Intellectual Property during a Chapter 11 Bankruptcy

Many of you would recognize the name CBGB from t-shirts and slogans, all without knowing that the name originated from a legendary music venue in Manhattan. Even more interesting, the club has been closed since 2006. Yet, the investors who purchased it bought it for the naming rights, not the club. These rights, called intellectual property rights, are now in the midst of a Chapter 11 Bankruptcy filed on behalf of the investors. So the question is, what happens to those intellectual property rights during a Chapter 11 Bankruptcy?

In a typical Chapter 11 Bankruptcy, the case is administered in the following way: 1) rejection or assumption of executory contracts; (2) sale of assets; (3) claims adjudication; (4) litigation. For this article, we are only concerned with the first issue, the executory contract. A contract is considered to be executory if there is still an outstanding obligation by one or both parties to the contract, of which the terms were the consideration for entering into the contract. Bankruptcy Courts have found that non-exclusive licenses of intellectual property can not be assumed and assigned unless there is consent. Everett Systems, Inc. v. Cadtrack Corp, 89 F.3d (9th Cir. 1996).

Stepping back for a moment, let’s put ourselves in the shoes of the person who has licensed intellectual property from a licensor who subsequently becomes bankrupt. In this scenario, when the license is an exclusive one, then it is treated as an executory contract. The licensor cannot sell those rights to anyone else, no more than the licensee can stop paying royalties. See Encino Bus. Management, Inc. v. Prize Frize, Inc. In those cases where the license is non-exclusive, Section 365(n) of the Chapter 11 Bankruptcy Code states that if the trustee or the Chapter 11 Debtor rejects “an executory contract under which the debtor is a licensor of a right to intellectual property”, the licensee under the contract may:

1) treat the license as terminated and assert a claim for breach of contract; or

2) elect to retain its rights to the use of the intellectual property as such rights existed immediately before the commencement of the bankruptcy case, or the duration of the contract. 11 U.S.C. 365(n)(1)(B)

Thus, no matter what they choose the the licensee must be allowed to exercise either of its rights, and it must continue to make payments for the rights it is licensing for the duration of the contract.

It is important to note though that Section 365(n) does not apply to ALL contracts which contemplate or involve intellectual property. Rather, the contract must be one which the debtor is a “licensor of a right to intellectual property”.

By: Aaron Kellly

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Intellectual property (IP) is anything which has been created in the mind of an individual that is protected under IP law. Included in the list of what is protected are songs, written works, designs, inventions and symbols. The means by which people can protect themselves against others copying their intellectual creations come in a number of forms. The most common types are copyright, design rights, trademarks and patents.

IP is one aspect of commercial law that has a large relevance to a lot of companies. Without realising it many companies deal with intellectual property rights on a daily basis. In some cases the ignorance of the rights that others have over a particular design, piece of text or even symbol can cause very complicated and stressful legal issues.

IP law is a very complicate area of commercial law. The lines between copyright or design right infringement and the simple evolution of a design are very ill defined. In order to decide whether copyright has been infringed there often have to be a set number of differences in the design. The number and definition of these differences is something which very much depends on each individual case.

Disputes over whether copyright or a patent has been infringed can have huge implications for the companies involved. If a company is found guilty of infringement then the damages that are incurred can be very substantial. If you are having issues with IP law then by far the best way to address them is to find good intellectual property solicitors to offer advice and representation. Due to the distinctions between intellectual property right infringements being so ill defined, experience counts for everything. Often the only way to get any bearing on whether IP has been abused is to use cases that have gone before as a guide.

In situations like this the experience of specialist intellectual property solicitors will shine through. Using a non specialist solicitor, even if they have extensive experience in commercial or corporate law, will leave you at a distinct disadvantage, both in the lead up, and in the courtroom itself. Another reason to use specialist intellectual property solicitors is the level of service they will provide. Their particular understanding of IP law will mean that they are far better qualified to explain the situation to you. With this greater understanding of your situation you will be able to make better informed decisions, as well as feeling much more relaxed about the legal situation you are in. When the stakes are so high, using the most experienced and knowledgeable intellectual property solicitors possible will make the whole process far less stressful for you.

By: Tom Pearson

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