1	"Gerry J" Gerry J. Elman Elman Technology Law, P.C. Swarthmore, Pennsylvania Second Annual Philadelphia Conference on Mastering Complex Intellectual Property Licensing May 23, 2006
2	What happens when … the bubble bursts?
3	Who’s left … holding an empty bag?
4	This talk will be about … How to prevent … Or at least minimize … That eventuality.
5	What can you do … To keep your licensed Intellectual Property safe? Even when your licensor or licensee goes bust.
6	Outline Overview of U.S. Bankruptcy Code as it affects IP licenses The Intellectual Property Bankruptcy Protection Act of 1988 How to avoid potential problems with insolvency when negotiating & drafting licensing agreements
7	Underlying policy of Bankruptcy Code To maximize payments to creditors To provide the trustee or debtor-in-possession broad powers for reorganization or liquidation Bankruptcy creates problems for unsecured non-debtor parties to a license agreement
8	Bankruptcy Jargon Debtor The party that winds up in bankruptcy Executory contract A contract wherein each party has an obligatation yet to be fulfilled Assumption of a contract Formally accepting continuation of the contract Rejection of a contract Tearing it up as part of the bankruptcy
9	The infamous Lubrizol case In Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985): RMF granted Lubrizol a nonexclusive license to utilize a metal coating process technology. RMF filed for bankruptcy under Chapter 11 and rejected the license because the agreement was executory and as the debtor licensor, RMF had the right to reject Licensee Lubrizol was left with the right to seek monetary damages (from the bankrupt estate) for the breach, but no specific performance
10	"If the licensee’s business is..." If the licensee’s business is dependent upon licensed technology, rejection could shut down operations Debtor can use threat of “rejection” to renegotiate the license Licensee is in limbo until the licensor decides to either assume or reject the contract Seeking a license elsewhere may constitute a breach
11	If the law supposes that … The law is a ass.
12	Intellectual Property Bankruptcy Protection Act of 1988, 11 U.S.C. 365(n) Amendment to US Bankruptcy Code Congress’ response to Lubrizol Enterprises v. RMF Intended to protect interests of a patent or copyright licensee when licensor goes into bankruptcy
13	Response to the Lubrizol decision Congress added a definition for “intellectual property” Applies to trade secrets, patent applications, patents, copyrights and mask works But does not include trademarks or trade names Added §365 (n) – defining rights and obligations of non-debtor/licensee and debtor/licensor if licensor rejects executory license agreement
14	Selected provisions of the U.S. Bankruptcy Code Determination of whether a license is executory: Made at the time of filing for bankruptcy. Contract is considered in its entirety Fact-specific and depends on the particular terms of the agreement. If both parties have virtually any ongoing obligations, a license agreement is considered an executory contract
15	Selected provisions of the U.S. Bankruptcy Code Cure all defaults under the contract or provide adequate assurance that any defaults will be cured promptly AND Compensate or provide adequate assurance that it will promptly compensate any third party to the contract for any defaults AND Provide adequate assurance of future performance
16	Selected provisions of the U.S. Bankruptcy Code Deadline for debtor to assume the contract under §365(b) Chapter 7 –within 60 days of the bankruptcy petition (Court can extend deadline) Chapter 11 – can be assumed at any time prior to confirmation of a plan of reorganization, but any party may seek to have the Bankruptcy Court impose a deadline or compel the assumption or rejection of the contract.
17	Selected provisions of the U.S. Bankruptcy Code 11 U.S.C. §365(f) – A debtor may assign a contract to a third party if The contract is properly assumed under §365; and Adequate assurance of future performance by the assignee is provided. 11 U.S.C. §363 allows a debtor to sell the intellectual property upon notice and a hearing.
18	Selected provisions of the U.S. Bankruptcy Code 11 U.S.C. §365(c)- A debtor cannot assume or assign an executory contract if Applicable law excuses a party to the contract, other than the debtor, from either accepting performance from or rendering performance to an entity other than the debtor whether or not the contract specifically restricts such assignment of rights or delegation of duties AND That party does not consent to the assumption or assignment
19	Sequence of events under § 365(n)
20	Licensee’s choices under §365(n) Two options for licensee upon rejection: § 365(n)(1)(A) - Licensee treats license as terminated, seeks monetary damages for breach in a general unsecured claim against the bankruptcy estate OR ELSE § 365(n)(1)(B) - Licensee can retain rights under license (and any supplementary agreements) as they existed immediately prior to bankruptcy filing for the remaining life of the license plus any renewal or extension period
21	If the licensee retains its rights under the license agreement Licensee cannot enforce use of post-bankruptcy improvements or modifications (disadvantage for software licensee) Licensee must continue to pay royalties, §365(n)(2)(B) Licensee must waive right to set off claims that arise from licensor’s failure to perform, §365(n)(2)(B)-(C) Licensee may recoup loss in value of rights due to failure of the licensor to perform Debtor/Licensor is relieved of performing any ongoing or future affirmative obligations Debtor/Licensor is not relieved of passive obligations
22	"What are royalties" What are royalties? 9th Circuit broadly interpreted royalties to encompass all payments to use a license, In re Prize Frize, Inc., 32 F.3d 426, (9th Cir. 1994). Non-debtor/licensee may be forced to pay both royalties and license fees to continue using a rejected license
23	"Non-exclusive licensees may have no..." Non-exclusive licensees may have no protection from infringing competitors If a debtor/licensor rejects a license, it is relieved from any future affirmative obligations The licensor is therefore relieved of enforcing the patent by suing potential infringers A non-exclusive licensee has no standing to sue a potential infringer
24	Issues Arising from 1988 Intellectual Property B.P.A Debtor/licensee can continue to use license after bankruptcy filing without paying fees Non-debtor/licensor forced to file non-priority unsecured claims for post-petition payments
25	Issues Arising from 1988 Intellectual Property B.P.A Occurs when an entity buys intellectual property from a debtor/licensor, but does not assume any prior obligations or accept them by assignment If the licensee decides to retain its rights under §365(n), royalty payments will go to the debtor and not the new intellectual property owner
26	Issues Arising from 1988 Intellectual Property B.P.A Example: Licensee acquires a copyright and trademark license to produce and sell software If debtor/licensor files for bankruptcy and rejects, licensee can continue use of copyright under §365(n), but may lose right to use the trademark which is not protected under the code Disadvantage for debtor – the value of packaged license agreements are greater than its parts, but debtor will be unable to offer package exclusively to third parties during reorganization Disadvantage for non-debtor – inability to use trademark results in loss of goodwill associated with copyrighted product
27	Issues Arising from 1988 Intellectual Property B.P.A Circuit split on application of §365(c) “Hypothetical” test vs. “Actual” test
28	“Hypothetical” test
29	“Actual” test
30	Issues Arising from 1988 Intellectual Property B.P.A.
31	How to protect a licensee’s interest when the licensor is the debtor The following suggestions may help a licensee to a better position than otherwise, in the undesired circumstance that its licensor files for bankruptcy. Due to the nature of bankruptcy, particularly the ability of the trustee or debtor in possession to reject the provisions of a license agreement, these suggestions couldn’t guarantee a licensee as good a relationship as before bankruptcy. But they would provide an opportunity for additional protection via the limited remedies under Section 365(n).
32	How to protect a licensee’s interest
33	How to protect a licensee’s interest If license involves software, obtain a present right to Use and repair the intellectual property. Make derivative works as of the effective date of the license, even if the licensee is not in possession of the source code.
34	How to protect a licensee’s interest Include sufficient ongoing duties, so that the license will be deemed “executory” in the event of a bankruptcy filing. Duty to notify the licensee of patent infringement suits Duty to defend the licensee against infringement claims Indemnities and warranties for licensee Duty to account for and pay royalties to licensor Duty to maintain books and records for licensor Confidentiality agreements
35	How to protect a licensee’s interest
36	How to protect a licensee’s interest
37	How to protect a licensee’s interest
38	How to protect a licensee’s interest
39	How to protect a licensee’s interest
40	How to protect a licensor’s interest when the licensee is the debtor The following suggestions are meant to improve the position of the licensor if a licensee files for bankruptcy. Again, the bankruptcy code provides the trustee or debtor in possession great power to reject the provisions of a license agreement, but these suggestions may help a licensor to a better position than otherwise, via provisions of Section 365 or other law.
41	How to protect a licensor’s interest
42	How to protect a licensor’s interest
43	How to protect a licensor’s interest
44	How to protect a licensor’s interest
45	Additional suggestions for both parties A licensor should obtain a security interest in embodiments of the intellectual property A licensee should obtain a security interest in the intellectual property
46	Security Interests Article 9 of the U.C.C. was revised, as of July 1, 2001 “General intangible” may be recited in the description of property and includes IP, whether owned or obtained by license. “Location” of a corporate debtor is place of incorporation, not its headquarters. See Forms under Revised Article 9, ABA Uniform Commercial Code Committee (2002)(paperback book with forms on CD-ROM)
47	Where to File? Trademarks, unregistered copyrights, trade secrets, Internet domains – file a UCC1 in the debtor’s state Registered copyrights - file Security Agreement in the Copyright Office Patents - file both a UCC1 in the debtor’s state and a Security Agreement at the PTO
48	Additional suggestions for both parties
49	For Further Information ... Visit http://www.elman.com Call Gerry Elman at (610) 892-9942 Send email to gerry@elman.com Elman Technology Law, P.C. PO Box 209 Swarthmore, PA 19081