Bankruptcies involving intellectual property can impact entire industries. Decisions regarding IP assets in a bankruptcy proceeding often affect businesses that own IP and use it as collateral to secure debt, own IP and license its use (licensors), or license the use of IP from the owner (licensees). Because IP assets are regularly sold and transferred through bankruptcy and other liquidation processes, any party with an IP interest must pay close attention when a licensor or licensee begins a liquidation process.
Because we are a country of knowledge workers, IP is an undeniably important asset in most restructurings. Many companies’ most valuable assets include their patents, trademarks, copyrights and trade secrets. This bundle of IP rights often determines whether a company will dominate an industry or struggle for market share. When these rights are embroiled in bankruptcy or other liquidation processes, IP users (both licensors and licensees) must be vigilant. As with any material asset, the potential change of IP ownership can have serious ramifications for licensed and unlicensed IP users. But as IP assets are transferred through the restructuring process, opportunities may arise for strategic acquisition.
Sale of IP assets in bankruptcy
IP assets are often disposed of in a bankruptcy proceeding. Section 363 of the Bankruptcy Code gives a debtor broad powers to sell its assets. The bankruptcy court must, however, approve the sale after notice and a hearing. Because the process is public, interested parties may participate. Whether a bankruptcy court approves a 363 sale is based on whether the debtor, in its business judgment, has proper economic
justification for the sale.
When a debtor chooses to sell its IP assets, this decision can greatly impact other market participants. If the debtor sells its IP rights to a competitor, this sale could alter the dynamics of the entire industry. If the debtor chooses to sell its IP rights to a firm in a different industry, this sale could change both industries in ways no party could have predicted. In either case, when IP assets are disposed of in a 363 sale, the savvy market participant has much to gain – or much to lose. For this reason, more and more IP owners and users are monitoring bankruptcy cases to determine a debtor’s intentions regarding its IP assets and to participate in the 363 process.
The Nortel Network’s bankruptcy matter demonstrates the importance of IP in bankruptcy proceedings. In June 2009, Nortel announced that it was attempting to sell its LTE and CDMA divisions. This proposed 363 sale included the sale of critical IP assets. Multiple firms expressed interest in the sale, including previous competitors of Nortel and competitors in different markets with similar technologies. All of these firms, however, recognized how much the acquisition of Nortel’s IP assets could alter their position in their own markets. Ultimately, LM Ericsson outbid Research in Motion with an offer of $1.13 billion. Those participating as potential bidders (and those simply monitoring the process) recognized that Nortel’s disposition of these IP assets was a market-changing event.
IP contracts: Rejection vs . assumption and assignment
License rights can also be impacted by a bankruptcy filing. Section 365 of the Bankruptcy Code addresses whether a debtor can either reject or assume and assign an executory contract.1 Scholars and courts have hotly debated the term “executory.” Although views vary, the bankruptcy community generally agrees that a contract is executory if both parties have major obligations remaining. In general, debtors want to assume and assign good executory contracts and reject bad ones. The rules regarding when a debtor can reject an executory contract and when it can assume and assign an executory contract vary – certain contracts receive special treatment.
IP licenses (e.g., patent or copyright licenses) are not treated the same as other executory contracts. Exclusive IP licenses are not even considered executory. Rather, they are considered non-executory and not subject to the “rejection vs. assumption and assignment” debate. When in bankruptcy, parties to exclusive IP licenses must take great care to protect and preserve their IP licenses. These exclusive IP rights are usually critical to ongoing business operations and contribute significantly to the value of the bankruptcy estate.
For non-exclusive IP licenses, the debtor can either reject or assume and assign based, at least partially, on whether the debtor is the licensor or the licensee of the IP at issue. When the bankruptcy debtor is the IP owner, it can freely decide to assume and assign the license. If the owner does so, the licensee must uphold its obligations under the license. However, if the IP owner rejects the license, the licensee may retain its rights if the licensee makes all required payments.
When the debtor is the IP licensee, however, the outcome may differ. A debtor that is an IP licensee, unlike a debtor that is an IP owner, may freely reject a license in its reasonable business judgment. A debtor/licensee may find trouble, though, if it wishes to assume and assign a license that requires an IP owner’s consent. In many of these cases, bankruptcy courts have found that the terms of the license severely restrict a licensee’s ability to assume and assign the license.
Become familiar with your IP assets and your need for the IP. How would a change in licensor impact your business? What if a competitor purchases nonexclusive IP rights from a bankruptcy debtor?
If you are a lender secured by IP, what steps have you taken to confirm perfection of your security interest? How are you monitoring the debtor to ensure that IP asset value (the collateral securing your loan) is preserved and protected?
Stay current on potential distress and bankruptcy filings for those in your industry. IP assets may be put up for sale, impacting you in a variety of ways.
Contact attorneys familiar with the bankruptcy process to monitor bankruptcy proceedings and to determine if, or when, important IP assets are being sold in 363 sales.
Review trade publications and monitor current industry news to understand whether your competitors are interested in IP assets. Bankruptcy lawyers may also have information regarding potential bidders through bankruptcy publications and case monitoring.
Engage lawyers familiar with the bankruptcy process to review IP bidding and sale procedures. Participating in the bidding process may allow access to due diligence information that could be valuable even if you decide not to bid or purchase the IP.
When strategically appropriate, enter into a dialogue with debtor’s counsel regarding IP assets.
1. The Bankruptcy Code does not allow for the rejection of non-executory contracts.