IP Issues in Bankruptcy
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The document discusses intellectual property (IP) issues in bankruptcy, outlining definitions, applicable bankruptcy codes, and the treatment of IP during bankruptcy proceedings. It highlights the distinction between bankruptcy-eligible IP and excluded rights such as trademarks and domain names, as well as the statutory mechanisms for selling IP assets and the implications of executory contracts. Key takeaways include the importance of understanding valuation, the role of license agreements, and the impact of venue choice on managing IP during bankruptcy.
IP Issues in Bankruptcy
- 1. IP ISSUES IN BANKRUPTCY ABI ASM 2014
- 2. Panelists Steve Darr Senior Managing Director, Mesirow Financial Jil Mazer-Marino Partner, Meyer Suozzi English & Klein, P.C. Jay Silverberg Partner, Sills Cummis & Gross P.C. Gabe Fried CEO, Hilco Streambank
- 3. Definitions: IP – What is it? • GAAP & the Balance Sheet • Internally generated intangibles are expensed • Acquired intangibles are valued at cost • Categories of IP • patents • trademarks • copyrights • IP addresses/spectrum • Foreign vs. Domestic • License Agreements • Bankruptcy definition of intellectual property
- 4. Definitions: What IS Bankruptcy IP? • Defined in Bankruptcy Code Section 101(35A) • Trade Secret • Invention, process, design, or plant protected under title 35 (patent) • Patent application • Plant variety • Work of authorship protected under title 17 (copyright) • Mask work protected under chapter 9 of title 17
- 5. Definitions: What is NOT Bankruptcy IP • Bankruptcy Code Section 101(35A) Excludes • Trademarks • Trade dress • Domain names • Overseas intellectual property not covered by treaty • Why are trademarks excluded?
- 6. Bankruptcy Tools To Realize Value • Section 363 – Use, Sale or Lease of Property • Section 364 – Financing • Section 365 – Executory Contracts and Unexpired Leases
- 7. Bankruptcy Code Section 363 - Sales • Section 363 is used to sell assets in which debtor has property interest as opposed to contract right • Section 363(f) is mechanism for selling assets free and clear of liens, claims, encumbrances and interests • Question of fact whether exclusive, perpetual license is property right that is sold under Section 363 or executory contract that is assumed and assigned. • Potentially Section 363(f) can be used to sell IP free and clear of burdensome license agreements.
- 8. Maximize Value of Sale • Understanding the strategic value • Protect your IP through the Sale Process • Monitor deadlines for PTO filings • Monitor filings of PTO for trolls • Prosecute infringers • Preventing collusion in sale • When the sum of parts > whole • Mimicking a going concern sale
- 9. Section 364 – DIP/Lending Issues • Secured lending in non-bankruptcy context • Perfection of Liens Against IP • IP Issues in Loan Documentation and Origination • Enforcement Issues • DIP Financing
- 10. Valuation Issues Intellectual property value arises from (a) monopoly rights (right to exclude others) or (b) signal of quality for consumers • How bankruptcy impacts IP values • (OLV, FLV vs FMV) • Comparable Value Problem • Infrequent, Out of Context, Unique Assets • As much art as science • Where valuation matters • Financing/Adequate Protection • Plan confirmation • Fraudulent Conveyance • Drawbacks of traditional methods of valuation
- 11. Section 365 – Executory Contracts Generally • What is an executory contract • Not defined in bankruptcy code • Countryman definition • Functional definition • Underlying purpose of Section 365 is to maximize value of contracts and permit estate to shed burdensome obligations
- 12. Section 365 - Tools and Options • Assumption: Permits debtor to benefit from favorable contract. Debtor agrees to be bound by executory contract • Assumption and Assignment: Debtor assumes executory contract and sells contract to third party • Rejection: Frees debtor from burdensome contracts. Contract is treated as material breach by debtor that occurred the day before the date of the filing of the bankruptcy petition
- 13. Section 365 - Intersection of IP and Executory Contracts • Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers, Inc.), 756 F.2d 1043 (4th Cir. 1985) • Leads to the enactment of 365(n), which protects licensees of bankruptcy IP from harsh consequences of contract rejection
- 14. Section 365(n) Rejection of Bankruptcy IP License • Upon rejection, election by licensee: • to treat license as terminated, or • retain its rights (including a right to enforce any exclusivity provision) under the license for duration of contract and any extension period
- 15. Section 365 - Licensee Elects to Retain Rights • Obligations of Licensor • allow licensee to exercise rights under license • provide any intellectual property (including such embodiment) held by licensor • not interfere with rights of licensee • Obligation of Licensee • make all royalty payments • waive setoff rights • waive administrative expense claim arising from licensee’s performance
- 16. Section 365 - Rejection of Non- Bankruptcy IP Licenses (i.e., Trademark Licenses) • No 363(n) election • Split of authority regarding whether licensee may continue to use trademark notwithstanding rejection of trademark license
- 17. Section 365 - Assumption of Licenses • No distinction between bankruptcy IP and trademark • Assumption by licensor is treated like any other executory contract: must cure defaults and provide adequate assurance of future performance. • Assumption by licensee may be prohibited by Section 363(c)(1) depending on venue of case
- 18. Language of 365(c) (1) (c) The trustee may not assume or assign any executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties, if-- (1)(A) applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties; and (1)(B) such party does not consent to such assumption or assignment;
- 19. Section 365 - What does “assume or assign” mean • Section 365(f) (2) requires a debtor to assume a contract before assigning a contract • Does “assume or assign” in 365(c) mean • “assume and assign” (i.e., 365(c) only applies if the contract is ultimately being assigned), or • “assume or assume and assign” (i.e., it applies whether the debtor intends to assume the contract and exploit the IP itself or ultimately assign to a third party ).
- 20. Interpretations of 363(c) • Majority View. Hypothetical Test: If, hypothetically speaking, the debtor could assign a license to a third party, then, the debtor cannot assume the contract. This is true regardless of whether or not the debtor or trustee intends to assign the contract. • Minority View. Actual Test: Is the non-debtor party actually being forced to accept performance from someone other than the party with which it actually contracted? That is, is the debtor intending to assume and assign the contract as opposed to assuming the contract for the debtor’s continued use. The court should not presume that the trustee is a legal entity materially distinct” from the prepetition debtor. Instead, the court’s inquiry should be whether in assuming the contract, the trustee is able to provide its non-debtor contracting counterpart with “the full benefit of its bargain. • S.D.N.Y. View. “Footstar Test”: The prohibition in § 365(c)(1) operates to restrict a chapter 7 or chapter 11 trustee from assuming a contract but does not restrict the assumption of a contract by a debtor in possession.
- 21. QUESTIONS?
- 22. The Takeaway • Prepetition contract and financing issues can impact value in bankruptcy. • Bankruptcy rules can be helpful in re-organizing unprofitable IP contracts and licenses but venue choice is important until there is uniform law • Because IP is generally considered a strategic asset, value may be difficult to ascertain immediately and sale process is exceptionally important.