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The Intersection of IP & Bankruptcy (Series: Chapter 11 Potpourri)

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The Intersection of IP & Bankruptcy (Series: Chapter 11 Potpourri)

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 as special issues regarding assignment of licenses in bankruptcy proceedings.

To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/the-intersection-of-ip-bankruptcy-2021/

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 as special issues regarding assignment of licenses in bankruptcy proceedings.

To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/the-intersection-of-ip-bankruptcy-2021/

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The Intersection of IP & Bankruptcy (Series: Chapter 11 Potpourri)

  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 Sponsor
  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 C. Cohn – Murtha Cullina LLP PANELISTS: Victor Vilaplana - Foley & Lardner LLP Gregory Werkheiser - Benesch Friedlander Coplan & Aronoff LLP Christopher Wick - Hahn Loeser John Demmy - Saul Ewing 6
  6. 6. About This Webinar The Intersection of IP & Bankruptcy 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 as special issues regarding assignment of licenses in bankruptcy proceedings. 7
  7. 7. About This Series Chapter 11 Potpourri 2021 As of this writing (April, 2021), the nation and the world are just beginning to emerge from the COVID-19 pandemic, which has been ongoing for more than 13 months. The number of Chapter 11 filings with greater than $10m of liabilities grew by 16.5% in 2020. This, however, does not necessarily paint an accurate picture of the financial distress that may be ahead. The two rounds of federal stimulus approved during 2020 may have blunted some of the worst of the disruption that companies faced in 2020, but many companies now face an uncertain future, as a result of, among other things, increased debt service obligations they took on to survive this last year. These circumstances suggest that we may see a significant uptick in the number of Chapter 11 bankruptcy cases filed by businesses across the American Landscape. Designed for the corporate attorney, litigator, and anyone else who is not a Chapter 11 bankruptcy expert who finds herself stepping into bankruptcy for the first time or only on occasion, each episode in this Financial Poise webinar series takes a deep dive into one aspect of a chapter 11 bankruptcy case at a level that can be understood by the non-expert. Each Financial Poise Webinar is delivered in Plain English, understandable to investors, business owners, and executives without background in these areas, yet also invaluable to seasoned attorneys, accountants, and other professionals who need to refresh their understanding of this timely topic. Each episode brings you an engaging conversation designed to entertain as it teaches, and may be viewed independently so that your knowledge will be enhanced whether you attend one, some, or all episodes. 8
  8. 8. Episodes in this Series #1: The Nuts & Bolts of a Chapter 11 Plan Premiere date: 2/24/21 #2: The Nuts & Bolts of a Section 363 Sale Premiere date: 3/24/21 #3: The Intersection of IP & Bankruptcy Premiere date: 4/21/21 9
  9. 9. Episode # 3 The Intersection of IP & Bankruptcy 10
  10. 10. Types of Intellectual Property  Patents  Copyrights  Trademarks  Trade Secrets  Domain Names
  11. 11. Patents  A patent is a right to exclude others from using an invention for a limited term.  Governed by the Patent Act, 35 U.S.C. §§ 101., et seq.  Regulated by the United States Patent and Trademark Office.  U.S. now uses a “first to file” patent system (used to be “first to invent”) 12
  12. 12. Patents  Patent Act recognizes three types of patents:  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; does not need to meet the usefulness standard applicable to a utility patent. 13
  13. 13. Copyrights  A copyright is a right to exclude others from using an original work of authorship for a limited term.  Governed by the Copyright Act, 17 U.S.C. §§ 102, et seq.  Federal copyrights are registered at the United States Copyright Office.  Important exception: Doctrine of “fair use” permits others to make limited use of a copyrighted work, for example, to quote a small portion of a book. 14
  14. 14. 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 15
  15. 15. 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.  Federal trademarks are registered at the United States Patent and Trademark Office 16
  16. 16. Trademarks  Trademarks must be used in commerce; so long as they are, they do not expire  Trademark must stand for something:  Particular manufacturer (e.g., “aspirin,” “escalator” and “linoleum” used to be trademarked but have now become generic)  Set of standards (e.g., franchisors impose standards on franchisees to assure quality and uniformity)  Federal registration 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 in the US 17
  17. 17. Trade Secrets  A trade secret is a formula, practice, process, design, instrument, pattern, or compilation of information that is not generally known or reasonably ascertainable and that provides a business with an economic advantage.  Governed by state law rather than federal law  Most states have adopted the Uniform Trade Secrets Act  Example: The formula to make Coca-Cola™ 18
  18. 18. Domain Names  A domain name is a part of a larger internet address called a “URL” – an identification string that defines a 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 19
  19. 19. Bankruptcy Overview – Treatment of Contracts  Executory Contracts  No statutory definition  Generally accepted is the “Countryman Definition”: A contract with sufficient performance due on both sides that either party’s failure to perform is a material breach excusing performance by the other party  Debtor’s Options: Reject, Assume, or Assume and Assign  Executory Contracts are governed by Section 365 of the Bankruptcy Code  But when assigned, see also Section 363 (governing sales) 20
  20. 20. Bankruptcy Overview – Treatment of Contracts  Automatic Stay (Bankruptcy Code Section 362)  Prevents contract termination  During “limbo period” while Debtor decides what to do, non-debtor party generally must continue to perform  May ask court for “adequate protection” for any financial exposure  May ask court to set early deadline for Debtor to assume or reject 21
  21. 21. Bankruptcy Overview – Treatment of Contracts  Rejection  Debtor may seek court approval to reject a contract it no longer wants  Court generally defers to Debtor’s business judgment  Rejection deemed breach by Debtor as of the bankruptcy petition date  Non-debtor counterparty has prepetition claim (typically, a general unsecured claim) for damages  Area of controversy: Do any contractual provisions survive rejection? 22
  22. 22. Bankruptcy Overview – Treatment of Contracts  Assumption  The opposite of rejection: Debtor affirms the contract will continue  Once again, deference to Debtor’s business judgment  Debtor must cure defaults and provide “adequate assurance of future performance”  Assumption and Assignment  Two separate steps  Must demonstrate “adequate assurance of future performance by the assignee”  After assignment, Debtor has no further obligation under contract 23
  23. 23. Bankruptcy Overview – Treatment of Contracts  Certain Contract Provisions are Unenforceable in Bankruptcy  “Ipso facto” termination clauses and bankruptcy default provisions  Contractual restrictions on assignment  Certain Executory Contracts May Not Be Assumed and/or Assigned in Bankruptcy  Contracts to make a loan or provide “financial accommodations”  Contracts of a type where applicable law excuses the non-debtor party from accepting performance from a party other than the debtor o Personal services contracts o Certain intellectual property licenses where Debtor is licensee 24
  24. 24. Treatment of IP Licenses in Bankruptcy  Bankruptcy Code defines intellectual property as:  (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. 11 U.S.C. § 101(35A)  Conspicuously (and deliberately) omitted: Trademarks 25
  25. 25. Debtor as Licensor: IP Other than Trademarks  Section 365(n): Special protection for licensee of “intellectual property” (i.e., everything but trademarks)  During the “limbo period” before assumption or rejection  Debtor must perform the license  Licensee may demand turnover of the subject IP including any embodiment of the IP (such as computer source code, prototypes, patented cell lines) as provided in the contract 26
  26. 26. Debtor as Licensor: IP Other than Trademarks  If debtor-licensor rejects, Section 365(n) provides licensee with two options:  Treat the rejection as termination of the license and assert a claim for damages (same as any other counter-party to a rejected contract).  Retain right to use the IP (and obligation to pay royalties) under the license, BUT:  Licensee waives any right of setoff or for an administrative claim  Licensee has no right to IP generated after bankruptcy petition  Debtor no longer has affirmative obligations under license 27
  27. 27. Debtor as Licensor: IP Other than Trademarks  Debtor’s non-performance creates uncompensated risk to licensee:  In-licenses (what if in-licenses are rejected?)  Development (what happens if key employees are laid off?)  Supply (are alternative sources available?)  Infringement actions (licensee is on its own to defend) 28
  28. 28. Debtor as Licensor – Trademarks  During the “limbo period” before assumption or rejection  Not clear whether debtor must protect trademark  Licensee must continue to perform (with possible exception of clear postpetition breach by debtor) 29
  29. 29. Debtor as Licensor – Trademarks • Rejection of trademark license does not divest licensee of all rights. • Non-exclusive trademark licensee may continue to use trademarks consistent with the terms of the license and state law remedies for a licensor’s breach of the license. Mission Product Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652 (2019). • Tempnology resolved a circuit split on whether rejection simply vaporized the license, but leaves a conundrum:  For the debtor-licensor: What good is rejection if the licensee can still use the trademark?  For the licensee: What good is the right to use the trademark if the debtor-licensor is no longer bound by the contract, for example, no longer required to protect the value of the trademark? 30
  30. 30. Debtor as Licensor – All Types of IP  Does the Qualitech case offer a way around Section 365(n) and the residual trademark rights that Sunbeam conferred on the non-debtor licensee?  Section 363 permits sale of estate property free and clear of “interests” of non- debtor parties.  Courts have permitted sale of real estate free and clear of a lease. Precision Industries, Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003).  Just as the Qualitech sale deprived the tenant of its right to continue in possession under § 365(h) if the lease had been rejected, a sale of IP under § 363 might deprive a licensee of its right to continued use of the IP under § 365(n).  What would constitute “adequate protection” for the licensee in this context? 31
  31. 31. Debtor as Licensee  The Catapult issue: May the debtor assume an IP license without the licensor’s consent?  The Problem: Bankruptcy Code § 365 provides that a license may not be assumed or assigned if applicable law excuses the non-debtor party from accepting performance from a party other than the debtor  Federal common law or state law treats many types of intellectual property licenses as assignable only with licensor consent  The 9th Circuit has held that intellectual property licenses may not be assumed without licensor consent. Pearlman v. Catapult Entertainment, Inc. (In re Catapult Entm’t, Inc.), 165 F.3d 747 (9th Cir. 1999). The Third Circuit has followed Catapult. 32
  32. 32. Debtor as Licensee  Two other approaches to the problem:  1st Circuit – An intellectual property license may be assumed if an assignment is not in prospect. Institut Pasteur v. Cambridge Biotech Corp., 104 F.3d 489 (1st Cir. 1997).  The Footstar approach – Section 365(c)(1) bars only an actual trustee, not a debtor in possession, from assuming an IP license. In re Footstar, Inc., 323 B.R. 566 (Bankr. S.D.N.Y. 2005). 33
  33. 33. Debtor as Licensee  If the licensor objects to assumption and/or assignment:  The terms of the license itself may rescue the estate. A typical license provision permits assignment of a license in conjunction with sale of the business to which the license relates.  If the debtor holds an exclusive license, the court may treat the IP as an asset rather than a contract right or in some instances may rule the contract non-executory 34
  34. 34. Preserving the Value of IP  Especially in the case of patents , software copyrights and trade secrets, the value of the IP may depend on key employees. In this type of situation, the debtor must take steps to hold the team together during its period of financial challenge.  The value of IP may also depend on documents such as data compilations, lab notebooks, and so on. A company entering chapter 11 should make sure to preserve these assets.  The value of IP may depend on in-licenses. The debtor should make identify and preserve license rights on which the value of its own IP depends. 35
  35. 35. Preserving the Value of IP  Confidentiality can be key  Debtor must require execution of a non-disclosure agreement by any prospective bidder for IP assets.  Debtor’s own breach of confidentiality can be costly to the estate. MBNA Am. Bank, N.A. v. TWA (In re TWA), 275 B.R. 712 (Bankr. D. Del. 2002) (bid procedures and the sale order did not protect a debtor from liability for breaching the confidentiality provisions of an agreement).  Buyer should make sure that debtor and losing bidders are bound by confidentiality obligations that are enforceable by the buyer. 36
  36. 36. About the Faculty 37
  37. 37. About The Faculty Daniel Cohn - dcohn@murthalaw.com Dan Cohn, based in Boston, devotes his practice at Murtha Cullina LLP to financially distressed businesses. 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, trust mortgages and assignments for benefit of creditors. Besides representing debtors, he serves as counsel to acquirers of troubled businesses, equity sponsors, directors and officers, litigation defendants, trustees, landlords, suppliers, tort claimants and creditors’ committees. Dan is a trained mediator and frequent lecturer on bankruptcy law. A fellow of the American College of Bankruptcy, he serves as chair of its Policy Committee responsible for developing positions on bankruptcy legislation. Mr. Cohn is ranked by America’s Leading Business Lawyers (Chambers & Partners USA). To read more, go to http://www.murthalaw.com/our_people/daniel-cohn 38
  38. 38. About The Faculty Victor Vilaplana - VAVilaplana@foley.com Victor A. Vilaplana is of counsel and a business reorganization attorney with Foley & Lardner LLP. Victor focuses his practice on the handling of insolvency matters, particularly complicated business bankruptcies and international transactions. His experience includes representing businesses in multiple fields, from medical device companies to agricultural producers in Chapter 11 cases. Victor is a member of the firm’s Bankruptcy & Business Reorganizations, International, and Latin America Practices as well as the Automotive Industry Team. Prior to joining Foley, Victor was a shareholder of Seltzer Caplan McMahon Vitek and a managing partner of the San Diego office of Sheppard, Mullin, Richter & Hampton. Victor is a frequent lecturer for the California Continuing Education of the Bar, Practicing Law Institute, Law Education Institute, and National Institute of Trial Advocacy on the topics of insolvency, uniform commercial code, and various U.S./Mexico related issues, such as real estate ownership, commercial law, equipment leasing and debtor/creditor relations. He is also an ALI-ABA lecturer on practice under the Bankruptcy Abuse Prevention and Consumer Protection Act. Victor has authored articles on the administration of multi-national bankruptcies and prepackage Chapter 11 plans of reorganization. He is co-editor of Advanced Chapter 11 Bankruptcy Practice for the American Law Institute. 39
  39. 39. About The Faculty Gregory Werkheiser - gwerkheiser@beneschlaw.com Greg is a partner in Benesch’s Insolvency & Creditors’ Rights Practice Group and represents debtors, creditors and other parties in complex business bankruptcy cases and out-of-court restructurings. Greg devotes a substantial portion of his practice to bankruptcy appellate litigation and assisting clients with navigating the intersection of intellectual property and bankruptcy law. In addition, Greg’s extensive experience includes advising fiduciaries and managers for distressed enterprises, acquisitions of financially distressed companies, representing official and ad hoc creditors’ committees, negotiating and drafting debtor-in- possession financing documents, distressed M&A transactions, and bankruptcy-related litigation. He has represented clients across a range of industries, including retail, energy, transportation, manufacturing, healthcare, pharmaceuticals, financial services and investment. Greg is a frequent writer and speaker on leading edge bankruptcy and insolvency topics. He has been recognized as a leading Delaware attorney in the bankruptcy and restructuring area by Chambers USA and listed in The Best Lawyers in America. 40
  40. 40. About The Faculty Christopher Wick - cwick@hahnlaw.com Christopher B. Wick specializes in corporate restructuring and bankruptcy. Chris focuses his practice on corporate reorganizations, workouts, debtors’ and creditors’ rights and corporate transactions across the United States. He has represented parties in the restructuring, reorganization or sale of complex business in various industries, including energy, automotive, agriculture, telecommunications, logistics, manufacturing, real estate and steel. He also has a broad range of transactional experience and has advised clients in connection with a variety of DIP financing facilities, recapitalization transactions and asset dispositions and acquisitions. Chris has substantial experience representing and advising companies, buyers and investors in all aspects of distressed and insolvency situations. He counsels boards of directors, chief executive offices and other members of senior management with respect to their duties and obligations to and exposures in connection with financially challenged companies. 41
  41. 41. About The Faculty John Demmy - john.demmy@saul.com John Demmy represents debtors, creditors' and ad hoc committees, asset buyers, insurers, and all types of creditors in bankruptcy cases and related litigation matters, and he draws on his involvement in many of the major bankruptcy cases in the District of Delaware over the past 30 years to guide them. He also handles bankruptcy appeals to the Delaware District Court and to the Court of Appeals for the Third Circuit. He has appeared in major bankruptcies in the Southern District of New York and other bankruptcy jurisdictions, including Texas, Louisiana, California, Chicago, Pittsburgh, Minneapolis, Virginia and North Carolina, as well. John is also an experienced commercial litigator who assists clients with cases in the Delaware Court of Chancery, a premiere venue for business disputes. He also provides opinions with respect to matters of bankruptcy and Delaware law relating to Delaware entities. 42
  42. 42. 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. 43
  43. 43. 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/
  44. 44. About Financial Poise 47 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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