Protect Intellectual Property Before Bankruptcy Looms

May 5, 2009
Applying bankruptcy laws to technology licenses is complex. Specific rules apply depending on whether one is the owner or user and whether the technology involves patents, trademarks, copyrights, or trade secrets.

Michael N. Spink
Brinks Hofer Gilson & Lione
Ann Arbor, Mich.

With a staggering number of U.S.-based companies facing dire financial scenarios and the threat of bankruptcy looming for both large and small corporations, it is increasingly important for companies to protect their technology and related licensing agreements. Technology-licensing agreements are surprisingly vulnerable to loss during bankruptcy proceedings, regardless of whether it’s the licensor or licensee facing bankruptcy.

Applying bankruptcy laws to technology licenses has become increasingly complex. Specific rules apply depending on whether one is the owner or user and whether the technology involves patents, trademarks, copyrights, or trade secrets. Outcomes also highly depend on which court hears the case because the law is being interpreted and applied differently by courts across the country.

For example, a licensee (user) who files bankruptcy may be able to keep the license through the bankruptcy process. Furthermore, if the licensor (owner) is not prompt in objecting, the user may even be permitted to transfer the license to a third party undesirable to the owner. Another concern arises when a company licenses technology critical to its business; the owner might be able to completely or partially cut off those rights if either company enters into bankruptcy. That is why it’s important to address these issues during licensing negotiations and to closely monitor any bankruptcy proceedings to ensure timely objections can be raised.

Generally, bankruptcy provisions are designed to maximize the value of the debtor’s estate. There are special provisions that control the handling of technology licenses. Under these provisions, the debtor can usually keep the license if it is still valuable to the company or reject the license if it is not.

That doesn’t mean an owner filing for bankruptcy can cut off the licensee’s access to the technology. Special provisions enacted by Congress deal with this situation. If the owner rejects a license, the nonbankrupt licensee can either treat the contract as breached and become a creditor or keep its license rights and pay ongoing royalties.

There may be downsides to both choices. Creditors may only recover a small portion of the damages suffered. And if you keep your rights, the bankrupt licensor may not be required to perform technical assistance, maintain the technology (for example, software upgrades), or transfer know-how or future developments.

Different problems can arise when the user (licensee) is in bankruptcy — it will not always be able to keep the license. Generally, if that license was nonexclusive and personal — meaning that the owner retained the right to control who else is licensed and whether the licensee could transfer its license — then the owner of the technology may be able to prevent the licensee (in bankruptcy) from keeping the license or transferring it to another company.

The best time to protect intellectual property is before any threat exists. Strategies for intellectual-property protection are best sought during the development and introductory phase of any new technology or product. This helps avoid numerous problems that can arise from bankruptcy and other unanticipated events.

Brinks Hofer Gilson & Lione ( specializes in intellectual-property and unfair-competition litigation, patents, trade secrets, intellectual asset technology licensing agreements.

Edited by Kenneth Korane

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