with incomplete patent protection. Holding an American patent without holding a patent enforceable in the Europe may significantly restrict its use and utility. This is at odds with the Congressionally stated purposes in §1501.
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All the patents should be treated the same. There should not be disparate results simply because of the location of a factory or research facility or corporate office. This would be the result if the supplemental order were left in place. It is clear that the inclusion of §365 in the supplemental order was improvident. It had unintended consequences that significantly and adversely affect the main proceeding in Germany.
Conclusion. The Qimonda AG decision underscores that although Section 365(n) of the Bankruptcy Code offers significant protection to licensees, its benefits frequently stop at the water’s edge. When the licensor is based outside of the United States, Section 365(n) will be of little help, even if the license covers U.S. issued patents and the foreign licensor obtains protection for its U.S. assets and interests under Chapter 15 of the Bankruptcy Code. Licensees must continue to keep the limits of Section 365(n) in mind when negotiating licenses of intellectual property from foreign licensors.