Monday, 20 April 2009

Question on Rejection of IP Licenses in Bankruptcy or Insolvency

I am departing from my usual form of commentary to pose a short request for information from readers. I have just completed a short piece for a publication on the issue of the treatment of IP licenses in a bankruptcy proceeding. While there is apparently a major divide on the issue between the U.S. position and the position elsewhere on whether a licensee can seek to force the licensor in bankruptcy to continue with the license, all systems seem to allow the trustee, in some fashion, to reject the license.

My question is whether any reader is aware of a decision under a national bankruptcy law in which a trustee has rejected the license and the issue was later brought to court. If so, I would be most grateful for receiving particulars about such decision. Please post the particulars as a Comment below or, if that is not possible, email me here


Renzo Marchini said...

I was surprised by the assertion "all systems seem to allow the trustee, in some fashion, to reject the license". I didn't think that this was generally the case in the UK.

In UK corporate insolvencies, office holders can only disclaim "onerous property" which is defined (Insolvency Act 1986, s 178) as including "unprofitable contracts". The mere grant of a licence does not - to my eyes - constitute such a thing. To be unprofitable the cost of performing the contract needs to be more than the benefit obtained; and there is generally no cost in merely granting rights (albeit ancillary performance obligations might have an associated cost).

The language in section 315 IA 1986for individual bankruptcies seems the same.

But I know of no cases, so happy to see further comments on this.

Anonymous said...

I assume you're familiar with Bankruptcy Code 365(n), allowing continued use by licensees of patents and copyrights? Trademark are not included, but I recall a case where a hotel franchisee was allowed to continue its license because of the harm to it if the license was terminated - but I'll be darned if I can find it.

Rick Allison said...

In the bankruptcy of DAK Industries, the debtor rejected a license from Microsoft for distributing copies of Word. The license had a royalty rate per copy sold and minimum commitment requirements. After filing the bankruptcy petition, the debtor rejected the contract and the court found that the money owed under the minimum commitment requirements became a general/unsecured claim. The court's analysis focused on whether the contract was more like a sale of goods (in which case Microsoft would only have a general claim) or a license for ongoing use of the IP (in which case Microsoft would be given administrative expense priority).

While the court focused on the character of the contract between Microsoft and DAK to determine the priority of the obligations, some people (including myself) think that a more reasonable approach would have been to center the analysis on whether or not Microsoft would have been able to enforce the future obligations of the license outside of bankruptcy. Such an approach would create a result in bankruptcy that follows what would have happened outside of bankruptcy. However, in the context of a patent license, this could call for a full-blown patent trial within the bankruptcy court.

Microsoft Corp. V. DAK Industries, Inc., 66 F.3d 1091 (9th Cir. Cal. 1995)

As I write this, I realize that the case is primarily about the priority given to license obligations in a bankruptcy, but it is a good example of a debtor rejecting an IP license during a bankruptcy.


Rick Allison said...

After seeing the other comments, I noticed that mine was the only one addressing situations where debtor is the licensee as opposed to the licensor - mea culpa.

But this business about forcing the licensor debtor to assume the license is interesting. Let us know when you've finished the article!

Neil Wilkof said...


Thanks--I was referring to the right to disclaim onerous property under UK law.


Thanks. Indeed I am familiar (I even remember the pre-365(n) days!


Thanks for reminding me of the DAK case.