Intellectual Property Licenses in Bankruptcy

The Bankruptcy Code protects licensees, to an extent, when the licensor files for bankruptcy.  As a debtor, the licensor may reject, or assume and assign, executory contracts, which are contracts on which performance remains due to some extent on both sides.  This would include contracts under which the debtor is a licensor of a right to intellectual property. 

If the debtor/licensor were to assume the intellectual property license, the licensee would be required to continue to perform and pay royalties pursuant to the terms of the license agreement.  If the licensee fails to perform its obligations under the agreement, the licensee would be in breach and risk having the license terminated by the licensor.

If the debtor/licensor were to reject the intellectual property license, the licensee could either agree to treat such license as terminated and file a claim for damages, or refuse to agree and retain its rights during the duration of the license agreement (including a right to enforce any exclusivity provision of such agreement, but excluding any other right under applicable nonbankruptcy law to specific performance of such contract), as such rights existed immediately before the bankruptcy case was filed.  If the licensee elects to retain its rights, the licensee would have to make all royalty payments and waive any right to setoff or to an administrative expense claim arising from the performance of the agreement.  It is important to note that this election pertains only to the rights the licensee had when the debtor/licensor filed for bankruptcy relief.  It does not pertain to any future rights the license agreement may provide.

The above discussion is limited to licenses of “intellectual property,” which is defined by the Bankruptcy Code as trade secret, invention protected under Title 35, patent application, plant variety, work of authorship protected under Title 17 and mask work protected under Chapter 9 of Title 17.  Trademark licenses do not have these protections and are treated like any other executory contract.  This means that if a licensor/debtor rejects a trademark license, and such rejection is approved by the bankruptcy court, the licensee may not elect to retain its rights under the trademark license agreement, and would only be entitled to a damages claim against the debtor’s estate.