patent

Showing: 1 - 7 of 20 Articles
Business Bankruptcy Issues Recent Developments The Financially Troubled Company

The Monetization Of Intellectual Property In Bankruptcy And Restructuring

ABI Panel. Last month I had the honor of speaking on a panel at the American Bankruptcy Institute’s 2022 Annual Spring Meeting in Washington, D.C. The topic of our panel was the Monetization of Intellectual Property in Bankruptcy and Restructuring.

  • I was joined by four distinguished panelists, Leslie Zmugg, General Counsel of Gordon Brothers (who was our moderator); Arthur Daemmrich, the Jerome and Dorothy Lemelson Director at the Lemelson Center for the Study of Invention and Innovation at the Smithsonian Institution; Bradley Limpert at Limpert & Associates; and Joshua Pichinson, Managing Director at Sherwood Partners, Inc./agencyIP.
  • The panel covered a range of issues, including an historical perspective on intellectual property and the way business failures impacted technological development, the impact of licenses on IP sales in bankruptcy, due diligence issues in distressed IP sale transactions, and cross-border implications in certain intellectual property transactions.

Video Available. The American Bankruptcy Institute has now made the the video of the panel discussion available for your viewing pleasure — just follow the link in this sentence to watch it.

I hope you find it helpful.

 

 

Image Courtesy of Flickr by Alejandroxwq

Business Bankruptcy Issues Recent Developments

A Beam Of Sun For Trademark Licensees: Another Appellate Court Holds Rejection Does Not Terminate A Trademark Licensee’s Rights

The In re Tempnology LLC bankruptcy case in New Hampshire has produced yet another important decision involving trademarks and Section 365(n) of the Bankruptcy Code. This time the decision is from the United States Bankruptcy Appellate Panel for the First Circuit (“BAP”). Although the BAP’s Section 365(n) discussion is interesting, even more significant is its holding on the impact of rejection of a trademark license. The decision is also further evidence of the continuing trend of courts seeking ways to protect trademark licensees in bankruptcy.

Before we get ahead of ourselves, let’s take a quick look back at the Bankruptcy Court’s decision.

The Bankruptcy Court’s Decision. Just about a year ago the New Hampshire Bankruptcy Court issued a decision involving the effects of rejection by the debtor, Tempnology LLC, of a Co-Marketing and Distribution Agreement (“Agreement”). In re Tempnology, LLC, 541 B.R. 1 (Bankr. D.N.H. 2015). In the Agreement, Tempnology had granted Mission Product Holdings, Inc. (“Mission”) (1) a non-exclusive license to certain of Tempnology’s copyrights, patents, and trade secrets, (2) an exclusive right to distribute certain cooling material products that Tempnology manufactured, and (3) an associated trademark license. With one of its first motions in the bankruptcy case, Tempnology rejected the Agreement.

  • The Bankruptcy Court held that the non-exclusive license to Tempnology’s copyright, patent, and trade secret rights was a license of “intellectual property” as defined in Section 101(35A) of the Bankruptcy Code, and that Mission’s rights to continue to use that IP was protected under Section 365(n). However, the exclusive distribution rights were not “intellectual property” under Section 101(35A) and the Bankruptcy Court held Mission’s distribution rights were not protected under Section 365(n).
  • The Bankruptcy Court also held that because trademarks were not included in Section 101(35A)’s definition of intellectual property, Mission’s trademark license rights were not protected by Section 365(n).
  • In considering the impact of rejection, the Bankruptcy Court followed the 1985 decision in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985). The Bankruptcy Court held that due to the rejection of the Agreement, Mission lost both the exclusive distribution rights and the trademark license rights.
  • You can get the details on the Bankruptcy Court’s decision at this prior post, entitled “A Reminder Of The Limits Of Section 365(n)’s Licensee Protection.”

Why No Mention Of The Seventh Circuit’s Sunbeam Decision? In that earlier post, I noted that given Circuit level decisions over the last few years involving trademarks and bankruptcy, it was interesting that the Bankruptcy Court’s decision did not mention the Seventh Circuit’s 2012 decision in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 382 (7th Cir. 2012).

  • In Sunbeam, the Seventh Circuit expressly rejected the Lubrizol decision and its analysis of the effects of rejection (follow the link for a full discussion of the Sunbeam decision). In contrast to Lubrizol, the Sunbeam court held that rejection is a breach by the debtor and does not terminate the agreement or the rights of the non-breaching party.
  • As a result, the Seventh Circuit allowed the non-debtor trademark licensee to continue using the licensed trademarks despite rejection of the trademark license.

At the time I speculated that if the Bankruptcy Court in the Tempnology case had applied the Sunbeam decision, the result might have been different.

The Bankruptcy Appellate Panel Decision. Mission appealed the Bankruptcy Court’s decision to the BAP. On November 18, 2016, the BAP issued its decision, affirming in part and reversing in part the Bankruptcy Court’s decision. Follow this link for a copy of the BAP’s November 18, 2016 decision.

  • The BAP affirmed the Bankruptcy Court’s holding that the exclusive distribution rights in the Agreement were not intellectual property as defined in the Bankruptcy Code and were not protected by Section 365(n).
  • The BAP also affirmed the Bankruptcy Court’s decision that Section 365(n) did not protect Mission’s rights as a trademark licensee, ruling that the Bankruptcy Court had corrected held that Section 101(35A)’s definition of “intellectual property” excludes trademarks.
  • On the trademark point, Mission urged the BAP to follow the equitable approach that Judge Ambro had suggested in his concurring opinion in the Third Circuit’s decision in In re Exide Techs., 607 F.3d 957 (3d Cir. 2010), which would let bankruptcy courts fashion equitable protections for trademark licensees. The BAP declined to follow either that approach or the one taken by the New Jersey Bankruptcy Court in In re Crumbs Bake Shop, 522 B.R. 766 (Bankr. D.N.J. 2014), which had effectively applied Section 365(n) to trademarks.
  • For more on the Crumbs Bake Shop and Exide Techs. decisions, take a look at this earlier post.

The BAP Discusses, And Then Follows, Sunbeam. Had the BAP stopped there, it would have affirmed the Bankruptcy Court’s holding. The BAP, however, did not stop there. Instead, it considered the Sunbeam decision and ultimately followed its analysis on the effect of rejection on a trademark license agreement. In so doing, the BAP became the first appellate court outside the Seventh Circuit to adopt the Sunbeam decision’s rejection analysis.

The BAP turned to the Lubrizol decision first:

We must part company with the bankruptcy court, however, on the effect the Debtor’s rejection of the Agreement had on Mission’s licensee rights in the Debtor’s trademark and logo. The bankruptcy court ruled that, because the Debtor’s trademark and logo were not protected by Mission’s election under § 365(n), Mission did “not retain rights to the Debtor’s trademarks and logos post-rejection.” This conclusion endorses Lubrizol’s approach to the rejection of executory contracts, namely that rejection terminates the contract. Lubrizol, however, is not binding precedent in this circuit and, like the many others who have criticized its reasoning [footnote omitted], we do not believe it articulates correctly the consequences of rejection of an executory contract under § 365(g). We adopt Sunbeam’s interpretation of the effect of rejection of an executory contract under § 365 involving a trademark license.

The BAP went on with its analysis:

Applying Sunbeam’s rationale, we conclude that, while the Debtor’s trademark and logo were not encompassed in the categories of intellectual property entitled to special protections under § 365(n), the Debtor’s rejection of the Agreement did not vaporize Mission’s trademark rights under the Agreement. Whatever post-rejection rights Mission retained in the Debtor’s trademark and logo are governed by the terms of the Agreement and applicable non-bankruptcy law.

Thus, we conclude that the bankruptcy court did not err in ruling that Mission’s § 365(n) election failed to protect its rights under the Agreement as licensee of the Debtor’s trademark and logo, but it erred in ruling that Mission’s rights in the Debtor’s trademark and logo as set forth in the Agreement terminated upon the Debtor’s rejection of the Agreement.

Sunbeam, Now Joined By Tempnology, Raises A Number Of Questions. If followed by other courts, the Sunbeam and Tempnology decisions raise a variety of issues. These include the following:

  • Aside from the right to use the licensed trademarks, does the licensee keep other rights under the trademark license, such as exclusivity if applicable?
  • Does the licensee have rights to use the trademarks for the full term of the license agreement plus any extensions, or some shorter period?
  • If payment of royalties is required under a trademark license, must the trademark licensee continue to pay them post-rejection to use the licensed trademarks, as an IP licensee covered by Section 365(n) is required to do?
  • Can the trademark licensee instead argue that rejection is a material breach by the debtor and excuses the obligation to pay royalties?
  • Under Sunbeam and Tempnology, if rejection does not terminate trademark license rights, is the same true for intellectual property licenses other than trademarks, such as patents and copyrights, covered by Section 365(n)?
  • Is the Section 365(g) analysis of Sunbeam and Tempnology just limited to trademark license rights? Can a non-debtor party to an executory contract argue that other of its contract rights are also preserved, as long as they don’t impose affirmative performance obligations on the debtor? If so, in Tempnology, would that extend to Mission’s exclusive distribution rights?
  • Are licensees of patents, copyrights, or trade secrets, otherwise protected by Section 365(n), required to follow Section 365(n)’s statutory scheme to retain their rights, or can they rely on the analysis in Sunbeam and Tempnology as a complete alternative?
  • How will purchasers of trademarks and other assets react to the potential continued use of trademarks by licensees under rejected trademark licenses?

Conclusion. The BAP’s Tempnology decision marks the first time an appellate court other than the Seventh Circuit has applied the Sunbeam analysis to a trademark license.

  • It remains to be seen if other courts will start to follow suit or, alternatively, if the Lubrizol decision’s approach to the consequences of rejection will continue to hold sway.
  • If many courts followed the Sunbeam/Tempnology approach and rejected Lubrizol, the omission of trademarks from Section 365(n) protection could matter less than in the past. In addition, the license agreement’s provisions governing the licensee’s rights upon the licensor’s breach could become much more significant.

Given the broad implications of the Lubrizol/Sunbeam split on rejection of executory contracts, and especially on trademark licenses, be sure to stay tuned.

 

Image Courtesy of Flickr by discutant

Business Bankruptcy Issues Recent Developments

U.S. Supreme Court Denies Review In Jaffe v. Samsung, Letting Stand The Fourth Circuit’s Decision Applying Section 365(n) To Protect Licensees In A Chapter 15 Bankruptcy Case

5554035521_f6b59ccafa_z

On Monday, October 6, 2014, the U.S. Supreme Court issued an order denying the petition for a writ of certiorari in the Jaffe v. Samsung case, also known as the Qimonda case. The Supreme Court let stand the Fourth Circuit’s December 2013 decision that affirmed the bankruptcy court’s order applying Bankruptcy Code Section 365(n) in a Chapter 15 cross-border bankruptcy case.

For a full discussion of the Fourth Circuit’s decision, follow the link to this prior post discussing the case and its implications for intellectual property licensees, Chapter 15 cases, and more. For a quick refresher, here’s the conclusion from that earlier post:

The Fourth Circuit’s Qimonda decision is important for licensees of intellectual property owned by a foreign entity. It signals that U.S. courts will incline to protect licensees by applying Section 365(n) when an insolvent foreign entity’s administrator or other representative asks for assistance from the U.S. bankruptcy courts. However, the Fourth Circuit did not go as far as some licensees would have liked, stopping short of declaring that an attempt to reject licenses without applying Section 365(n) would be “manifestly contrary” to U.S. public policy. That makes the Qimonda decision a helpful, but perhaps not decisive, tool for IP licensees. It of course remains to be seen whether other courts will follow the Qimonda decision or chart a different path.

Image Courtesy of Flickr by Phil Roeder

Business Bankruptcy Issues Recent Developments

Patent Reform Bill, And Its Revisions To Bankruptcy Code Section 365(n), Stalls In The Senate

800px-US_Capitol_from_NW

Image courtesy of Matt H. Wade

In December 2013 I wrote about the Innovation Act, H.R. 3309, a bill focused on patent infringement litigation and other patent law reforms that passed the House of Representatives on a bipartisan basis. My interest in the bill was because it would make the most sweeping changes to the treatment of intellectual property licenses in bankruptcy since the 1988 enactment of Section 365(n) of the Bankruptcy Code. Follow the link in this sentence for a full discussion of the proposed law.

Proposed Changes In The House-Passed Innovation Act. To bring you up to date, here are the four major changes the Innovation Act would make to Section 365(n)’s protections for IP licensees.

  • First, it would extend Section 365(n)’s protections, including through an amendment to Section 101(35A) of the Bankruptcy Code’s definition of intellectual property, to licenses of trademarks, service marks, and trade names.
  • Second, rejection of a trademark, service mark, or trade name license would not relieve the trustee (or presumably a debtor in possession in a Chapter 11 case) of the debtor’s contractual obligations to monitor and control the quality of a licensed product or service.
  • Third, it would expand the payments that a licensee would have to continue to make to the estate, if it elected to retain its license rights, to include not only “royalty” payments but also “other” payments under the license.
  • Fourth, it would amend Section 1522 of the Bankruptcy Code to make Section 365(n) directly applicable to Chapter 15 cases, providing that if a foreign representative rejects or repudiates an IP license, the licensee would be entitled to elect to retain its IP rights under Section 365(n).

If enacted and signed by the President, the Innovation Act’s revisions would apply as of the date of enactment to pending and future cases.

After House Passage, Action On A Senate Version. After passing the House, the Innovation Act moved to the Senate and was referred to the Senate Committee on the Judiciary. Senator Patrick Leahy, the Senate Judiciary Committee Chairman, had introduced a similar bill, S. 1720, the “Patent Transparency and Improvements Act of 2013.”  As introduced, that bill would have made many of the same changes to Section 365(n) and the Bankruptcy Code definition of intellectual property (specifically, adding in coverage of trademarks as discussed above) as in the House-passed Innovation Act. The Senate bill would have also addressed the applicability of Section 365(n) in Chapter 15 cases, but by amending a different section of Chapter 15.

The Legislation Hits A Roadblock. The Senate Judiciary Committee held a hearing on S. 1720, and a number of discussions and negotiations involving companies affected by patent litigation ensued. However, those efforts reached an impasse and on May 21, 2014, Senator Leahy announced:

We have been working for almost a year with countless stakeholders on legislation to address the problem of patent trolls who are misusing the patent system. This is a real problem facing businesses in Vermont and across the country.

Unfortunately, there has been no agreement on how to combat the scourge of patent trolls on our economy without burdening the companies and universities who rely on the patent system every day to protect their inventions.  We have heard repeated concerns that the House-passed bill went beyond the scope of addressing patent trolls, and would have severe unintended consequences on legitimate patent holders who employ thousands of Americans.

I have said all along that we needed broad bipartisan support to get a bill through the Senate. Regrettably, competing companies on both sides of this issue refused to come to agreement on how to achieve that goal.

Because there is not sufficient support behind any comprehensive deal, I am taking the patent bill off the Senate Judiciary Committee agenda.  If the stakeholders are able to reach a more targeted agreement that focuses on the problem of patent trolls, there will be a path for passage this year and I will bring it immediately to the Committee.

We can all agree that patent trolls abuse the current patent system.  I hope we are able to return to this issue this year.

Conclusion. Senator Leahy’s statement makes clear that the focus of this legislation is on patent litigation reform, not bankruptcy and IP licenses. The fate of the legislation will depend on whether the interested parties can reach agreement on those patent issues. However, the stalling of the patent legislation also means the bankruptcy provisions, at least for now, will stay on hold; it seems unlikely the bankruptcy provisions would move forward in legislation separate from the overall patent reform effort. Stay tuned, but the odds now seem considerably lower that these changes to the treatment of IP licenses in bankruptcy will be enacted.

Business Bankruptcy Issues Recent Developments

Innovation Act, Passed By The House, Would Make Major Changes To Section 365(n)’s IP Licensee Protections

It isn’t law yet, but on December 5, 2013, the U.S. House of Representatives passed a significant patent reform bill known as the "Innovation Act." Although the focus of the legislation is on patent infringement litigation and other patent law revisions, the Innovation Act, H.R. 3309, would also make major changes to Section 365(n) of the Bankruptcy Code. Follow the link in the prior sentence for a copy of the Innovation Act in the form passed by the House and received in the Senate last week. It would also address the interplay between Section 365(n) and Chapter 15 cross-border bankruptcy cases, the subject of my last post, on the Qimonda AG decision from the U.S. Court of Appeals for the Fourth Circuit.

Licensee Protections Under The Current Version Of Section 365(n). Section 365(n) was added to the Bankruptcy Code in 1988 to protect licensees of intellectual property in the event the licensor files bankruptcy.

  • Under Section 365(n) as it now exists, if a debtor or trustee rejects a license, the 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 payments.
  • 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 the current version of Section 365(n)’s benefits and its protections, follow the link in this sentence.

Limits Of The Current Section 365(n). These existing protections have several significant limitations. First, the Bankruptcy Code’s special definition of "intellectual property" excludes trademarks from the scope of Section 365(n)’s protections (although a recent Seventh Circuit decision may have opened an alternative path for trademark licensees to retain their rights). Another is that Section 365(n) is in the U.S. Bankruptcy Code and applies only in a U.S. bankruptcy case. Most other countries do not have protections similar to Section 365(n).

Proposed Changes In The House-Passed Innovation Act. The Innovation Act would make four major changes to Section 365(n)’s protections for licensees.

  • First, it would extend Section 365(n)’s protections, including through an amendment to Section 101(35A) of the Bankruptcy Code’s definition of intellectual property, to licenses of trademarks, service marks, and trade names.
  • Second, rejection of a trademark, service mark, or trade name license would not relieve the trustee (or presumably a debtor in possession in a Chapter 11 case) of the debtor’s contractual obligations to monitor and control the quality of a licensed product or service.
  • Third, it would expand the payments that a licensee would have to continue to make to the estate, if it elected to retain its license rights, to include not only "royalty" payments but also "other" payments under the license.
  • Fourth, it would amend Section 1522 of the Bankruptcy Code to make Section 365(n) directly applicable to Chapter 15 cases, providing that if a foreign representative rejects or repudiates an IP license, the licensee would be entitled to elect to retain its IP rights under Section 365(n).

If enacted and signed by the President, the Innovation Act’s revisions would apply as of the date of enactment to pending and future cases.

Will The Innovation Act Become Law? I’m a bankruptcy lawyer, not a political analyst, but it’s fair to say we shouldn’t get too excited about these potential legislative changes just yet. The Innovation Act has passed only the House and has been referred to the Senate Committee on the Judiciary, where the bill meets an uncertain fate. Even if the Innovation Act passes the Senate, the Section 365(n) provisions could be amended or the legislation could otherwise stall. However, the Innovation Act is not a one-party bill: it passed the House with a large bipartisan majority on a 325-91 vote. That suggests it has the potential for support in the Senate.

Potential Impact Of Innovation Act’s Changes To Section 365(n). If the changes to Section 365(n) do become law, they would be the most significant revisions since its enactment in 1988.

  • The biggest changes would be the extension of Section 365(n)’s protections to trademarks, service marks, and trade names, together with the monitoring obligations on a trustee. In the 25 years since Section 365(n) was enacted, trademark licensees have lived under the specter of losing trademark license rights in bankruptcy. These revisions would be a sea change in the trademark area.
  • In addition, the Innovation Act provides that the trustee or debtor in possession would not be relieved of a contractual obligation to continue to monitor the quality of goods or services using a mark, in effect limiting the benefits of rejection to an estate for the protection of consumers. However, it’s unclear how a trustee would be able to meet such an obligation, particularly if an estate had no assets, and how a trustee could meet a long-term obligation to monitor quality given that the Chapter 7 case would eventually be closed. These were some of the difficult issues that led Congress to leave trademarks out of Section 365(n) originally.
  • Another significant change is the requirement that a licensee that elects to retain its IP rights under Section 365(n) essentially continue to make all payments under the license agreement and not simply those determined to be "royalty" payments. If this provision becomes law, drafters of license agreements will need to consider how rejection and the non-performance of the licensor’s obligations would impact payments otherwise required under the license agreement.
  • As a timely anticipation of the Fourth Circuit’s Qimonda AG decision, the Innovation Act would apply Section 365(n) in all Chapter 15 cases through an amendment to Section 1522. The language used — applying when a foreign representative rejects or "repudiates" a license agreement — suggests that the House intended this to cover not only rejection under Section 365 of the Bankruptcy Code but also equivalent foreign law powers to repudiate or disclaim contracts. By placing the Section 365(n) reference in a new, separate subsection of Section 1522 governing protection of creditors and other interested persons, it seems that Section 365(n) would apply in all Chapter 15 cases, regardless of whether the foreign representative sought preliminary or discretionary relief under Sections 1519 or 1521.

Conclusion. If it becomes law in its current form, the Innovation Act would bring the most sweeping changes to Section 365(n) since its enactment in 1988. Although there’s a long way to go before that actually happens, the breadth of the proposed changes and their impact on bankruptcy and IP law makes this piece of legislation one to watch. Stay tuned.

Business Bankruptcy Issues Recent Developments

When Worlds Collide, The Sequel: Fourth Circuit Rules On Section 365(n)’s IP Licensee Protections In Chapter 15 Cross-Border Bankruptcy

My how time flies in protracted bankruptcy litigation. More than four years ago, as I reported back at the time, the Bankruptcy Court in the Chapter 15 cross-border bankruptcy case of Qimonda AG issued its first decision on the application of Section 365(n) in that case. After an initial appeal, a four-day trial on remand, and another appeal, last week the U.S. Court of Appeals for the Fourth Circuit issued a major decision that may bring the litigation to a close.

Even if you are not a Chapter 15 bankruptcy aficionado, this decision has important implications for licensees of intellectual property, especially when the IP owner is a foreign entity.

Before diving into the Fourth Circuit’s decision and examining where the decision leaves licensees, let’s first take a look at Section 365(n), Chapter 15, and the long and winding road that led to the Fourth Circuit’s decision. Or, if so inclined, you can just jump to the discussion of the Fourth Circuit’s decision and where it leaves licensees, found toward the end of this post.

Section 365(n) And Licensee Rights. 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 payments.
  • 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.
  • For more on 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 is that the Bankruptcy Code’s special definition of “intellectual property” excludes trademarks from the scope of Section 365(n)’s protections (although at least one recent decision may have opened an alternative path for trademark licensees to retain their rights). Another is that Section 365(n) is in the U.S. Bankruptcy Code and applies only in a U.S. bankruptcy case. Most other countries do not have protections similar to Section 365(n).

Chapter 15 Bankruptcy. Chapter 15 allows a foreign entity’s official representative to obtain U.S. bankruptcy protection for assets and interests in the United States, ancillary to the insolvency proceedings in the entity’s home country. It was was added to the Bankruptcy Code to implement certain cross-border insolvency procedures when corporations or others have assets and interests in more than one country. To read more on Chapter 15 bankruptcy, follow the link in this sentence.

Does Section 365(n) Apply In Chapter 15 Cases? An open question has been what would happen if a foreign licensor were the subject of a cross-border case under Chapter 15 of the U.S. Bankruptcy Code. Would Section 365(n) apply to protect licensees in a Chapter 15 proceeding?

  • In the Qimonda case, the two worlds collided — Chapter 15’s cross-border bankruptcy procedures and Section 365(n)’s protections for IP licensees.
  • The first bombshell came in November 2009. Judge Robert G. Mayer of the U.S. Bankruptcy Court for the Eastern District of Virginia issued an initial decision, holding that Section 365(n)’s protections did not apply in the Chapter 15 case, starting the four-year journey to the Fourth Circuit’s decision.

The Qimonda Chapter 15 Case. Qimonda, a German company that manufactured semiconductor devices, was in an insolvency proceeding in Germany. The principal assets of Qimonda’s estate were approximately 10,000 patents, of which roughly 4,000 were U.S. patents. It had issued licenses of rights under those U.S. patents to third party licensees. Qimonda’s German insolvency administrator had filed the Chapter 15 case to seek recognition by the Bankruptcy Court of the pending German insolvency proceeding as a “foreign main proceeding.” The Bankruptcy Court granted recognition and, at the request of the administrator, granted him discretionary relief under Section 1521(a)(5) of the Bankruptcy Code, entrusting to him the administration of all of Qimonda’s assets within the United States, primarily the 4,000 U.S. patents. In its supplemental order granting relief under Section 1521, the Bankruptcy Court on its own provided that, among other things, Section 365 of the U.S. Bankruptcy Code would apply to the Chapter 15 case (it does not apply automatically in Chapter 15 cases).

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 the intellectual property that Qimonda had licensed them.

The Bankruptcy Court’s Decision. In November 2009, Judge Mayer issued the first decision on the issue, agreeing with Qimonda’s administrator and modifying the prior supplemental order to exclude the effect of Section 365(n). Judge Mayer provided that Section 365(n) would apply only if the administrator “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).”

Appeal To The District Court. The licensees appealed to the District Court, which remanded the case back to the Bankruptcy Court.

  • The District Court ordered the Bankruptcy Court to consider the requirement under Section 1522(a) of the U.S. Bankruptcy Code to ensure that “the interests of the creditors and other interested entities, including the debtor, [were] sufficiently protected.” The District Court held that the Bankruptcy Court had to balance the relief granted to the German insolvency administrator as foreign representative with the interests of those affected by that relief.
  • As a separate basis for remand, the District Court directed the Bankruptcy Court to consider whether Section 365(n) is a fundamental U.S. public policy such that, under Section 1506 of the U.S. Bankruptcy Code, subordinating it to Section 103 of the German Insolvency Code would be “manifestly contrary to the public policy of the United States.”

The Bankruptcy Court On Remand. On remand, another Bankruptcy Judge, Stephen S. Mitchell, held a four-day evidentiary hearing, with testimony on the likely impact of applying, or not applying, Section 365(n) to licenses under Qimonda’s U.S. patents. At the outset, the administrator had committed to re-license the licensees under a “reasonable and nondiscriminatory” royalty license (known as RAND), but the licensees pressed to keep their existing license rights without having to negotiate and pay a new royalty. At stake for the Qimonda estate was approximately $47 million in estimated re-licensing fees. The licensees argued the stakes were far higher on their side. They contended that a failure to apply Section 365(n) would destablize the system of licensing and cross-licensing in place to address the “thicket” of multiple patents held by different parties in the semiconductor industry, and in turn that would reduce investment and innovation.

Ultimately, the Bankruptcy Court issued its decision and, under Section 1522(a), balanced the interests of Qimonda and the licensees in favor of requiring that Section 365(n) apply to the administration of Qimonda’s U.S. patents. Taking up the other issue raised by the District Court, the Bankruptcy Court independently held that “deferring to German law, to the extent it allows cancellation of the U.S. patent licenses, would be manifestly contrary to U.S. public policy.” Under Section 1506, the Bankruptcy Court concluded that U.S. public policy required that Section 365(n)’s protections apply to Qimonda’s U.S. patents.

The Fourth Circuit’s Decision. After procedural hurdles were cleared, a direct appeal to the Fourth Circuit followed. On December 3, 2013, the Fourth Circuit issued its 45 page opinion affirming the Bankruptcy Court’s decision to apply Section 365(n). After first examining the history, purpose, and structure of Chapter 15, the Fourth Circuit turned to the three arguments the German administrator had advanced on appeal.

  • No request for Section 365(n) to apply. The administrator argued that in seeking discretionary relief under Section 1521, he had never asked for either Section 365 or 365(n) to apply; since relief under Section 1521 has to be requested by the foreign representative, he asserted that his decision not to request it should resolve the question. The Fourth Circuit rejected the argument, holding his view of the relationship between Sections 1521(a) and 1522(a) “too myopic.” Instead, it held that if any discretionary relief is granted under Section 1521(a), the interests of creditors and the debtor must be “sufficiently protected” under Section 1522(a).
  • Erroneous test under Section 1522(a). The administrator next argued that the “sufficiently protected” standard is designed only to make sure that all creditors can participate in the foreign proceeding on an equal footing, not to change the substantive outcome in that foreign proceeding. Reviewing the Guide to Enactment of the Model Law on which Chapter 15 is based, the Fourth Circuit also rejected this argument. It held that Section 1522(a) requires a balancing of interests before discretionary relief is granted, and anticipates a particularized analysis of the impacts on creditors and the debtor from the relief sought.
  • Faulty balancing analysis. Finally, the administrator argued that the Bankruptcy Court abused its discretion in balancing the interests involved. Specifically, he asserted that the lower court overstated the risk to the licensees’ investments made in reliance on the licenses that Qimonda had granted, especially given the administrator’s RAND license offer. The Fourth Circuit rejected this argument as well, agreeing with the Bankruptcy Court’s assessment of the risks. These included the risks to investments already made and the threat of infringement litigation contrary to the Qimonda licenses. The Fourth Circuit also held that although the RAND proposal would reduce the licensees’ risks, it would not sufficiently protect them. The outcome of those negotiations were uncertain, there were significant hold-up risks in the RAND license negotiations. Moreover, it was unclear whether even new RAND licenses would survive if the administrator sold the patents in the German proceeding — and the purchaser later filed an insolvency proceeding under German law.

In the final section of the decision (Part IV), the Fourth Circuit returned to the purposes of Chapter 15 and Section 365(n). It stated that in affirming the Bankruptcy Court’s decision based on Section 1522(a), it was also indirectly furthering the public policy behind Section 365(n). However, the Fourth Circuit did not reach Section 1506. Unlike the Bankruptcy Court, the Fourth Circuit did not hold that subordinating Section 365(n) to Section 103 of the German Insolvency Code would be “manifestly contrary to the public policy of the United States.” Interestingly, Part IV of the opinion only got two votes. Circuit Judge Wynn concurred in the judgment and in the first three parts of the decision, but not in Part IV, which he found to be “unnecessary dictum.”

Where Does The Decision Leave Licensees? While plainly good news for the Qimonda licensees, who can now use Section 365(n) to retain their pre-existing IP rights, the Fourth Circuit’s decision leaves a number of unanswered questions for future cases.

  • Is a decision allowing a foreign representative to reject licenses without applying Section 365(n) protection “manifestly contrary to the public policy of the United States” under Section 1506? The Bankruptcy Court thought it was, but the Fourth Circuit carefully chose not to reach the issue. It remains an open question even in the Fourth Circuit, much less in Chapter 15 cases filed in the rest of the country. Section 1506, quoted below, is so important because it’s Chapter 15’s local law trump card:

Nothing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States.

By declining to reach the Section 1506 question, the Fourth Circuit kept the Section 1506 trump card in the deck. That leaves licensees with continued uncertainty about whether Section 365(n) will in fact be applied in the next Chapter 15 case.

  • Must courts apply Section 365(n) every time a foreign representative requests any discretionary relief under Section 1521? The Fourth Circuit’s decision required courts to balance the particular interests of creditors and the debtor under Section 1522(a), not just their access to the foreign court. To coin a phrase, this means “substantive sufficient protection” instead of just “procedural sufficient protection.” The Qimonda decision should help licensees tip the balance in their favor, especially when a foreign representative is asking to administer U.S. patents. However, the Fourth Circuit holding was that the Bankruptcy Court’s exercise of discretion was reasonable. It did not hold that no other decision was possible. That makes it a little less clear whether the Fourth Circuit would allow this particularlized balancing to go the other way — a refusal to apply Section 365(n) — in another case.
  • What if the foreign representative doesn’t seek any discretionary relief? Remember, the Fourth Circuit affirmed the Bankruptcy Court only under Section 1522(a), which in turn applies only when a foreign representative requests discretionary relief under Section 1521 (or relief under Section 1519 before recognition).  Most foreign representatives will seek discretionary relief, and specifically seek to have U.S. assets entrusted to them. That is what Qimonda’s German administrator did. However, if a foreign representative decided not to request any such relief, the balancing of interests called for by the Fourth Circuit would not be triggered. That could leave licensees with only Section 1506’s public policy trump card, which the Fourth Circuit did not invoke.
  • What if the foreign representative doesn’t file a Chapter 15 case at all? This one is pretty easy. If the foreign representative chooses not file a Chapter 15 case in the first place (or of course a Chapter 11 or Chapter 7 case), then there would be no U.S. bankruptcy case in which to try to invoke Section 365(n). That’s one of Section 365(n)’s major limitations, and one licensees — and the attorneys who draft their licenses — should remember.

Conclusion. The Fourth Circuit’s Qimonda decision is important for licensees of intellectual property owned by a foreign entity. It signals that U.S. courts will incline to protect licensees by applying Section 365(n) when an insolvent foreign entity’s administrator or other representative asks for assistance from the U.S. bankruptcy courts. However, the Fourth Circuit did not go as far as some licensees would have liked, stopping short of declaring that an attempt to reject licenses without applying Section 365(n) would be “manifestly contrary” to U.S. public policy. That makes the Qimonda decision a helpful, but perhaps not decisive, tool for IP licensees. It of course remains to be seen whether other courts will follow the Qimonda decision or chart a different path.

Business Bankruptcy Issues Recent Developments

Seventh Circuit Bankruptcy Ruling Is Big Win For Trademark Licensees

On July 9, 2012, the U.S. Court of Appeals for the Seventh Circuit issued its decision in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, and in doing so handed a major victory to trademark licensees whose licenses are rejected in bankruptcy by trademark owners. A copy of the opinion is available through this link. However, before discussing the details of the opinion, it’s important to put it in context first. And for that, we need to journey back to the 1980s.

A History Of Rejection. Back in 1985, the U.S. Court of Appeals for the Fourth Circuit issued a decision in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985). The Fourth Circuit held that Lubrizol, a nonexclusive patent licensee whose patent license was rejected as an executory contract in the bankruptcy case of Lubrizol’s licensor, debtor Richmond Metal Finishers, could not "rely on provisions within its agreement with [the debtor] for continued use of the technology."  According to the Lubrizol court, when Congress enacted Section 365(g) of the Bankruptcy Code, governing the effect of rejection of an executory contract, "the legislative history of § 365(g) makes clear that the purpose of the provision is to provide only a damages remedy for the non-bankrupt party," and no specific performance remedy. The Fourth Circuit held that, as a result, when the debtor rejected the contract, Lubrizol, as the patent licensee, lost its rights under the license.

Congress Protects Certain IP Licensees. In reaction to the Lubrizol decision and the concerns of the decision’s potential impact on patent and other technology licensees, in 1988 Congress added Section 365(n) to the Bankruptcy Code, expressly permitting licensees of intellectual property to elect to retain their rights to the intellectual property. However, Congress also added to the Bankruptcy Code its own definition of "intellectual property" for Section 365(n) purposes, and decided not to include trademarks in Section 101(35A)’s definition. As a result, trademark licensees have none of the protections of Section 365(n). Follow the link for more on Section 365(n) and its protections for licensees.

Back To The Future. With that history in mind, it’s time to come back to the future, or at least the present. Lubrizol’s decision that a licensee cannot rely on the provisions of its license agreement for continued use of the intellectual property, together with the fact that Section 365(n)’s protections do not extend to trademark licenses, has for years left trademark licensees at great risk of losing all trademark rights if the license is rejected. That is, it seemed that way until just the past couple of years.

  • A 2010 decision from the U.S. Court of Appeals for the Third Circuit in the In re: Exide Technologies case held that when a trademark license was provided in connection with the sale of a business, and that sale had been substantially performed, the trademark license was no longer executory, could not be rejected, and the licensee could continue to use the trademarks.
  • In a concurring opinion in Exide Technologies, Judge Ambro went further, concluding that rejection of a trademark license should not deprive the licensee of all rights. In enacting Section 365(n) but leaving trademarks outside the definition of "intellectual property," Congress did not intend that Lubrizol’s result apply to trademark licenses and instead courts should use equitable powers to protect licensees.
  • Last year, in the case that led to the Seventh Circuit’s decision here, the bankruptcy court in In re Lakewood Engineering & Manufacturing Co., Inc, 459 B.R. 306 (Bankr. N.D. Ill. 2011), decided to "step into the breach," follow Judge Ambro’s reasoning, and begin the "development of equitable treatment" of trademark licensees that it concluded Congress had anticipated would occur. In so doing, it held that despite rejection of a manufacturing and supply agreement that included a trademark license, the licensee could continue to sell trademarked goods as it had been licensed to do.

The Seventh Circuit’s Decision. The bankruptcy court’s decision was taken up on appeal to the Seventh Circuit. In its July 9, 2012 opinion, written by Chief Judge Frank H. Easterbrook, the Seventh Circuit disagreed with the bankruptcy court’s analysis but ultimately affirmed its decision. In its opinion, however, the Seventh Circuit took aim directly at the Lubrizol decision and reasoning.

The facts of the Sunbeam case are fairly straightforward. Lakewood Engineering & Manufacturing Co. made various consumer products, including box fans, which were covered by its patents and trademarks. Lakewood contracted with Chicago American Manufacturing ("CAM") to make its fans for 2009, granting CAM a license to the relevant patents and trademarks. In recognition of both the investment CAM would have to make to manufacture the fans and Lakewood’s own distressed financial condition, the agreement authorized CAM to sell directly any of the 2009 production of box fans that Lakewood did not purchase. A few months after the agreement was signed, Lakewood was forced into involuntary bankruptcy and a trustee was appointed. The trustee sold Lakewood’s assets, including the patents and trademarks, to Sunbeam Consumer Products, which wanted to sell its own fans and not have to compete with CAM’s sales. The trustee rejected the CAM agreement and, when CAM continued to sell the remaining fans, Sunbeam sued CAM for infringement.

The issue on appeal was the effect of the trustee’s rejection of the CAM agreement, and specifically the trademark license, on CAM’s ability to sell the fans. The Seventh Circuit’s focus on the Lubrizol decision was apparent:

Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985), holds that, when an intellectual-property license is rejected in bankruptcy, the licensee loses the ability to use any licensed copyrights, trademarks, and patents. Three years after Lubrizol, Congress added §365(n) to the Bankruptcy Code. It allows licensees to continue using the intellectual property after rejection, provided they meet certain conditions. The bankruptcy judge held that §365(n) allowed CAM to practice Lakewood’s patents when making box fans for the 2009 season. That ruling is no longer contested. But “intellectual property” is a defined term in the Bankruptcy Code: 11 U.S.C. §101(35A) provides that “intellectual property” includes patents, copyrights, and trade secrets. It does not mention trademarks. Some bankruptcy judges have inferred from the omission that Congress codified Lubrizol with respect to trademarks, but an omission is just an omission. The limited definition in §101(35A) means that §365(n) does not affect trademarks one way or the other. According to the Senate committee report on the bill that included §365(n), the omission was designed to allow more time for study, not to approve Lubrizol. See S. Rep. No. 100–505, 100th Cong., 2d Sess. 5 (1988). See also In re Exide Technologies, 607 F.3d 957, 966–67 (3d Cir. 2010) (Ambro, J., concurring) (concluding that §365(n) neither codifies nor disapproves Lubrizol as applied to trademarks). The subject seems to have fallen off the legislative agenda, but this does not change the effect of what Congress did in 1988.

Chief Judge Easterbrook’s opinion noted that the bankruptcy court had permitted CAM to continue using the trademarks on equitable grounds, but rejected that approach as going beyond what the Bankruptcy Code permits. The Seventh Circuit then directly addressed the Lubrizol decision:

Although the bankruptcy judge’s ground of decision is untenable, that does not necessarily require reversal. We need to determine whether Lubrizol correctly understood §365(g), which specifies the consequences of a rejection under §365(a). No other court of appeals has agreed with Lubrizol—or for that matter disagreed with it. Exide, the only other appellate case in which the subject came up, was resolved on the ground that the contract was not executory and therefore could not be rejected. (Lubrizol has been cited in other appellate opinions, none of which concerns the effect of rejection on intellectual-property licenses.) Judge Ambro, who filed a concurring opinion in Exide, concluded that, had the contract been eligible for rejection under §365(a), the licensee could have continued using the trademarks. 607 F.3d at 964–68. Like Judge Ambro, we too think Lubrizol mistaken.

After observing that outside of bankruptcy a licensor’s breach does not terminate a licensee’s right to use intellectual property, and Section 365(g) provides that rejection is breach, the Seventh Circuit turned to the impact of Section 365(g) and rejection in bankruptcy:

What §365(g) does by classifying rejection as breach is establish that in bankruptcy, as outside of it, the other party’s rights remain in place. After rejecting a contract, a debtor is not subject to an order of specific performance. See NLRB v. Bildisco & Bildisco, 465 U.S. 513, 531 (1984); Midway Motor Lodge of Elk Grove v. Innkeepers’ Telemanagement & Equipment Corp., 54 F.3d 406, 407 (7th Cir. 1995). The debtor’s unfulfilled obligations are converted to damages; when a debtor does not assume the contract before rejecting it, these damages are treated as a pre-petition obligation, which may be written down in common with other debts of the same class. But nothing about this process implies that any rights of the other contracting party have been vaporized. Consider how rejection works for leases. A lessee that enters bankruptcy may reject the lease and pay damages for abandoning the premises, but rejection does not abrogate the lease (which would absolve the debtor of the need to pay damages). Similarly a lessor that enters bankruptcy could not, by rejecting the lease, end the tenant’s right to possession and thus re-acquire premises that might be rented out for a higher price. The bankrupt lessor might substitute damages for an obligation to make repairs, but not rescind the lease altogether.

The Court then distinguished rejection from avoidance powers, which might lead to rescission or termination of an agreement, observing that "rejection is not ‘the functional equivalent of a rescission, rendering void the contract and requiring that the parties be put back in the positions they occupied before the contract was formed.” Thompkins v. Lil’ Joe Records, Inc., 476 F.3d 1294, 1306 (11th Cir. 2007). It ‘merely frees the estate from the obligation to perform’ and ‘has absolutely no effect upon the contract’s continued existence’. Ibid. (internal citations omitted)." Follow the link for more background on the Thompkins decision.

The Seventh Circuit referenced scholarly criticism of the Lubrizol decision before turning back to the Fourth Circuit’s opinion: 

Lubrizol itself devoted scant attention to the question whether rejection cancels a contract, worrying instead about the right way to identify executory contracts to which the rejection power applies.

Lubrizol does not persuade us. This opinion, which creates a conflict among the circuits, was circulated to all active judges under Circuit Rule 40(e). No judge favored a hearing en banc. Because the trustee’s rejection of Lakewood’s contract with CAM did not abrogate CAM’s contractual rights, this adversary proceeding properly ended with a judgment in CAM’s favor.

A Significant Decision. The Seventh Circuit’s opinion in the Sunbeam case not only creates a circuit split that could potentially lead the Supreme Court to address the issue, but more significantly represents the first court of appeals decision in 27 years to challenge Lubrizol’s view of how rejection impacts an intellectual property license. Although binding only in the Seventh Circuit (much like, in theory, Lubrizol was binding only in the Fourth Circuit), the Sunbeam decision has the potential to impact licensee rights in cases across the country. Licensees, and especially trademark licensees, will be arguing that rejection does not terminate their license rights. Debtors and purchasers of trademarks may well argue otherwise. If followed by other courts, the Sunbeam decision and its potential interplay with Section 365(n) raises a number of questions, including:

  • Aside from the right to use the licensed trademarks, does the licensee keep other rights under its agreement, such as exclusivity if applicable?
  • How long does the right to the trademarks continue, the full term of the license agreement plus any extensions, or some shorter period?
  • If royalties are required under a trademark license, must the trademark licensee continue to pay them post-rejection to use the licensed trademarks, as an IP licensee covered by Section 365(n) is required to do, or can the trademark licensee argue that rejection is a material breach excusing that performance?
  • Since under Sunbeam rejection does not terminate trademark license rights, does the same analysis apply to intellectual property other than trademarks, including those covered by Section 365(n)?
  • Are licensees of patents, copyrights, or trade secrets, otherwise protected by Section 365(n), required to follow Section 365(n)’s statutory scheme to retain their rights, or can they rely on the Sunbeam decision’s analysis of the effect of rejection as an alternative approach? 
  • How will purchasers of trademarks and other assets react to the potential continued use of the marks by licensees under rejected trademark licenses?

Conclusion. As these questions suggest, the full impact of the Seventh Circuit’s Sunbeam decision is yet to be determined. It remains to be seen how other circuits — and bankruptcy courts in important venues such as Delaware and the Southern District of New York — will react. Given the circuit split now created, it’s possible the Supreme Court could address the issue, either in Sunbeam or a later case. In the meantime, however, a long-standing and often accepted view of the impact of rejection on intellectual property licenses, and especially on trademark licenses, has been upended. It will likely take courts, licensors, and licensees some time to sort through how the new, post-Sunbeam state of the law will play out. This could get interesting — stay tuned.