presents ip licenses in bankruptcy

presents

IP Licenses in BankruptcyStrategies for Licensees and Licensors to Protect

presents

Strategies for Licensees and Licensors to Protect IP Interests Under the Code

A Live 90-Minute Teleconference/Webinar with Interactive Q&A

Today's panel features:Jason B. Binford, Attorney, Haynes & Boone, Dallas

Evan M. Jones, Partner, O'Melveny & Myers, Los AngelesCh l H J f S i l C l C i t & B li N Y k

A Live 90-Minute Teleconference/Webinar with Interactive Q&A

Charles H. Jeanfreau, Special Counsel, Covington & Burling, New York

Tuesday, July 13, 2010

The conference begins at:The conference begins at:1 pm Eastern12 pm Central

11 am Mountain10 am Pacific10 am Pacific

You can access the audio portion of the conference on the telephone or by using your computer's speakers.Please refer to the dial in/ log in instructions emailed to registrations.

For CLE purposes, please let us know how many people are listening at your location by y

• closing the notification box • and typing in the chat box your• and typing in the chat box your

company name and the number of attendeesattendees.

• Then click the blue icon beside the box to sendto send.

• If the sound quality is not satisfactory• If the sound quality is not satisfactory and you are listening via your computer speakers please dial 1-866-871-8924speakers, please dial 1 866 871 8924 and enter your PIN when prompted. Otherwise, please send us a chat or e-, pmail [email protected] so we can address the problem.

• If you dialed in and have any difficulties during the call, press *0 for assistance.

Overview of Bankruptcy Code Sections Applicable to Intellectual PropertyApplicable to Intellectual Property

Presented by:Presented by:Jason B. Binford

Bankrupt Licensees and Licensors: St t i f IP Li E f tStrategies for IP License Enforcement

July 13, 2010

© 2009 Haynes and Boone, LLP©2008 Haynes and Boone, LLP

© 2010 Haynes and Boone, LLP

Common DefinitionCommon Definitionof “Intellectual Property”

• Copyrights– original works of authorship

• Patents– inventions

• Trade Secrets

• Trademarks– Any word, name, symbol or device used to identify the

source or origin of a product or service

© 2010 Haynes and Boone, LLP5

Bankr ptc Code DefinitionBankruptcy Code Definitionof “Intellectual Property”

• Copyrights

• Patents

Trade Secrets• Trade Secrets


Definition of Intellectual Property

(35A) The term “intellectual property” means –

(A) trade secret;(A) trade secret;

(B) invention, process, design or plant protected under title 35;

(C) patent application;

(D) plant variety;

(E) work of authorship protected under title 17; or

(F) mask work protected under chapter 9 of title 17;

to the extent protected by applicable nonbankruptcy law.


R j ti f T d k LiRejection of Trademark License Agreements

• Does Section 365(n) Apply to Trademarks?

• Legislative History of Section 365(n)• Legislative History of Section 365(n)– Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc., 756 F.2d

1043 (4th Cir. 1984)

– Exclusion of trademarks from Bankruptcy Code definition of “intellectual property” appears to have been deliberate

P li R f T ti T d k Diff tl• Policy Reasons for Treating Trademarks Differently– Unlike owners of copyrights and patents, trademark owners must

take affirmative acts to control use



• Does Section 365(n) Apply to Trademarks?

– Case law:

l 8 ( k S l 993)• In re Matusalem, 158 B.R. 514 (Bankr. S.D. Fla. 1993): Yes

• Most every other case: No• Most every other case: No



• In re Exide Technologies, 2010 WL 2163190 (3d Cir. June 1, 2010)– Judge Thomas L. Ambro Concurrence

– Courts can use equitable powers to determine the effect of a rejected trademark license agreement


A I t ll t l P t LiAre Intellectual Property Licenses Executory Contracts?

• Is the Debtor a Licensee or an Owner of the Trademark?– Look to the legal effect of the conveyance– Exclusive versus non-exclusive licenses

• Determining Whether Trademark Licenses are ExecutoryContractsContracts– Most courts have held that trademark licenses are executory

contracts– But see In re Exide Techs., 2010 WL 2163190 (3d Cir. June 1,

2010) – perpetual, exclusive, royalty-free license is not an executory contract


QuestionsQuestionsQuestionsQuestions

Jason B. BinfordAttorney

haynesboone

Attorney

Haynes and Boone LLPHaynes and Boone, LLP2323 Victory Avenue, Suite 700

Dallas, Texas 75219Ph 214 651 5626Phone: 214. 651.5626

Fax: [email protected]

Evan M. Jones(213) 430-6236

July 13, 2010

( )[email protected]

July 13, 2010

Section 365(n) of the Bankruptcy Code

Is the Contract Executory

• “Executory Contract” Not Defined in Bankruptcy CodeCode

• Courts Generally Use Countryman Definition “Executory Contract Is One Where Each Side Has Material Remaining Obligations Such that Default by Either Would Excuse Performance by Other”

See, e.g., Otto Griffel v. Murphy, (In re Wegner)See, e g , Otto G e u p y, ( e eg e )839 F.2d 533 (9th Cir. 1988)

• Courts Struggle with License – What Does Licensor Still Do?

BD1:11731616

In the Contract Executory (Con’t)• Recent and Better Case Law Says Licensor’s Negative

Covenant to Permit Quiet Enjoyment of Its Property Is Sufficient

S E S I C dt k C (I CFLCSee, e.g., Everex Sys., Inc. v. Cadtrak Corp. (In re CFLC, Inc.), 89 F.3d 673, 677 (9th Cir. 1996)

• A recent 3d. Circuit decision suggests that courts may test materiality of remaining obligations more stringently. Thus, a y g g g y ,fully paid license may not be executory.

In re Exide Technologies, 2010 W.L. 2163190 (3d. Cir. June 1, 2010)

Note: An Exclusive “License” Agreement That Exhausts the Economic Life of the Property May be a Disguised Installment Sale

See, e.g., Zenith Prods. Ltd. v. AEGSee, e.g., Zenith Prods. Ltd. v. AEG Acquisition Corp. (In re AEG Acquisition Corp.) 127 B.R. 34, 59-60 (Bankr. C.D. Cal. 1991)

BD1:11731617

Courts Struggle With Effect of Rejection

Hornbook Law: Rejection Relieves Debtor’s Estate of Future Obligations Does Notof Future Obligations – Does Not “Undo” Performance Already Rendered

How Does This Rule Apply to License Agreement?

In Lubrizol, 4th Circuit Holds Post-Rejection Licensee of Metal W ki P H N Ri ht t U PWorking Process Has No Right to Use Process

Lubrizol Enters. Inc. v. Richmond Metal Finishers (In re Lubrizol) 756 F.2d 1043 (4th Cir. 1985)

But see concurring opinion in Exide suggesting 365(n) result applies in all rejection situations.

BD1:11731618

Within Year Congress Responds With 365(n) –Addresses Only IP Licenses

Limbo Relief (365(n)(4))

Prior to Rejection Trustee MustPerform– Perform

– Provide Physical Embodiment ifContract ProvidesContract Provides

– Not Interfere with Right to ObtainEmbodiment from Third Party IfEmbodiment from Third Party If Contract Provides

BD1:11731619

365(n) (Con’t)

Post Rejection Relief

Rejected Licensee May ElectRejected Licensee May Elect– To Treat Contract as Terminated

oror– To Retain Rights Including

– exclusivityexclusivity– no other specific performance– for duration of contractfor duration of contract

and– any extension by right

BD1:11731620

365(n) (Con’t)

Post Rejection Relief (Con’t)

Licensee Who Elects to Retain Must– Licensee Who Elects to Retain Must Make All “Royalty” Payments Without Set Off

365(n)(2)(B)(c)(i)

BD1:11731621

Problems For Licensee– Is Contract Executory?– Can’t Force Further Performance– Is Subject “Intellectual Property” as Defined in Bankruptcy Code?

– TrademarksCompare In re HQ Global Holdings, Inc., 290 B.R. 507 (Bankr. D. Del. 2003) andIn re Matusalem, 158 B.R. 514 (Bankr. SD Fla. 1993)

– IP from foreign licensor. In re Quimonda, AG, 2009 WL 4060083 (Bankr. E.D.Va. 2009) holds that even in Chapter 15 US case ancillary to foreign insolvency proceeding, rights in US intellectual property under US governed contracts are determined by foreign insolvency law.contracts are determined by foreign insolvency law.

– Foreign IP – 365(n) may be limited to US IP even in IS case.– “As Such Rights Exist at Commencement of Case”

– Focus on State of IP– no new IP

See, e.g., Biosafe Int’l v. Controlled Shredders (In re Szombathy) 1996 Bankr. Lexis 888 (Bankr. N.D. Ill. 1996), aff’d in part rev’d in part 1997 U.S. Dist. Lexis 5168 (N.D. Ill. 1977).

BD1:11731622

– multi product deal

Problems For Licensee (Con’t)

– Focus on State of License– no “springing” licenseSee, e.g., In re Storm Technology, Inc., 260 B.R. 152 (Bankr. N.D. Cal. 2001)

– Recoupment of Advance– no set-off– set-off v. recoupmentset off v. recoupment

– Is a Distribution Agreement a “license”?

BD1:11731623

Section 365(n) of the United States BankruptcyCode 11 U.S.C. §365(n)

(n)(1) If the trustee rejects an executory contract under which the debtor is a licensor of a right to intellectual property, the licensee under such contract may electsuch contract may elect –

(A) to treat such contract as terminated by such rejection if such rejection by the trustee amounts to such a breach as would entitle the licensee to treat such contract as terminated by virtue of its own terms, applicable nonbankruptcy law, or an agreement made by the licensee with another entity; or

(B) to retain its rights (including a right to enforce any exclusivity i i f h t t b t l di th i ht dprovision of such contract, but excluding any other right under

applicable nonbankruptcy law to specific performance of such contract) under such contract and under any agreement supplementary to such contract, to such intellectual property (including any embodiment of

h i t ll t l t t th t t t t d b li blsuch intellectual property to the extent protected by applicable nonbankruptcy law), as such rights existed immediately before the case commenced, for –

(i) the duration of such contract; and

BD1:11731624

Section 365(n) of the United States BankruptcyCode 11 U.S.C. §365(n) (Con’t)

(ii) any period for which such contract may be extended by the licensee as of right under applicable nonbankruptcy law.

(2) If the licensee elects to retain its rights, as described in paragraph (1)(B) of this subsection, under such contract –

(A) the trustee shall allow the licensee to exercise such rights;

(B) the licensee shall make all royalty payments due under such contract for the duration of such contract and for any period described in paragraph (1)(B) of this subsection for which the licensee extends such contract; andcontract; and

(C) the licensee shall be deemed to waive –

(i) any right of setoff it may have with respect to such contract under this title or applicable nonbankruptcy law; and

(ii) any claim allowable under section 503(b) of this title arising from the performance of such contract.

BD1:11731625


(3) If the licensee elects to retain its rights, as described in paragraph (1)(B) of this subsection, then on the written request of the licensee the trustee shall –trustee shall

(A) to the extent provided in such contract, or any agreement supplementary to such contract, provide to the licensee any intellectual property (including such embodiment) held by the trustee; and

(B) not interfere with the rights of the licensee as provided in such contract, or any agreement supplementary to such contract, to such intellectual property (including such embodiment) including any right to obtain such intellectual property (or such embodiment) from another entityobtain such intellectual property (or such embodiment) from another entity.

BD1:11731626


(4) Unless and until the trustee rejects such contract, on the written request of the licensee the trustee shall –

(A) to the extent provided in such contract or any agreement(A) to the extent provided in such contract or any agreement supplementary to such contract –

(i) perform such contract; or

(ii) provide to the licensee such intellectual property(ii) provide to the licensee such intellectual property (including any embodiment of such intellectual property to the extent protected by applicable nonbankruptcy law) held by the trustee; and

(B) not interfere with the rights of the licensee as provided in(B) not interfere with the rights of the licensee as provided in such contract, or any agreement supplementary to such contract, to such intellectual property (including such embodiment), including any right to obtain such intellectual property (or such embodiment) from another entity.

BD1:11731627

Section 101(35A) of the United States Bankruptcy Code 11 U.S.C. §101(35A)

(35A) The term “intellectual property” means—(A) trade secret;(A) trade secret;(B) invention, process, design, or plant protected under

title 35;(C) patent application;(D) plant variety;(E) work of authorship protected under title 17; or(F) mask work protected under chapter 9 of title 17;t th t t t t d b li bl b k tto the extent protected by applicable nonbankruptcy

law;

BD1:11731628

Evan JonesEvan M. Jones is a partner in O'Melveny's Los Angeles office and a member of the Restructuring Practice. Major cases he has worked on include representing bank gcreditors in billion dollar coal, agribusiness and timber reorganization cases, debtors in possession in large retail chains and financial companies, creditors committees in high tech and financial companies, secured lenders to petroleum and home builder borrowers and parties on all

Los Angeles

400 South Hope Streetpetroleum and home builder borrowers, and parties on all sides of complex entertainment deals and restructurings.

Much of Evan's practice is transactional. He is often involved in structuring deals to avoid or minimize the risks

Los Angeles, CA 90071

Phone: +1-213-430-6236

Fax: +1-213-430-6407

ejones@omm comgof bankruptcy in close cooperation with our corporate, entertainment, and real estate attorneys. He has substantial experience in purchasing assets out of bankruptcy, including television stations, industrial companies, and entertainment and gaming assets and operations including

[email protected]

entertainment and gaming assets and operations, including major motion pictures.

BD1:11731629

DEBTOR AS LICENSEE OFDEBTOR AS LICENSEE OF INTELLECTUAL PROPERTY

Charles H. JeanfreauCovington & Burling LLP(212) [email protected]

SECTION 365(N) DOES NOT APPLY WHERE THESECTION 365(N) DOES NOT APPLY WHERE THE DEBTOR IS THE LICENSEE

• Section 365(n) by its terms applies only where the debtor is the licensor of intellectual property and has no applicability where the debtor is the licensee.– When a debtor licensee rejects an intellectual property license, the

licensor receives an unsecured claim for damages arising out of a deemed breach of the license as of the petition date.

– Non-debtor licensor entitled to an administrative expense claim for any use of the license prior to rejection.

– Non-debtor licensor may, if unduly burdened by the debtor’s failure to assume or reject the license move to compel the debtor either toto assume or reject the license, move to compel the debtor either to assume or reject the license.

• Such a motion will not likely succeed early on in the case, but may be successful at a later stage of the case.

31

Requirements for Assumption and AssignmentRequirements for Assumption and Assignment

• Assumption or rejection of an intellectual property license is possible only where the license is an executory contract.

• Debtor in possession (or trustee) must cure any existing defaults, other than defaults relating to the insolvency or financial condition of the g ydebtor, the commencement of a bankruptcy case, the appointment of a trustee, or the satisfaction of a penalty provision relating to non-monetary obligations. (Sec. 365(b)).

• Debtor in possession (or trustee) must also provide the non-debtor li ith d t th t it ( it i ) ill b bl tlicensor with adequate assurance that it (or its assignee) will be able to perform under the license.

– Adequate assurance doesn’t necessarily mean perfect assurance, but should indicate debtor or assignee’s ability to perform under the license and to cure any future defaultsto cure any future defaults.

32

Effect of Assumption, Assignment or Rejection

• If the license is assumed, the debtor retains its rights under the license, and assumes its obligations to the licensor.

– Following assumption, the debtor must comply with all ongoing obligations under the license. Subsequent breach of the license will give the licensor an administrative claim in the licensee’s bankruptcy case.

• If the license is assumed and assigned the debtor transfers all rights and obligations under• If the license is assumed and assigned, the debtor transfers all rights and obligations under the license to a third party.

– License agreements (and other executory contracts) must be assumed and assigned as a whole. Debtor may not assume, or assume and assign, beneficial portions of the license while rejecting burdensome portions.

– Where a license agreement is entered into at the same time as other, related contracts, the court may find that the license agreement along ith the related contracts form a single integrated contract Infind that the license agreement along with the related contracts form a single, integrated contract. In that case, all contracts integrated with the license agreement will must be assumed or rejected together. (See In re Exide Tech., 2010 WL 2163190 at *1 (3d Cir. 2010) (noting that four agreements, a Trademark and Trade Name License Agreement, an Asset Purchase Agreement, an Administrative Services Agreement and a letter agreement together formed a single integrated agreement).

33

Standards for Assumption or Assumption andStandards for Assumption or Assumption and Assignment

• In addition to the above requirements, debtors must show that the assumption, assumption and assignment, or rejection is in the best interests of the estate.

– In the case of rejection, the debtor need only show that rejection is in the best interests of the estate.– Effect of rejection on the counterparty generally not relevant (unless effect on counterparty is so

disporportionate to benefit to estate as to indicate that decision was manifestly unreasonable or made in bad faith)in bad faith).

• In evaluating the debtor’s decision in this respect, courts will generally defer to the debtor’s business judgment.

– Higher standards may apply in cases involving regulated industries or contracts.• Section 365(e) invalidates anti-assignment clauses in intellectual property licenses.

– This provision does not apply to contracts with respect to which “(i) applicable law excuses a party– This provision does not apply to contracts with respect to which (i) applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to the trustee or to an assignee of such contract or lease, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties; and (ii) such party does not consent to such assignment or assumption.”

34

Timing of Assumption or Rejection Decision

• Debtors generally may assume or reject intellectual property licenses at any time from the commencement of the case through the confirmation f th lof the plan. – Non-debtor licensors may attempt to compel the debtor to

assume or reject the license at an earlier time.Such requests are not often granted at an early stage in the– Such requests are not often granted at an early stage in the case. However, they may be renewed at a later time, and may be granted if the non-debtor counterparty can demonstrate a significant burden resulting from the failure to assume or reject the contractassume or reject the contract

35

Section 365(c) – Still Unsettled

• Section 365(c)(1) of the Bankruptcy Code provides that “the trustee may not assume or assign any executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts

i t f i ht d l ti f d ti if (1)(A) li bl lassignment of rights or delegation of duties, if - (1)(A) applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession, whether or not such p ,contract or lease prohibits or restricts assignment of rights or delegation of duties.”

– Intellectual property licenses are generally licenses with respect to which applicable law excuses the licensor from accepting performance from orapplicable law excuses the licensor from accepting performance from or rendering performance to any party other than the original licensee.

36

Hypothetical Test Versus Actual Test

• The majority of circuit courts to have considered the issue hold that Section 365(c)(1) prevents the debtor from assuming an intellectual property license even when the debtor has no intention of actually assigning the license to a third party but merely intends to continueassigning the license to a third party but merely intends to continue using the license itself.

– Third, Fourth, Ninth and Eleventh Circuits have adopted this “hypothetical” test. See In re West Elecs., Inc., 852 F.2d 79, (3d Cir. 1988); RCI Tech. Corp. v. Sunterra Corp. (In re Sunterra Corp.), 361 F.3d 257 (4th Cir. 2004);Corp. v. Sunterra Corp. (In re Sunterra Corp.), 361 F.3d 257 (4 Cir. 2004); Perlman v. Catapult Entm’t, Inc. (In re Catapult Entm’t, Inc.) 165 F.3d 747 (9th Cir. 1999); City of Jamestown v. James Cable Partners, L.P. (In re James Cable Partners, L.P.) 27 F.3d 534 (11th Cir. 1994).

– referred to as “hypothetical” test because it looks to whether the license could, hypothetically, be assumed and assigned to a third party.

37

• The First and Fifth Circuits, by contrast, have adopted an “actual” test, holding that section 365(c)(1) prohibits assumption of an executory contract only where circumstances indicated that the debtor actually i t d t i th t t t thi d t f h th liintends to assign the contract to a third party from whom the licensor would be excused by applicable law from accepting performance.

38

Effects of Rejection

• If the license is rejected, the license is treated as having been breached as of the commencement of the bankruptcy case, the debtor loses all rights to use the intellectual property under the license and is relieved of all ongoing obligations under the license.

– Rejection is a breach of the license, not a termination. • As a result, other provisions of the license (e.g., arbitration provisions) may

remain enforceable.– Rejection entitles the licensor to an unsecured claim for damages resulting

from breach of the contract.from breach of the contract.– Licensor may also have an administrative expense claim to the extent the

intellectual property was used prior to the rejection of the license.

39

presents ip licenses in bankruptcy

Documents