Legal uncertainty abounds for intellectual property licensees and licensors when their license counterparties enter the murky waters of bankruptcy. When a licensor hits the skids, a licensee’s two primary concerns should include: 1) whether the protections afforded by Bankruptcy Code section 365(n) are available if the debtor-licensor rejects the license; and 2) protecting its rights if the debtor-licensor seeks to sell the intellectual property. By contrast, when a licensee considers filing for bankruptcy, it must consider whether it can assume or assign the license.
Assuming, Rejecting and Assigning IP Licenses
A key decision for any debtor is whether to reject, or assume and assign its “executory contracts.” By assuming a contract, a debtor reaffirms the contract and agrees to honor its obligations going forward. To assume a contract, the debtor must cure or provide “adequate assurance” that all defaults will be cured, and provide adequate assurance of future performance. By rejecting a contract, the debtor disavows the contract and refuses to continue performing thereunder. A rejection is treated as a prepetition breach of the contract, and the counterparty is entitled to a general unsecured claim, which may be paid only cents on the dollar. Last, the debtor may assign a contract to such party, notwithstanding any contractual provision prohibiting assignment, so long as a debtor provides adequate assurance that the assignee can perform the contractual obligations.
