In these troubling economic times, situations involving a licensing counterparty filing for bankruptcy are becoming more common, so it is vital for practitioners to address bankruptcy issues upfront during the negotiation of the licensing agreement. This is especially true for licensees who often rely heavily, if not exclusively, on a licensor for significant aspects of their business.
This article first will review the general legal principals surrounding the treatment of intellectual property licenses in bankruptcy and will then provide several negotiation and drafting pointers that practitioners can utilize to help protect their licensee clients in the event of a bankruptcy filing under chapter 11, of Title 11, of the United States Code (the “Bankruptcy Code”) by the licensor counterparty.
Bankruptcy Law Framework
Section 365
Section 365 of the Bankruptcy Code gives the debtor and debtor in possession (the “Debtor”) the option to (1) assume, (2) assume and assign or (3) reject its unexpired leases and executory contracts in order to maximize the value of its estate. For the purposes of bankruptcy law, intellectual property licenses are generally considered to be executory contracts.
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Section 365(n)
In 1988, Congress enacted section 365(n) of the Bankruptcy Code to provide protections to licensees whose licenses have been rejected by Debtor-licensors. Section 365(n) gives a non-Debtor licensee of “intellectual property” faced with rejection the power to either treat the license as terminated or retain its rights under the license.
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Practice Tips: Licensee Negotiation And Drafting Tips
Keeping the legal framework in mind, it may be helpful to consider the following tips when negotiating a licensing agreement on behalf of a licensee.
- Specify that all intellectual property covered by the agreement is intended to be “intellectual property” within the meaning of the Bankruptcy Code. [Read more]
- Specify that § 365 applies and refer specifically to § 365(n). [Read more]
- Negotiate narrowly defined royalty payments and clearly differentiate royalty fees from fees for ongoing licensor affirmative obligations such as maintenance, service and upgrades. [Read more]
- Negotiate for a separate “supplemental” escrow agreement for source code or other embodiments of the intellectual property (e.g., designs and drawings) accompanied by a license to use such materials.
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- Take a security interest in the licensed intellectual property. [Read more]
- Negotiate separate agreements for the license, research, development, manufacturing, distribution and any other functions. [Read more]
For More Information:
If you have questions or would like more information on this topic, please contact the authors:
or one of our Bankruptcy & Financial Restructuring attorneys. |
