Protecting Intellectual Property Rights in Bankruptcy

January 31, 2020

By: Camila Bersani

There are many issues involving intellectual property that may arise in a bankruptcy. For this reason, parties entering into intellectual property agreements should always consider the possible implications of a bankruptcy vis-à-vis their contractual rights and obligations. Having an attorney who understands both areas of the law is paramount to ensure that a client’s interests are adequately protected.

Parties, for example, often attempt to avoid the hurdles of bankruptcy by including clauses to contracts that state that the filing of a bankruptcy is a basis to terminate an intellectual property license. Such clauses, however, are often found to be invalid under Section 541(c) of the Bankruptcy Code, which provides an “ipso factor clause” that terminates a contract due to the filing of a bankruptcy case is unenforceable. (See 11 U.S.C.A. § 541(c).)

In 2019, the Supreme Court of the United States addressed in Mission Prod. Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652, 203 L. Ed. 2d 876 (2019) an important issue involving the intersection between bankruptcy and intellectual property rights. The Court looked as to whether a licensor in bankruptcy could terminate a trademark agreement and deprive the licensee of the right to continue to use the trademark. (Id.)

In 1988, Congress added Section 365(n) to the Bankruptcy Code, which provides that a licensee can continue to use intellectual property licenses after a rejection from a debtor as long as the licensee continues to make contractual payments under the parties’ agreement. (See 11 U.S.C.A. § 365(n).) Section 365(n), however, does not cover trademarks and the status of trademark licenses remained uncertain after 1988. (Tempnology, 139 S. Ct. at 1659.)

In the case before the Supreme Court, Mission Product Holdings (“Mission”) had entered into a contract with Tempnology, LLC (“Tempnology”) giving Mission a license to use Tempnology’s trademarks in connection with the distribution of athletic apparel. (Id. at 1658.) Tempnology then went bankrupt and tried to reject its license with Mission by arguing that the rejection of the license also terminated Mission’s rights to continue to use the trademark. (Id. at 1659.)

Finding for Mission, the Supreme Court ruled that the rejection of a trademark license has the same effect as a breach of that contract outside bankruptcy. (Id. at 1662-65.) As a result, a licensor’s rejection of a trademark license does not revoke the licensee’s right to use the mark as long as the licensee continues to make the license payments. (Id.)

Despite the Supreme Court’s decision in Tempnology, many issues involving intellectual property rights in bankruptcy remain unresolved. (E.g., while the licensee may have the right to continue to use the trademark, the licensor-debtor may not be obligated to provide maintenance and other post-petition assistance). (See Barreca Marc and Knapp John R., Intellectual Property and Bankruptcy in Intellectual Property Deskbook for the Business Lawyer 163 (American Bar Association, 3d. ed. 2013).)

A court may find, for instance, that unlike the agreement in Tempnology, a contract is not executory pursuant to Section 365 of the Bankruptcy Code. (See 11 U.S.C.A. § 365.) A contract is executory when there are outstanding obligations on both sides. A non-executory contract — one without outstanding obligations — may be sold under Section 363 free and clear of any liens. (See 11 U.S.C.A. § 363.)

One recent example addressing the distinction between executory and non-executory contracts arose in the bankruptcy of The Weinstein Company (“TWC”). On or around May 2018, Lantern Entertainment, LLC (“Lantern”) purchased the majority of TWC’s assets from the bankruptcy estate. During due diligence, it was uncovered that TWC had underpaid participation obligations pursuant to various talent agreements relating to the movie Silver Linings Playbook.

Lantern initiated an adversary proceeding seeking the determination that the talent agreements were non-executory. The Delaware court agreed and granted Lantern’s Motion for Summary Judgment. (See Order Granting Lantern Entertainment Motion for Summary Judgment, Lantern Entertainment, LLC v. Bruce Cohen Productions and Bruce Cohen, No. 18-50924-MFW (Bankr. D. Del. 2019).) The Court found that because the contracts were non-executory, Lantern was not required to cure unfulfilled obligations under the talent agreements prior to the purchase of TWC assets. The Court noted, however, that Lantern was required “to comply with all post-closing obligations arising thereunder, including, but not limited to its payment obligations.” (Id.)

These are only a few of the issues involving intellectual property that may arise in a bankruptcy. Contracts should always be carefully written to ensure that a party’s rights and obligations are clear and adequately protected.



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