Intellectual Property Licenses in Bankruptcy

            When a bankruptcy case is filed, an automatic stay prevents most creditors, including intellectual property licensors, such as licensors of trade names and trademarks, from collecting against the debtor.  Courts generally consider intellectual property licenses as executory contracts, which the debtor may assume or reject.   Generally, if a debtor rejects an executory contract, the debtor will no longer be bound by the contract and the other party is left with a prepetition claim for damages.  If a debtor wants to assume an executory contract, it must first cure all defaults or provide adequate assurances that it will do so.  Once the debtor has properly assumed the contract, it may then assign it to a third party.

            This, however, does not mean that a debtor may automatically assign an intellectual property license once it has cured all defaults.  Under the Bankruptcy Code, a debtor is not allowed to assume or assign an executory contract if applicable nonbankruptcy law excuses the other party from accepting performance from, or rendering performance to, an entity other than the debtor, where the other party does not consent.  Most courts compare intellectual licenses to personal services agreements, and disallow assignment of the contract rights without all parties’ consent.  Moreover, federal law generally restricts a licensee’s right and ability to assign an intellectual property license without the consent of the licensor.  Accordingly, an intellectual property licenses cannot be assigned absent the licensor’s consent. 

            It is not as clear whether a debtor can assume an intellectual property license without assigning it to a third party.  The Eleventh Circuit, however, appears to hold that if a debtor cannot assign the license, then it cannot assume it either – even if it has no intention of assigning it.  Accordingly, an intellectual property licensee debtor may not assume and assign, or assume and keep, the intellectual property license without the licensor’s consent - at least not in the 11th Court.

For more information regarding intellectual property in bankruptcies, contact Eugenia Chu, Attorney, at 305-379-9000 or email her at echu@kpkb.com.