Bankruptcy and Intellectual Property

Intellectual property smacks with bankruptcy when a technology licensor has a debtor licensee who wants to assign the licensed rights to a licensor competitor.

The Bankruptcy Code provides a debtor protection from spending to perform contract obligations with agreements are executory contracts. These agreements have material terms not yet performed by each party. For example, one party may not have provided services, and the other party not paid.

The Bankruptcy Code allows the debtor to assume, assign, or reject an executory contract, even when sections in the agreement limit assignment without consent of the non-debtor party in the case of bankruptcy.

When the debtor assumes the contract, it means the debtor will to fix any defaults that occurred before the filing of the bankruptcy petition and after the petition filing. For instance, if the debtor has not provided services, the debtor will provide the services suppose to be provided before bankruptcy, and then continue to provide the services after bankruptcy filing. The debtor agrees to be bound by the terms of the agreement. The debtor may continue as a party to the assumed agreement or assign the assumed contract to a third party to do the work.

If an executory contract is too hard to continue with, such as providing services when there are no further payments by the other party, the debtor may reject the contract, and not perform. Rejection is a material breach of contract that lets the other party stop performing. For instance, the other party, who is not getting services, does not need to pay. However, the other party may suffer a loss because of the debtor’s nonperformance. The non-debtor party ends up with an unsecured claim against the debtor. Unsecured claims take low priority and usually the non-debtor does not get 100% on the claim. If the non-debtor has to sue to determine the damages, the lawsuit may be stayed because of the bankruptcy.

Bankruptcy courts look to federal common law for intellectual property issues instead of state contract law. If the law excuses the non-debtor from accepting performance from or giving performance to a party other than the debtor, the Bankruptcy Code does not let assignment go on without consent of the non-debtor. This may happen when the debtor services are personal, such as when specific named persons are to perform for the debtor. A non-debtor party has a better chance of getting out of a contract when there is bankruptcy by making the agreement personal.