Acquiring IP Assets From Debtors in Bankruptcy Proceedings

By John DiGiacomo

When a business files for bankruptcy, all of its assets, including any and all intellectual property and licensing rights to IP, become subject to the jurisdiction of the bankruptcy court. In simple terms, all assets go into the bankruptcy “estate” and are subject to the control of the court. The purpose of a bankruptcy is to reorganize the debt (if the business intends to continue) or to sell off as many assets as possible to pay the creditors of the business. Often, bankruptcies involve a combination of liquidation and reorganization.

When debtors sell assets, alert, able, and willing buyers can often get good prices for the assets. While the bankruptcy court is tasked with obtaining the highest price for any assets sold, even the highest price approved in a bankruptcy may be much lower than what the market price might have been. This is because the “pool” of potential buyers is often limited, discovering that the assets are for sale can be difficult, and speed is often needed but, just as often, there are long delays and the bankruptcy bidding and approval process can be complex and cumbersome.

With respect to acquiring intellectual property assets (like patents, copyrights, or trademarks), the process is similar to acquiring tangible assets. However, careful attention must be paid to any sort of licensing or use agreements that might be associated with the relevant IP. Furthermore, different legal considerations exist if you are trying to acquire IP rights from the owner or the licensee of the IP rights.

Here is some quick information on acquiring IP assets from a debtor in bankruptcy:

The Court Bidding and Approval Process

In simple terms, any sale of assets by a debtor in bankruptcy must be approved by the court. Approval is essential to the buyer because the assets will then pass free of any liens or creditor claims.

Approval can be seen as a two-track system. On the first track, to approve a sale, the court must be satisfied that the highest value has been obtained. As a consequence, often a competitive bidding procedure is established. Generally, some effort is required to publicize the sale of the assets, some time is given for receiving bids and some mechanism is put in place to fully disclose, compare and evaluate any bids received.

On the second track, the court may also approve a sale if all the relevant “stakeholders” are in agreement. For our purposes, “stakeholders” are the debtor, all the creditors related to the assets being sold, all the potential buyers and any licensees of the IP. If there is agreement and the value being offered is in a reasonable range, the court will approve the sale.

Generally, efforts to sell assets and obtain court approval “run” on both tracks simultaneously. The result is a complex set of negotiations between and among the stakeholders and the court.

Special Attention When Acquiring IP That is Licensed

As noted, special attention must be paid to any existing licensing or use agreements when acquiring IP rights from a debtor in bankruptcy. With an IP license, the licensee pays a fee to the owner of the IP for the right to use the IP. A copyrighted song that is licensed to a television show is a good example.The licensing fees are a stream of income, so many buyers will desire to acquire IP that is currently licensed from the debtor-owner. If this is the desired outcome, part of the buyer’s due diligence will require confirmation that the licensees are ready and willing to continue the arrangement.

On the other hand, if the desire is to terminate the licensing arrangement(s), then great care must be taken. The bankruptcy laws are complex with respect to whether a debtor can cancel an IP license agreement. For example, the US Supreme Court recently held that a owner/licensor of trademark rights cannot reject a license agreement under the bankruptcy code and effect a termination of a licensee’s rights. See Mission Product Holdings, Inc. v. Tempnology, LLC, 139 S.Ct. 1652 (2019). The court held this because it concluded that rejection of a contract under the bankruptcy code is a breach of the contract. Generally, breach of contract by one party does not terminate the rights of the other party under the contract. Thus, if the desire is to cancel a licensing agreement, cancellation will either need to be done via mutual consent or pursuant to the terms of the agreement. Experienced legal counsel will be needed.

Special Attention When Attempting to Acquire Licensee’s IP Rights

As noted, there are different legal issues if the debtor owns the IP rights or licenses the IP rights. So far, we have focused on acquiring IP rights from a debtor-owner.  However, if the bankruptcy debtor is the licensee of IP rights, the legal issues are murky and, again, you will need to retain experienced legal representation. Essentially, acquiring an IP license through a bankruptcy proceeding is obtaining an assignment of that right. Some courts have held that IP licenses are not assignable; as such, those courts have refused to approve the sale of IP licensing rights where the owner of those IP rights refused to agree to the sale. Other courts have held the opposite. Consequently, where the debtor is the licensee of IP rights, obtaining those rights in a bankruptcy proceeding will depend on several factors including offering the best value, which court has jurisdiction and on whether the owner of the IP is agreeable.

If you have questions about acquiring IP rights from a debtor in bankruptcy, contact the IP litigation lawyers at Revision Legal at 231-714-0100.

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