90 Second Lesson: How a Licensee is Treated in the Bankruptcy of its Licensor

Editors’ Note: This is part of our irregular series in which we answer readers’ questions. If you have a question, submit it to [email protected], and we will try to answer it.

Question:

A reader named Harvey M. wrote in to ask this question: my business licenses certain intellectual property from another company. I am concerned that that company, which we can call “Licensor,” may file for bankruptcy. What will happen to our license if Licensor indeed files?

Answer:

Before 1988, a licensor of intellectual property could relieve itself of any burdens created by the underlying license simply by filing for bankruptcy and rejecting the license pursuant to Bankruptcy Code §365. This act terminated both the licensor’s affirmative obligations under the license and the passive requirement to allow the licensee to continue to use the license. So, before 1988, the answer is that your company would have lost its right to use the license and all your company would have had was a general unsecured claim.

Congress, however, added Bankruptcy Code §365(n) to the Code in 1988. It generally provides that if a debtor rejects an executory contract under which it is the licensor of “intellectual property” as defined by the Code, then the licensee may elect to either: (a) treat the license agreement as terminated; or (b) retain its rights to the intellectual property addressed by the license agreement. If the licensee elects the latter, the debtor will have no obligation to the licensee after rejection other than to grant the licensee unimpeded use of the technology. Read more in Jonathan Guy’s article, How to Protect Your IP Rights When Your Licensor Files for Bankruptcy.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure and each include a comprehensive customer PowerPoint about the topic):

• The Intersection of Bankruptcy and… Intellectual Property Law 
• The Intersection of IP & Bankruptcy
• Intellectual Property 201

This 90 Second Lesson is based, in substantial part, on material reprinted from “Commercial Bankruptcy Litigation” and “Strategic Alternatives For and Against Distressed Businesses,” with permission of Thomson Reuters. If you are a Westlaw subscriber, you can read more about this particular subject here.]

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