A YEAR OR two ago, you helped your client, the high-tech one, license a piece of intellectual property upon which the client was going to base its whole business. Now the bubble has burst. Your client has just called to say that the licensor of this intellectual property filed bankruptcy yesterday and asks if that is "a problem."

Remembering your law school bankruptcy classes - at least the ones during which you stayed awake - you respond that a license is an executory contract that, as such, can be rejected by a debtor in bankruptcy. Your client is now panic-stricken. Fortunately, with your memory now jogged, you remember that intellectual property licenses are treated differently than other executory contracts.

The key statutory provision is Section 365(n) of the United States Bankruptcy Code, 11 U.S.C. Sections 101 - 1330. The legislative history of Section 365(n) "corrects the perception of some courts that Section 365 was ever intended to be a mechanism for stripping innocent licensee(s) of rights central to the operation of their ongoing business . . ."

Section 365(n) provides that, subject to certain conditions, a licensee of intellectual property, from a licensor in bankruptcy, can retain certain rights under the license agreement. These rights can be retained despite the debtor or bankruptcy trustee's rejection of the contract. In addition, Section 365(n) protects a licensee by empowering it to require a debtor or bankruptcy trustee to turn over source code placed in escrow, a common practice in software licensing transactions.

Thus, immediately upon receiving notice of a licensor's bankruptcy, a licensee of intellectual property should send a written request to the bankruptcy trustee or debtor in possession for (1) performance of the license agreement or delivery of the intellectual property licensed and (2) delivery of any related escrowed property. If the licensee nevertheless receives notice of the licensor's/debtor's motion to reject the license agreement, the licensee should again send a written request to the bankruptcy trustee or debtor in possession for (1) performance of the license agreement and (2) delivery of the intellectual property licensed and any related escrowed property.

Notwithstanding the foregoing, the protections of Section 365(n) do have limitations for licensees. The most significant shortcoming is that trademark (including service mark) and tradename licensing agreements are not protected by Section 365(n). In addition, if the licensor/debtor does reject the intellectual property license, the licensee can retain only those rights in the licensed property that existed on the bankruptcy petition date. Thus, any advanced versions of the intellectual property developed by the licensor while in bankruptcy may not be available to the licensee. Finally, a licensee using Section 365(n) to retain rights in an intellectual property license waives any right it may have to any set off under the license.

In summary, there are significant protections for a licensee of intellectual property when the licensor files bankruptcy. Do not rely on your foggy memory of the Bankruptcy Code, but turn immediately to Section 365(n).

Home | About the Bar | For Members | For the Public | Legal Links | Publications | Online Store
Lawyer Referral Service | Law-Related Education | NHBA•CLE | NHBA Insurance Agency | NHMCLE
Search | Calendar

New Hampshire Bar Association
2 Pillsbury Street, Suite 300, Concord NH 03301
phone: (603) 224-6942 fax: (603) 224-2910
email: NHBAinfo@nhbar.org
© NH Bar Association Disclaimer