Bankruptcy and Intellectual Property: IP Rights, Asset Protection

Introduction

Bankruptcy can have significant implications for intellectual property (IP) rights and asset protection. This guide explores the intersection of bankruptcy law and intellectual property, providing a comprehensive overview of how IP assets are treated in bankruptcy proceedings, the protections available, and the legal frameworks governing these issues.

Understanding Bankruptcy

Types of Bankruptcy

Bankruptcy law in the United States is governed by the Bankruptcy Code, found in Title 11 of the United States Code. There are several types of bankruptcy filings, each with different implications for debtors and creditors:

• Chapter 7 Bankruptcy: Also known as liquidation bankruptcy, this involves the sale of a debtor's non-exempt assets by a trustee to pay off creditors.
• Chapter 11 Bankruptcy: Often used by businesses, this type allows for reorganization under the bankruptcy laws of the United States.
• Chapter 13 Bankruptcy: This is a wage earner's plan, enabling individuals with regular income to develop a plan to repay all or part of their debts.

For more detailed information, refer to the U.S. Courts Bankruptcy Basics.

Bankruptcy Proceedings

Bankruptcy proceedings involve several key steps:

1. Filing a Petition: The process begins when the debtor files a petition with the bankruptcy court.
2. Automatic Stay: Upon filing, an automatic stay is issued, halting most collection actions against the debtor.
3. Trustee Appointment: A trustee is appointed to oversee the case.
4. Creditors' Meeting: A meeting of creditors is held to allow them to question the debtor.
5. Asset Liquidation or Reorganization: Depending on the type of bankruptcy, assets may be liquidated or a reorganization plan may be proposed.

For official guidelines, see the U.S. Bankruptcy Code.

Intellectual Property in Bankruptcy

Types of Intellectual Property

Intellectual property encompasses various types of intangible assets, including:

• Patents: Legal rights granted to inventors to exclude others from making, using, or selling their inventions.
• Trademarks: Symbols, names, and slogans used to identify and distinguish products or services.
• Copyrights: Rights granted to creators of original works of authorship, such as literature, music, and art.
• Trade Secrets: Information that derives economic value from not being generally known and is subject to reasonable efforts to maintain its secrecy.

For more information, refer to the U.S. Patent and Trademark Office (USPTO).

Treatment of IP Assets in Bankruptcy

Valuation of IP Assets

Intellectual property assets must be accurately valued during bankruptcy proceedings. This can be challenging due to their intangible nature. Valuation methods include:

• Market Approach: Comparing the IP asset to similar assets that have been sold.
• Income Approach: Estimating the future income that the IP asset is expected to generate.
• Cost Approach: Determining the cost to recreate the IP asset.

IP as Collateral

IP assets can be used as collateral in secured transactions. In bankruptcy, secured creditors have a priority claim on the collateral. The treatment of IP as collateral is governed by Article 9 of the Uniform Commercial Code (UCC).

For more details, see the Uniform Commercial Code.

Executory Contracts and IP Licenses

Definition of Executory Contracts

An executory contract is a contract under which both parties have unperformed obligations that would constitute a material breach if not performed. In bankruptcy, the debtor can assume or reject executory contracts.

Treatment of IP Licenses

The treatment of IP licenses in bankruptcy is governed by Section 365(n) of the Bankruptcy Code. This section provides special protections for licensees of intellectual property, allowing them to retain their rights to use the IP even if the debtor rejects the license.

For more information, refer to Section 365 of the Bankruptcy Code.

Asset Protection Strategies

Protecting IP Assets in Bankruptcy

Structuring IP Ownership

One strategy to protect IP assets is to structure their ownership in a way that isolates them from the debtor's other assets. This can be done by:

• Creating Separate Entities: Placing IP assets in a separate legal entity, such as a holding company, to shield them from the debtor's liabilities.
• Licensing Agreements: Using licensing agreements to grant rights to use the IP while retaining ownership in a separate entity.

IP Escrow Agreements

An IP escrow agreement involves placing the IP assets in escrow with a third party. This ensures that the assets are protected and can be accessed by the licensee if the licensor files for bankruptcy.

For an example of an IP escrow agreement, see the SEC's Intellectual Property License and Escrow Agreement.

Legal Protections for IP in Bankruptcy

Automatic Stay

The automatic stay in bankruptcy proceedings provides temporary relief from creditors' actions, including those related to IP assets. This stay can provide time to develop a strategy for protecting IP assets.

Section 365(n) Protections

As mentioned earlier, Section 365(n) of the Bankruptcy Code provides protections for licensees of intellectual property, allowing them to retain their rights to use the IP even if the debtor rejects the license.

For more details, refer to Section 365 of the Bankruptcy Code.

Case Law and Precedents

Key Cases

Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc.

In this case, the court held that a debtor could reject an executory contract, including an IP license, leaving the licensee without rights to the IP. This decision led to the enactment of Section 365(n) to protect licensees.

For the full text of the decision, see Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc..

Mission Product Holdings, Inc. v. Tempnology, LLC

The Supreme Court held that a debtor's rejection of an executory contract under Section 365 of the Bankruptcy Code constitutes a breach of the contract but does not rescind the licensee's rights to use the IP.

For the full text of the decision, see Mission Product Holdings, Inc. v. Tempnology, LLC.

Impact of Case Law

These cases highlight the importance of understanding the legal protections available for IP assets in bankruptcy and the need for strategic planning to protect these valuable assets.

Conclusion

The intersection of bankruptcy and intellectual property law presents unique challenges and opportunities for asset protection. By understanding the legal frameworks governing bankruptcy and IP, and by employing strategic asset protection measures, individuals and businesses can better safeguard their intellectual property assets in the event of bankruptcy.

For further reading and official resources, refer to the following links:

• U.S. Courts Bankruptcy Basics
• U.S. Bankruptcy Code
• U.S. Patent and Trademark Office (USPTO)
• Uniform Commercial Code
• Section 365 of the Bankruptcy Code

By staying informed and proactive, stakeholders can navigate the complexities of bankruptcy and intellectual property with greater confidence and security.