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Back to the Future (Lubrizol): An Overview of IP & Bankruptcy Issues, Chapter 15, and the Qimonda Chapter 15 Proceeding
 

Back to the Future (Lubrizol): An Overview of IP & Bankruptcy Issues, Chapter 15, and the Qimonda Chapter 15 Proceeding

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Presentation slides from my BNA webinar on the intersection of intellectual property and bankruptcy, which includes discussion of the Qimonda case.

Presentation slides from my BNA webinar on the intersection of intellectual property and bankruptcy, which includes discussion of the Qimonda case.

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    Back to the Future (Lubrizol): An Overview of IP & Bankruptcy Issues, Chapter 15, and the Qimonda Chapter 15 Proceeding Back to the Future (Lubrizol): An Overview of IP & Bankruptcy Issues, Chapter 15, and the Qimonda Chapter 15 Proceeding Presentation Transcript

    • B EI JI N G F RAN KFU RT H O N G KO N G LO N D O N L O S AN G ELES MUN ICH N EW YO RK SI N G AP O RE T O KYO W ASH I N G T O N , D C Back to the Future (Lubrizol): An Overview of IP & Bankruptcy Issues, Chapter 15, and the Qimonda Chapter 15 Proceeding p g Moderated by: Michael M. Murray Featuring Presentations by: Blake Reese and Bradley Scott Friedman May 18, 2010
    • Presenters Michael M. Murray Blake Reese Partner, Intellectual Property/Litigation Associate, Intellectual Property/Litigation Milbank, Tweed, Hadley & McCloy LLP Milbank, Tweed, Hadley & McCloy LLP 1 Ch Chase M h tt Pl Manhattan Plaza 1 Chase Manhattan Plaza New York, NY 10005 (212) 530-5424 New York, NY 10005 MMurray@milbank.com (212) 530-5496 http://www.milbank.com/en/Attorneys/m- p y @ BReese@milbank.com o/Murray_Michael.htm http://www.milbank.com/en/Attorneys/p- r/Reese_Blake.htm Bradley Scott Friedman Associate, Financial Restructuring Milbank, T Milb k Tweed, Hadley & M Cl LLP d H dl McCloy 1 Chase Manhattan Plaza New York, NY 10005 (212) 530-5846 BFriedman@milbank.com BFriedman@milbank com http://www.milbank.com/en/Attorneys/d- f/Friedman_Bradley.htm 1 The views expressed in the presentation are those of the authors and may not be attributed to Milbank or its clients.
    • Roadmap • (1) Bankruptcy 101 • (2) IP Asset Sales • (3) The Treatment IP Licenses under Sections 365 of the Code • (4) The Qimonda Case – (i) Chapter 15 of the Code – (ii) Factual Background – (iii) Impact – (iv) Status • (5) ( ) Q&A 2
    • Roadmap • (1) Bankruptcy 101 • (2) IP Asset Sales • (3) The Treatment IP Licenses under Sections 365 of the Code • (4) The Qimonda Case – (i) Chapter 15 of the Code – (ii) Factual Background – (iii) Impact – (iv) Status • (5) ( ) Q&A 3
    • Why Businesses File for Bankruptcy • Businesses file for bankruptcy for p p y protection from their creditors • Types of Protection under the Bankruptcy Code (the “Code”) ( h “C d ”) – The Automatic Stay; – Ass me / Reject contracts Assume – No ipso facto clauses; and – Others 4
    • The Two Business Bankruptcies • Chapter 7 - pure liquidation • Chapter 11 – reorganization or liquidation li id ti 5
    • Filing for Protection • Who: Usually a corporation or related business association – Voluntary vs. Involuntary • When: 24/7 365 24/7, • Where: Venue (try for S.D.N.Y. or Del.) – Incorporated; – primary place of business; – firm’s assets; or firm s – affiliate or partner filed • What: A Petition 6 • Result: Filing the petition = automatic order; creates the “estate”
    • The Players in Chapter 11 • The Debtor in Possession (“DIP”) ( DIP ) • The United States Trustee (“Trustee”) • The Official Committee of Unsecured Creditors (“Committee”) • Others: 7
    • The Automatic Stay – the “Quiet Period” • Section 362 of the Code provides an automatic stay (a freeze on): – Actions/proceedings against the Debtor to recover a claim that arose before the petition – Enforcement of pre-petition j g p p judgments – Act to obtain possession of property of the estate or to exercise control over it (includes Contracts and Licenses) Li ) – Create / perfect lien against property of the estate 8
    • Assumption, Rejection, Assignment • Section 365 of the Code allows for the assumption or rejection of “executory contracts contracts” • Countryman definition adopted in nearly all jurisdictions: j i di ti – “A contract under which the obligations of both the bankrupt d the th th b k t and th other party t the contract t to th t t are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.” 9
    • Assumption, Rejection, Assignment (cont.) • Assumption: Must cure prepetition defaults and post petition defaults • Rejection: “Rejection is Breach” Rejection Breach • Assignment – few limitations – Overrides Anti-assignment agreements Anti assignment – Adequate Assurance – N li bilit post-assignment No liability t i t • Debtor has no liability post-assignment 10
    • The Chapter 11 Proceedings • Section 341 – Meeting of Creditors g • Almost every act is done on motion pursuant to the Federal Rules of Bankruptcy Procedure • Adversary Proceedings – Debtor or other interested party has a separate proceeding in the same case • Bar Date, Proofs of Claim, and Resolution Process ocess 11
    • The Plan and Disclosure Statement • The Plan of Reorganization (“Plan”) ( Plan ) – DIP has an exclusivity period (first 120 Days plus 18 month extension) – Generally Includes: •D i Designation of creditor classes ti f dit l • Explanation of payments • Other Requirements • Possibility for competing Plans • Any party in interest can object 12
    • The Plan and Disclosure Statement (cont.) • Solicitation of Votes – Each class gets a vote – 2/3 in amount OR more than ½ in number of creditors in that class votes for Plan – “Cram-Down” – Unimpaired claims = deemed to have accepted p • Proponent Can Modify at any point before confirmation, but generally not after solicitation • Confirmation and Objections 13
    • The Plan and Disclosure Statement (cont.) • Disclosure Statement (“Disclosure”) ( ) – “adequate information” • Hearing on Disclosure Statement • Why this slide is second? • Prof. Baxter: “Only an associate at a law firm y would read one of these cover to cover.” 14
    • Order of Distribution – "Waterfall" “Surcharge” Against Collateral “Carve-Out” For Professional Fees in DIP Financing Superpriority Claims Priming Lien in DIP Financing Secured Claims New Unsecured Debt Superpriority Claims Adequate Protection Claims Priority Claims* Priority Claims Administrative Claims Unsecured Claims Wage Claims Contributions To Employee Benefit Plans Equity Claims Tax Cl i T Claims 15 * Full list set forth in 11 U.S.C. § 507
    • Timeline Traditional Pre-Arranged Pre-Packaged Case Preparation Case Preparation Case Preparation (Time varies) Negotiate Major Terms of Plan Draft and Negotiate Plan With Creditors File Petition Plan Solicitation File Petition “First Day” and “Second Day” Hearings File Petition, Plan Disclosure Statement (Usually a few weeks) “First Day” and “Second Day” Hearings and Ballots (Usually a few weeks) Case Administration “First Day” Hearing, Disclosure (Usually 3 to18 months) Case Administration Statement Hearing & Confirmation (Usually faster than traditional case) ( y ) Hearing (Usually a week or two) Plan Proposal (Debtor’s exclusivity period limited to a Plan Proposal Plan Confirmation maximum of 18 months (Usually within a few months of filing) Exit and Post Confirmation Plan Solicitation Plan Solicitation (Time varies) (limited to a maximum of 180 days after ( y (Usually faster than traditional case) ( y ) plan proposal) Plan confirmation Plan confirmation Exit and Post Confirmation Exit and Post Confirmation (Time varies) (Time varies) 16
    • Roadmap • (1) Bankruptcy 101 • (2) IP Asset Sales • (3) The Treatment IP Licenses under Sections 365 of the Code • (4) The Qimonda Case – (i) Chapter 15 of the Code – (ii) Factual Background – (iii) Impact – (iv) Status • (5) ( ) Q&A 17
    • IP Asset Sales • Business Judgment Rule • Subject to Liens/other encumbrances – If Debtor fulfills “ ti and h i ” req’ts, D bt f lfill “notice d hearing” ’t sale can proceed subject to encumbrances 18
    • IP Asset Sales • Free and Clear (i e not subject to (i.e., encumbrances) – Debtor must: • Receive court authority under § 363(b); and • M t at least one special requirement under § Meet t l t i l i t d 363(f). 19
    • Special Requirement - 1 • Non-bankruptcy law permits the sale free Non bankruptcy and clear of the license (i.e., Article 9); 20
    • Special Requirement - 2 • The licensee consents (express/implied); – Implied Consent 21
    • Special Requirement - 3 • The license is in bona fide dispute; – An objective basis for either a factual or legal dispute as to the validity of the encumbrance 22
    • Special Requirement - 4 – The licensee could be compelled, in a legal or equitable proceeding, to accept a monetary substitute; OR 23
    • Special Requirement - 5 • The proceeds are used to foreclose a lien where the sale price is sufficient to discharge all liens liens. 24
    • Effect of Finding Free and Clear • Termination without Rejection: License j could be extinguished (i.e., sale could preclude rejection and thus not invoke protections under Code) – An objecting party may be entitled to adequate protection under § 363(e) 363(e). 25
    • Effect of Finding Free and Clear (cont.) • Protection on Appeal – May not be able to unwind transaction 26
    • Roadmap • (1) Bankruptcy 101 • (2) IP Asset Sales • (3) The Treatment IP Licenses under Sections 365 of the Code • (4) The Qimonda Case – (i) Chapter 15 of the Code – (ii) Factual Background – (iii) Impact – (iv) Status • (5) ( ) Q&A 27
    • The Scenario • MidTech LLC holds patents directed to p p pioneering g photovoltaic inventions, including novel software that networks these systems. MidTech’s technology dominates the market and consumers look for the SuperSolar® product-line • BigTech Inc. licenses rights in patents, trademarks, copyrights, and trade secrets related to technologies • BigTech builds factories and invests millions based on its agreement with MidTech BigTech pays all of its MidTech. royalties on time. • MidTech files for Ch. 11 bankruptcy, now what? p y 28
    • IP Licenses as Executory Contracts • Most IP licenses are “executory contracts” executory contracts because both parties’ failures to perform would be considered material breaches • “Executory contracts” may be (1) assumed or (2) rejected by Debtor 29
    • IP Licenses as Executory Contracts (cont.) • Aim for nonexecutory: – More like an assignment: • A b dl written and exclusive li broadly itt d l i license • A paid-up, or paid-in-full, license 30
    • IP Licenses as Executory Contracts (cont.) • Aim for executory: – State that failure to perform continuing obligations constitutes a material breach of the contract excusing performance by the other party or otherwise define events constituting a material breach – Include obligatory provisions 31
    • Debtor as Licensor – Debtor Assumes (Continues) License • Cure all monetary defaults under the agreement • Pay damages • Provide adequate assurances of future performance 32
    • Debtor as Licensor – Debtor Assumes (Continues) License (cont.) (cont ) • Court approval is required (i e Motion & (i.e., Order approving assumption) – Breach post-assumption results in damages post assumption that would be considered administrative expenses ( p (rather than unsecured debt from rejection) 33
    • Debtor as Licensor -- Debtor Rejects (Discontinues) License • L EE L’EE may treat rejection as a pre-petition pre petition breach and file a claim OR • L EE L’EE retains rights under “intellectual intellectual property” license for rest of term and keeps up with royalty p y p p y y payments and non- monetary obligations – Retention rights enacted in response to Lubrizol – Includes right to enforce “exclusivity provisions” – No prospective rights – Royalties ≠ maintenance, etc. 34
    • Debtor as Licensor -- Debtor Rejects (Discontinues) License (cont.) (cont ) • Definition of “intellectual property” under Code: intellectual property – (A) trade secret; – (B) invention, process, design, or plant protected under title 35; – (C) patent application; – (D) plant variety; – (E) work of authorship p ( ) p protected under title 17; or ; – (F) mask work protected under chapter 9 of title 17; • “IP” excludes trademarks  L’EE can IP L EE – (i) file claim, (ii) hold security interest, (iii) put 35 transition period in License Agreement
    • Debtor as Licensor -- Rejection and Source Code • If Debtor-L’OR seeks to reject, L’EE can try to j , y enforce obligation to provide Source Code per Agreement • Escrow Agreements popular  agent provides Source Code to L’EE if Debtor-L’OR rejects j license 36
    • Debtor as Licensor – L’OR Tips • Debtor may file Motion to Reject license as bargaining leverage in negotiations for new terms that Debtor will assume assume. • Worth asking: Is L’EE a prospective purchaser of the IP? 37
    • Debtor as Licensor-- L’EE Tips • In License Agreement: – Debtor agrees to “assume” – “IP” is clearly, broadly defined (include foreign IP patents) – Incent Debtor not to reject  load royalties at end of license – Allocate payments between royalty and maintenance – Get and perfect security interests whenever possible • Assert right to continue under 365(n) 38
    • The Scenario (cont.) • MidTech LLC holds patents directed to p p pioneering g photovoltaic inventions, including novel software that networks these systems. MidTech’s technology dominates the market and consumers look for the SuperSolar® product-line • BigTech Inc. licenses rights in patents, trademarks, copyrights, and trade secrets related to technologies • BigTech builds factories and invests millions based on its agreement with MidTech BigTech pays all of its MidTech. royalties on time. • MidTech files for Ch. 11 bankruptcy, now what? p y 39
    • The Scenario (cont.) • What if, instead, MidTech (L’EE) files for bankruptcy? , , ( ) p y 40
    • Debtor as Licensee -- Rejects License • Reject: License to Debtor discontinues – Claim for money damages • R j ti = b Rejection breach h – If a cross-license, L’OR may wish to continue its license under Debtor patents patents. 41
    • Debtor as Licensee -- Assignment Limitations • To assign, must assume and thus meet assumption req’ts ’t • Choice to assume-and-assign may be subject to non- assignment provision in license and laws applicable to IP • Non-exclusive Patent/Copyright Licenses: – most courts hold non-exclusive patent licenses are non- p assignable without consent – some courts applied reasoning to hold non-exclusive copyright licenses non-assignable without consent • Exclusive Patent/Copyright Licenses usually transferable • Trademark Licenses: nontransferable without consent 42
    • Debtor as Licensee -- Assumption When Nonassignable • If the license is transferable, the Debtor may y assume the license • If the license is not assignable there is a split assignable, of authority on whether it may be assumed 43
    • Debtor as Licensee -- Courts Split • Actual Test – Looks to see if the Debtor actually intends to assign the “non-transferable” license. – If so, it cannot assume the license. – If it has no intent to transfer the license to another party, party assuming the license is finefine. • Hypothetical Test – Will not allow the Debtor to assume (or continue) the license, even if no transfer was intended, if law would preclude transfer. 44
    • Debtor as Licensee -- Courts Split (cont ) (cont.) • Supreme Court on record in denying cert on p y g issue stating that it would like to address split, but when better facts arise See N.C.P. Marketing Group Inc v BG Star Productions Group, Inc. v. Productions, Inc., No. 08-463 (U.S. Mar. 23, 2009). 45
    • Debtor as Licensee -- L’EE Tips • L’EE includes transferability provision L EE (consent) in Agreement to keep “assumption” option open assumption • L’EE who wants to assume might consider filing Chapter 11 in venue that applies “Actual Test” 46
    • Debtor as Licensee -- L’OR Tips • Non-exclusive licenses over exclusive Non exclusive • Define “adequate assurance” that L’EE must satisfy to support “assumption” of license y pp p • Termination provisions with non-bankruptcy triggers gg • Hold security interests in embodiments of IP held by licensee • Limit consent to assumption to circumstances that do not provide change of control 47
    • Roadmap • (1) Bankruptcy 101 • (2) IP Asset Sales • (3) The Treatment IP Licenses under Sections 365 of the Code • (4) The Qimonda Case – (i) Chapter 15 of the Code – (ii) Factual Background – (iii) Impact – (iv) Status • (5) ( )Q&A 48
    • Qimonda -- Chapter 15 • Background: – Enacted with 2005 Amendments (BAPCPA) • Purpose • Chapter 15 Case = Ancillary to cases brought in the debtors home country 49
    • Qimonda -- Chapter 15 (cont.) (cont ) • Foreign Representative ( g p (“FR”) ) • Commencement – In principal place of business or assets in U.S. (VA) – FR must first file a petition in U.S. BUT this DOES NOT automatically trigger protection – Order must be entered to invoke protections • “Foreign Main Proceeding” = case is pending in the country where the debtor has ‘‘the center of its main interest’’ • During this “Gap Period” the Court can grant provisional injunction • Other Aspects of Chapter 15 50
    • Qimonda -- Background • Qimonda commenced an insolvency proceeding in Germany – appointed Dr. Michael Jaffé as preliminary insolvency administrator and as FR • June 15 2009 Dr Jaffé filed a petition for 15, 2009, Dr. Jaffé, relief under Chapter 15 • J l 22 2009 th B k t C t July 22, 2009, the Bankruptcy Court entered an uncontested order of recognition iti 51
    • Qimonda -- Background (cont.) (cont ) • Same day - order stating that, pursuant to Chapter 15, ‘‘the following sections [of the Bankruptcy Code] are also applicable in p y ] pp this proceeding: §§ 305-307, 342, 345, 349, 350, 364-366, 503, 504, 546, 551, 558.’’ 558 ’’ • About two and a half months later, Qimonda moved t amend th order t Qi d d to d the d to strike the reference to Section 365 or to limit the application of Section 365 52
    • Qimonda -- Court’s Order • Significant licensees objected to motion, as like most countries’ l t i ’ laws, GGerman llaw d does not afford 365( ) lik t ff d 365(n)-like protections to licensees • U.S. Bankruptcy Court granted Qimonda’s motion to amend, despite: – Qimonda’s availing itself of U.S. automatic stay provisions in U.S. U S bankruptcy court; – Congress’s clear intent in enacting 365(n) to avoid harsh “Lubrizol-esque” outcomes – The Court s earlier order dictating the applicability of 365 in the Court’s Ch. 15 case – Express provisions in at least one of the licenses that called for the application of 365(n) and New York law pp ( ) 53
    • Qimonda -- Rationale • “The principal idea behind chapter 15 is that the p p p bankruptcy proceeding be governed in accordance with the bankruptcy laws of the nation in which the main case is pending ” pending. • “If the patents and patent licenses are dealt with in accordance with the bankruptcy laws of the various nations in which the licensees or licensors may be located or operating, there will be many inconsistent results. results In fact the same idea, process or invention may fact, idea be dealt with differently depending on which country the particular ancillary proceeding is brought.” 54
    • Qimonda -- Impact • If Qimonda holding becomes widely-accepted, widely accepted, beware the following: – Multinational entity files abroad – Multinational entity brings Ch. 15 proceeding in U.S. to allow foreign bankruptcy court control over U.S. assetst – U.S. bankruptcy court defers to foreign proceeding and foreign law on licenses involving U S patents U.S. – Debtor gains extraordinary leverage over non-debtor licensees that are potential infringers p g 55
    • Qimonda v. Voda • Remember Voda v. Cordis: – “Regardless of the strength of the harmonization trend … [p]ermitting our district courts to exercise jurisdiction j i di ti over i f i infringement claims b t l i based on f i d foreign patents … would require [the Fed. Cir.] to define the legal boundaries of a property right granted by another sovereign and then determine whether there has been a trespass to that right” 56
    • Qimonda -- Status • On appeal to District Court – Only one amicus brief (supports appellee) – Oral argument May 14 2010 14, – Waiting for decision from District Court – Will likely be further appealed to regional circuit court 57
    • Roadmap • (1) Bankruptcy 101 • (2) IP Asset Sales • (3) The Treatment IP Licenses under Sections 365 of the Code • (4) The Qimonda Case – (i) Chapter 15 of the Code – (ii) Factual Background – (iii) Impact – (iv) Status • (5) ( )Q&A 58
    • Q&A Michael M. Murray Blake Reese Partner, Intellectual Property/Litigation Associate, Intellectual Property/Litigation Milbank, Tweed, Hadley & McCloy LLP Milbank, Tweed, Hadley & McCloy LLP 1 Ch Chase M h tt Pl Manhattan Plaza 1 Chase Manhattan Plaza New York, NY 10005 (212) 530-5424 New York, NY 10005 MMurray@milbank.com (212) 530-5496 http://www.milbank.com/en/Attorneys/m- p y @ BReese@milbank.com o/Murray_Michael.htm http://www.milbank.com/en/Attorneys/p- r/Reese_Blake.htm Bradley Scott Friedman Associate, Financial Restructuring Milbank, T Milb k Tweed, Hadley & M Cl LLP d H dl McCloy 1 Chase Manhattan Plaza New York, NY 10005 (212) 530-5846 BFriedman@milbank.com BFriedman@milbank com http://www.milbank.com/en/Attorneys/d- f/Friedman_Bradley.htm 59