Navigating the complex intersection of intellectual property and bankruptcy law has become an indispensable challenge for modern businesses. Whether a company is facing Chapter 11 proceedings or managing critical licensing agreements, understanding how IP rights are treated within the framework of bankruptcy can profoundly influence a business’s operational continuity and future viability. This intricate legal landscape demands a thorough grasp of both distinct legal domains, ensuring that valuable intangible assets are adequately protected and leveraged during financial restructuring.
At its core, intellectual property encompasses various creations of the mind, each afforded specific legal protections. Patents, for instance, safeguard inventions and discoveries, granting inventors exclusive rights for 20 years under the Patent Act, following a ‘first to file’ system. Copyrights protect original works fixed in tangible mediums, such as music, literature, and art, regulated by the US Copyright Office. Trademarks, governed by the Lanham Act, serve to distinguish goods and services in the marketplace, requiring commercial use for validity and offering significant advantages through federal registration.
A fundamental point of contention often arises from the differing priorities of the Bankruptcy Code and intellectual property law. While the Code aims to provide debtors with a fresh start and maximize value for creditors, IP law focuses on protecting creators and enforcing exclusivity. This divergence means that bankruptcy courts frequently defer to non-bankruptcy law—like state or federal IP statutes—to determine the precise nature and extent of IP rights, which in turn dictates the applicability of the Code’s provisions, particularly concerning the assumption or rejection of licenses.
Most intellectual property licenses are considered “executory contracts,” implying ongoing obligations for both the licensor and licensee. This classification is crucial because the Bankruptcy Code grants debtors powerful rights regarding such contracts: the ability to assume them, assume and assign them, or reject them. However, not all IP agreements are treated identically; exclusive licenses, for example, might be viewed as assignments and thus non-executory, whereas non-exclusive licenses typically fall under the executory category, merely granting permission rather than ownership.
Congress specifically enacted Section 365(n) of the Bankruptcy Code to offer vital protections for licensees of certain intellectual property, responding to previous judicial decisions that allowed debtors to unilaterally revoke IP licenses. This critical provision empowers licensees, if their rights qualify under the Code, to choose between treating the license as terminated and filing a claim, or continuing to use the intellectual property while fulfilling their royalty obligations. Importantly, this safeguard primarily applies to patents and and copyrights, leaving trademarks and foreign IP generally outside its direct scope.
Assigning an intellectual property license to a third party during bankruptcy can present significant hurdles for debtors. Section 365(c) of the Code imposes restrictions on assignment when “applicable law” prohibits performance by anyone other than the original contracting party, a common scenario with personal service contracts like many IP licenses. This often means that even if a debtor wishes to monetize an IP asset by transferring its license, the terms of the original agreement and governing IP law may prevent such a transfer without the licensee’s explicit consent.
When debtors opt to sell assets during bankruptcy, intellectual property rights frequently form a significant portion of the estate. However, this process is fraught with risks, including complex valuation challenges due to the intangible nature and varying usage breadth of IP assets. Furthermore, confidentiality breaches are a substantial concern, particularly if non-disclosure agreements or sensitive licensing terms are improperly disclosed during the sales process, potentially eroding the value of the IP and exposing parties to litigation.
Lenders extending credit secured by intellectual property assets must exercise meticulous care in perfecting their security interests. The procedures for perfection vary significantly depending on the type of IP: patents and federally registered trademarks typically require recording with the USPTO, while copyrights necessitate recording with the US Copyright Office. Conversely, trade secrets are generally governed by state law and do not have a centralized registration system, making them notably more challenging to secure effectively and often requiring bespoke contractual arrangements to ensure lien enforceability.
