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The Intersection of Bankruptcy and... IP Law (Series: Bankruptcy Intersections 2020) the intersection of bankruptcy and ip law

Intellectual property generally includes patent rights, copyright rights, trademark and servicemark rights, and trade secrets. The foundation of intellectual property law is the protection of exclusive rights afforded to original works and invention. These rights can be significantly impacted by bankruptcy proceedings. This webinar examines some of these key issues including the perfection of security interests in intellectual property, the protection of certain intellectual property licenses and lack of protection for other types of intellectual property, the relief available to licensors, as well a special issues regarding assignment of licenses in bankruptcy proceedings.

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The Intersection of Bankruptcy and... IP Law (Series: Bankruptcy Intersections 2020) the intersection of bankruptcy and ip law

  1. 1. 1
  2. 2. 2 Practical and entertaining education for attorneys, accountants, business owners and executives, and investors.
  3. 3. 3 Thank You To Our Sponsors
  4. 4. Disclaimer The material in this webinar is for informational purposes only. It should not be considered legal, financial or other professional advice. You should consult with an attorney or other appropriate professional to determine what may be best for your individual needs. While Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate, Financial Poise™ makes no guaranty in this regard. 5
  5. 5. Meet the Faculty MODERATOR: Daniel Cohn - Murtha Cullina PANELISTS: Gary Marsh - Troutman Sanders LLP Thomas Kiriakos - Mayer Brown James Wilton - Ropes & Gray LLP Elvir Causevic - Houlihan Lokey 6
  6. 6. About This Webinar The Intersection of Bankruptcy and… Intellectual Property Law Intellectual property generally includes patent rights, copyright rights, trademark and servicemark rights, and trade secrets. The foundation of intellectual property law is the protection of exclusive rights afforded to original works and invention. These rights can be significantly impacted by bankruptcy proceedings. This webinar examines some of these key issues including the perfection of security interests in intellectual property, the protection of certain intellectual property licenses and lack of protection for other types of intellectual property, the relief available to licensors, as well special issues regarding assignment of licenses in bankruptcy proceedings. 7
  7. 7. About This Series Bankruptcy Intersections Bankruptcy law is generally a federal-based practice, and governed by title 11 of the United States Code (the Bankruptcy Code). Bankruptcy law, however, is far from an insular practice; there is substantial interplay between bankruptcy law and almost every other area of law due to the myriad legal issues that arise during the course of a bankruptcy case. This webinar series focuses on how issues involving intellectual property, employment and labor, tax law, and environmental law are treated through the prism of bankruptcy. Each Financial Poise Webinar is delivered in Plain English, understandable to investors, business owners, and executives without much background in these areas, yet is of primary value to attorneys, accountants, and other seasoned professionals. Each episode brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. Each episode in the series is designed to be viewed independently of the other episodes so that participants will enhance their knowledge of this area whether they attend one, some, or all episodes. 8
  8. 8. Episodes in this Series #1: The Intersection of Bankruptcy and… Tax Law Premiere date: 2/12/20 #2: The Intersection of Bankruptcy and… Labor/Employment Law Premiere date: 3/11/20 #3: The Intersection of Bankruptcy and… IP Law Premiere date: 4/8/20 #4: The Intersection of Bankruptcy and… Environmental Law Premiere date: 5/13/20 9
  9. 9. Episode #3 The Intersection of Bankruptcy and… IP Law 10
  10. 10. What is Intellectual Property? • Generally Intangible Assets:  Patents  Copyrights  Trademarks  Trade Secrets  Domain Names 11
  11. 11. Patents • Exclusionary rights afforded to the holder of inventions or discoveries for a limited term. • Patents and Patent Applications:  Governed by the Patent Act, 35 U.S.C. §§ 101., et seq.  Regulated by the United States Patent and Trademark Office. 12
  12. 12. Three Types of Patents Under The Patent Act • Utility Patents: Protect useful inventions that are novel and non-obvious, including processes, methods, devises, software programs, and other compositions of matter. • Plant Patents: Protect new and distinct varieties of plants. • Design Patents: Protect any new, original, and ornamental design for an article of manufacture and doses not need to meet the usefulness standard to qualify for a utility patents. 13
  13. 13. Patents • Amended relatively recently to change the patent system from “First to Invent” to “First to File” system. 14
  14. 14. Copyrights • A copyright is a form of protection provided by title 17 of the United States Code to authors of “original works of authorship.” 17 U.S.C. §§ 102, et seq.  Governed by the Copyright Act  Regulated by the United States Copyright Office 15
  15. 15. Copyrights • To qualify for protection, the original work must display at least some creativity and be fixed in a tangible medium of expression. • Examples:  Literary works  Dramatic works  Musical works  Artistic works • Can be licensed as an exclusive license or non-exclusive license 16
  16. 16. Trademarks • A trademark is “any work, name, symbol, or device, or any combination thereof . . . Used by a person . . . To identify and distinguish his or her goods, including a unique product, from those manufactured or sold by others and to indicate the source of the goods, even if that source is unknown.”  Trademarks and service marks are governed by the Lanham Act. 15 United States Code §§ 1051, et seq.  Trademarks are registered at the United States Patent and Trademark Office 17
  17. 17. Trademarks • Trademarks must be used in commerce. • Federal registration is not required, but provides several advantages:  Notice to the public of the registrant’s claim of ownership  Legal presumption of ownership nationwide  Exclusive right to use the mark 18
  18. 18. Trade Secrets • Formulas, practices, processes, designs, instruments, patterns, or compilations of information that are not generally known or reasonably ascertainable and that provide a business with an economic advantage.  Governed by state law rather than federal law  Most states have adopted the Uniform Trade Secrets Act 19
  19. 19. Domain Names • A domain name is a part of a larger internet address called a “URL” • An identification string that defines the realm of administrative control on the internet • Domain names are obtained by registering with the applicable domain authority • Not licensed • Often incorporates a trademark or trade name of the domain name registrant 20
  20. 20. The Bankruptcy Code’s Definition of Intellectual Property • Title 11 of the United States Code defines “intellectual property” as follows: (A) Trade secret; (B) Invention, process, design, or plant protected under title 35 (the Federal Patent Act); (C) Patent application; (D) Plant variety; (E) Work of authorship protected under title 17 (the United States Copyright Act); and (F) Mask works protected under chapter 9 of the United States Copyright Act. 21
  21. 21. What is Missing from the Bankruptcy Code’s Definition? • Trademarks:  Congress excluded trademarks from the definition due to policy considerations. • Recent Trademark developments in Bankruptcy Law 22
  22. 22. Initial Considerations: Intellectual Property Issues in Bankruptcy • Policy clashes between Bankruptcy Law and IP Law • Key forms of IP dealt with in Bankruptcy  Patents, Copyrights, Trademarks, Trade Secrets, Domain names • International Application: In re Qimonda 23
  23. 23. Policy Differences Between IP Law & Bankruptcy Law • Protection of the inventor • Protection of the Debtor • Who wins? 24
  24. 24. Bankruptcy Law Policy Considerations • Prohibits creditors from taking actions against a debtor to provide the debtor with a fresh start. • Designed to maximize the value of a debtor’s assets. • A debtor generally has unfettered discretion to sell its assets and to assume, assign, or reject its executory contracts. • A debtor is generally allowed to assume, assume and assign, or reject certain executory contracts and leases without consent of non-debtor parties. 25
  25. 25. Intellectual Property Law Policy Considerations • Vigorously protects the IP holder against potential infringers. • License agreements are treated like personal contracts. • The rights of a licensee are preserved over the rights of a debtor if a debtor is the licensor. • IP laws may prevent a debtor from assuming or assigning the underlying license if a debtor is the licensee. 26
  26. 26. IP Licenses in Bankruptcy • IP Licenses are generally considered to be executory contracts: • See e.g., In re Kmart, 290 B.R. 614, 618 (Bankr. N.D. Ill. 2003) • “Generally speaking, a license agreement is an executory contract as such is contemplated in the Bankruptcy Code.” 27
  27. 27. 11 U.S.C. § 365: Executory Contracts & IP Issues • Defining Executory Contracts under the Bankruptcy Code-  Countryman Definition: Executory contracts are those “under which the obligation of both the bankrupt and other party to the contract are so far underperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.” transactions in carrying on business connected with such property . . . 28
  28. 28. 11 U.S.C. § 365: Executory Contracts & IP Issues • IP Licenses – Executory contracts or not? • Can IP Licenses be Assigned or rejected? • Different tests 29
  29. 29. Executory Contract? • Key issues regarding a contract’s executory status:  Whether performance remains due on the party of both the licensee and the licensor such that the failure to perform by either party constitutes a material breach  Whether remaining obligations are sufficient to show that the license is an executory contract • Determinative: whether the licensor has ongoing obligations 30
  30. 30. IP Licenses as Executory Contracts • EXCLUSIVE LICENSES: May be deemed to be an assignment if one side has completely performed its obligations. • NON-EXCLUSIVE LICENSES: Do not convey any ownership interest in the IP – they only grant permission to use the IP. Therefore, most non-exclusive licenses are considered executory. 31
  31. 31. The Debtor as the Licensor • Section 365(n) of the Bankruptcy Code limits the debtor’s right to reject licenses because the non-debtor may continue to use technology by paying royalties due under the license agreement and waiving the right to setoff and any administrative claims against the estate arising from the performance of the license. • Section 365(n) does not apply to trademarks, foreign IP, or future IP. 32
  32. 32. 11 U.S.C. § 365(n): Protection for Parties to IP Licenses • Specific protections set forth for parties to IP License agreements in the event of rejection or inaction by a bankruptcy trustee or debtor in possession • As a general rule, the “Business Judgment Test” applies to rejection of executory contracts under section 365 of the Bankruptcy Code. 33
  33. 33. Section 365(n): Two Options for the Licensee 1. Treat the debtor’s rejection as termination of the license and assert a claim for rejection of damages. 2. The licensee can retain its right to use the IP as it existed as of the filing of the debtor’s bankruptcy petition. • Licensee does not retain all of its rights under the license. There are no continuing obligations on the debtor to update or maintain the technology or defend the licensee against infringement actions. • The debtor may attempt to use section 363(f) of the Bankruptcy Code to sell the IP technology “free and clear of any interest in such property.” 34
  34. 34. Effect of Rejection • Rejection is a breach of contract – not termination of the agreement • Licensee can assert breach of contract damages as a general unsecured claim under section 502(g) of the Bankruptcy Code • Under the Supreme Court’s decision in Tempnology, rejection does not divest a non- exclusive trademark licensee of the right to continue to use trademarks consistent with the terms of the license and state law remedies for the debtor / licensor’s rejection and breach of the license 35
  35. 35. Assumption of IP Licenses • Section 365(a) and (b) allow a debtor to assume or reject an executory contract. Section 365(f) authorizes the assignment of an executory contract to a third party. • A debtor’s right to assume and assign an executory contract is restricted by section 365(c):  If applicable non-bankruptcy law excuses the non-debtor from accepting or rendering performance; and  Such party does not consent. • “Applicable law” does not include the enforceability of anti-assignment provisions in the contract (ipso facto clauses). • Extensive litigation has led to a jurisdictional split regarding assumption. 36
  36. 36. Three Approaches to Assumption 1. The Hypothetical Test 2. The Actual Test 3. The Footstar Approach 37
  37. 37. The Hypothetical Test • Majority approach.  Restricts assumption and assignment if applicable law excuses performance to or from a party other than the debtor.  Determinative issue: Whether the debtor may assign the license to an unaffiliated third party. • Pearlman v. Catapult Entertainment, Inc. (In re Catapult Entm’t, Inc.), 165 F.3d 747 (9th Cir. 1999) 38
  38. 38. The Actual Test • Focuses on the actual intentions of the debtor-licensee seeking to assume an IP license because, unless the license will actually be assigned, the non-debtor licensor will not be required to accept or render service “to an entity other than the debtor….” • Institut Pasteur v. Cambridge Biotech Corp., 104 F.3d 489 (1st Cir. 1997) 39
  39. 39. The Footstar Approach • 365(c)(1) bars only the trustee and not a debtor-in-possession from assuming an IP license if applicable law would excuse the non-debtor counterparty from being bound by an assignment of the license. • The court reasoned that the word “trustee” does not include a debtor-in-possession. Therefore, the right of a non-debtor to object to an assignment does not affect the right of the debtor to assume an executory contract. • In re Footstar, Inc., 323 B.R. 566 (Bankr. S.D.N.Y. 2005) 40
  40. 40. Section 363 Sales & IP Issues • Valuation of IP rights at sale? • Common risks to IP rights during sale process / Non Disclosure Agreements  Risks to confidentiality?  How can confidentiality be protected? 41
  41. 41. Confidentiality Issues in the Sale Process • Licenses may contain confidential provisions that may affect ability to market the assets • Parties should use non disclosure agreements as part of due diligence to address confidentiality issues • MBNA Am. Bank, N.A. v. TWA (In re TWA), 275 B.R. 712 (Bankr. D. Del. 2002): The court held that bid procedures and the sale order did not protect a debtor from liability for breaching the confidentiality provisions of an agreement. • Qualcomm Inc. v. Texas Instruments, Inc., 875 A.2d 626 (Del. 2005): The court held that the disclosure of the terms of a cross-licensing agreement did NOT constitute a material breach of the contract because a breach must concern the “essence of the contract.” 42
  42. 42. Lender Issues & Liens Against IP • How will a lender’s rights in IP be effected post-petition? • How can a lender or creditor obtain a lien against IP? • How can liens against IP be enforced post-petition? 43
  43. 43. Preserving and Maximizing Value of IP in Bankruptcy Sales • Patents should be analyzed separately from operating businesses. • Maximizing the value of patents is easier when there is so-called “evidence of use” of the patented invention, i.e. market size, market share. • Understanding market share allows the parties to better understand the range of a “reasonable royalty” that the patent should command. Licensing can generate more revenue than a sale. • Standard manner of demonstrating “evidence of use” is through a claim chart.  Claim charts are tables that outline a patent’s claims, element by element, and compares those claims to the claims of an allegedly infringing patent. 44
  44. 44. Maximizing Value • Timing of Sales  Nortel bankruptcy case  Kodak bankruptcy case  Old Hostess Brands bankruptcy case 45
  45. 45. About the Faculty 46
  46. 46. About The Faculty Daniel Cohn - dcohn@murthalaw.com Dan Cohn devotes his practice at Murtha Cullina LLP to financially distressed businesses and is recognized as one of New England’s best-known counsel to troubled companies. His experience includes Chapter 11 reorganizations and sales, out of court debt restructurings, troubled company acquisitions, trust mortgages and assignments for benefit of creditors, and representation of directors and officers, equity sponsors, litigation defendants, trustees, landlords, suppliers, tort claimants and creditors’ committees. Dan is a trained mediator and frequent lecturer on bankruptcy law. He is a fellow of the American College of Bankruptcy and currently the College’s regent for the First Circuit. Mr. Cohn is listed with a Tier One ranking in America’s Leading Business Lawyers (Chambers & Partners USA). For more, go to http://www.murthalaw.com/our_people/daniel-cohn 47
  47. 47. About The Faculty Gary Marsh - gary.marsh@troutman.com Gary Marsh is a partner with Troutman Sanders LLP in Atlanta. A veteran restructuring attorney focused on all aspects of bankruptcy, workouts, debtor and creditor law, Gary’s practice also encompasses general commercial litigation. He represents debtors and creditors in Chapter 11 cases, out-of-court restructurings and litigation. He also represents court appointed receivers, examiners and trustees. Gary’s practice primarily involves representing financial institutions and servicers in and out of court in enforcing their rights and remedies. He also analyzes and defends against preference and fraudulent conveyance actions, represents buyers of assets out of bankruptcy and represents landlords and other parties who have leases or contracts with debtors. Gary has deep industry experience particularly with healthcare, energy and real estate insolvencies. 48
  48. 48. About The Faculty Thomas Kiriakos - TKiriakos@mayerbrown.com Tom Kiriakos is a financial restructuring and bankruptcy lawyer and is the Office Practice Leader for Restructuring in our Chicago office. He represents clients in bankruptcy cases involving debtors across the business spectrum such as real estate, construction, retail, manufacturing (including auto and aircraft parts), hotels, restaurants, equipment leasing, meat packing, life settlement, personal services (consulting), distribution, transportation, for-profit education, oil field and agricultural chemicals, and oil and gas drilling, production and refining. Among his representations, Tom was the lead bankruptcy attorney for the successful senior lender in the landmark Supreme Court 203 North LaSalle Street decision, 526 U.S. 434 (1999). Tom advises and represents clients in related litigation matters, including fraudulent transfer and other avoidance claims, successor liability issues, lender-liability claims, intercreditor disputes, and instances of possible borrower fraud. He represents potential acquirers of distressed businesses, whether via bankruptcy sales, through foreclosure sales, or from assignees for the benefit of creditors, and across a wide array of asset classes. He has represented official unsecured creditors' committees including as co-counsel to the Official Committee of Unsecured Creditors of the Holding Company Debtors in the Chapter 11 cases of Conseco, Inc. (et al.), the third-largest bankruptcy cases in U.S. history at the time of filing. 49
  49. 49. About The Faculty James Wilton - James.Wilton@ropesgray.com With extensive experience in Chapter 11 and out-of-court restructurings, Jim Wilton has represented debtors, creditors’ committees, corporate directors and officers, and acquirers of distressed assets in major cases throughout the United States. Jim’s clients include major pharmaceutical companies, biotech companies, strategic purchasers of assets, and boards of directors of troubled companies. Jim represents Tempnology, a Chapter 11 debtor, in a case currently before the U.S. Supreme Court involving the rights of trademark licensees under contracts rejected in bankruptcy. 50
  50. 50. About The Faculty Elvir Causevic - ECausevic@HL.com Dr. Causevic is a Managing Director and Co-Head of Houlihan Lokey’s Tech+IP Advisory practice. He was formerly the founder and CEO of Black Stone IP, a boutique investment bank focused on valuing and trading Tech+IP assets, which was acquired by Houlihan Lokey in 2017. Prior to Black Stone, he was instrumental in the MIPS semiconductors $350 million patent transaction while he served as the Head of IP Strategy Practice at Ocean Tomo. Before Ocean Tomo, Dr. Causevic founded several industrial, medical, and high-tech businesses, raising over $50 million in premier venture capital, two of which were ultimately acquired by Fortune 500 companies. He is a named inventor on more than 20 patents and patent applications, and was a J.W. Gibbs Assistant Professor of Applied Mathematics at Yale University. Dr. Causevic holds a B.S., an M.S., and a Doctor of Science in Electrical Engineering from Washington University in St. Louis, and a J.D. from the University of California, Hastings College of the Law. 51
  51. 51. Questions or Comments? If you have any questions about this webinar that you did not get to ask during the live premiere, or if you are watching this webinar On Demand, please do not hesitate to email us at info@financialpoise.com with any questions or comments you may have. Please include the name of the webinar in your email and we will do our best to provide a timely response. IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education. 52
  52. 52. ABOUT DailyDAC DailyDAC.com is the leading source of information about assignments, article 9, bankruptcy, receiverships, out-of-court workouts and vulture investing, designed for business owners and vulture investors. Visit us at www.dailydac.com. Premium Public Notice Service DailyDAC’s Premium Public Notice Service helps market asset sales on behalf of fiduciaries (e.g., Chapter 11 debtors- in-possession and committees, trustees, receivers, assignees), secured lenders selling collateral under UCC Article 9, and auctioneers to a very large and self-selected group of potential bidders and their advisors. The Service also assists with noticing other events, deadlines, and milestones – including tombstones and other press releases. Our free weekly newsletter, DailyDAC contains our latest bankruptcy article, current Public Notices and all opportunistic deals added to our proprietary database that week. Sign up at: https://www.dailydac.com/dacyak-weekly-newsletter-signup/
  53. 53. About Financial Poise 56 Financial Poise™ has one mission: to provide reliable plain English business, financial, and legal education to individual investors, entrepreneurs, business owners and executives. Visit us at www.financialpoise.com Our free weekly newsletter, Financial Poise Weekly, updates you on new articles published on our website and Upcoming Webinars you may be interested in. To join our email list, please visit: https://www.financialpoise.com/subscribe/

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