1. Intellectual Property Assets in
Bankruptcy: How to Take
Advantage of Another’s
Misfortune & Avoid Your Own
Mike Annis

2. IP in Bankruptcy – is there value?
 Nortel
– How can $950 million turn into $4.5 billion?
– Strategic value of portfolio rather than
licensing income opportunity.
 Kodak
– Can patent sale fund reorganization?
– Can others prevent a proposed sale?

3. Distress Leads to Unique
Valuation Issues
 What exactly does the debtor own?
– GAAP does not reflect internally-developed IP
on financial statements.
– GAAP does require valuation of acquired IP –
FAS 141.
– Management may not know all types of IP the
debtor owns.
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4. Distress Leads to Unique
Valuation Issues
 Must ensure you purchase all relevant IP out of
entity to make a go of it
– Obtain the know-how necessary to turn the IP
into cash flow.
– Employees with know-how may have
departed long ago.
– Further investment beyond your sale price
may therefore be necessary.
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5. Case Study from Another World
 Circuit City trademark and website
– Purchased in May 2009 by Systemax for $14
million.
– Systemax reported a $67 million sales
increase in 2009 related to acquisition of
brand, trademark and website.
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6. IP Involved in Bankruptcy Proceeding
 Three Critical Questions to Answer
1. What type of asset is involved?
- Patent, copyright, trademark, trade secret?
- Each how there own unique issues in bankruptcy
2. Who “owns” the asset?
- Debtor? Third-party?
3. What is the debtor’s relationship to the asset?
- Fee-title owner? Licensee?
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7. Licensed IP in Bankruptcy Proceeding
 Do you have an “executory contract?”
– Most IP licenses are considered “executory”
– Some future performance by both parties
– Material obligation
 Recent 8th Circuit case Confirms
– In re Interstate Brands, 690 F.3d 1069 (8th Cir. 2012)
– Even if exclusive, prepaid and perpetual

8. Licensed IP in Bankruptcy Proceeding
 Section 365 is the key Code provision
– Rejection (Section 356(n))
• Can you treat the contract as terminated?
– Assumption (Section 365(a))
• Can debtor continue on your licensee?
– Assumption and Assignment (Section 365(a))
• Can your licensee effectively transfer its license
rights to another?

9. Example – (1) debtor owns IP, and
(2)is licensor
• Buyer beware -- Prospective purchaser may be
required to purchase the asset subject to existing
agreements.
• If existing license is “exclusive,” it will only give
purchaser the right to receive royalties and at the
rate previously agreed to between the licensee
and former owner.
• If existing license is “non-exclusive,” buyer can
practice and receive royalties from licensee.

10. Rejection –Section 365(n)
– If the IP is owned by the debtor, the trustee
or DIP may “reject” the license.
– Big questions:
• What effect does rejection have on an existing
license?
• Does rejection terminate the license and allow
Debtor to sell the asset free and clear?

11. Rejection –Section 365(n)
Answer likely depends upon the type of
asset.
• Clearly covers patents and copyrights
• “Trademarks” are not “IP” as defined in BR Act
• Much debate on the subject – Circuit Split
– 4th Circuit – Trademarks not subject to 365(n)
– 7th Circuit – Trademarks are subject to 365(n)

12. Rejection –Section 365(n)
 Options Available to Existing Licensee Subsequent to
Court’s Rejection of License
– Section 365(n) basically provides the licensee two
options:
(1) Treat license as terminated by the rejection
-- walk away
(2) Licensee can retain its rights under the license
so long as it continues to pay required royalty
payments

13. Rejection –Section 365(n)
Scenario –
(1) Debtor owns IP Encumbered by License,
(2) Trustee/DIP Reject License,
(3) You Buy the IP from BR Estate and;
(4) Licensee Continues to Use the IP over your Objection.
Options Available to New Owner –
– Rejection may not prohibit licensee’s ability to practice patents,
copyrights or trade secrets.
– If licensee does not confirm properly, sue the holdover licensee
to stop using the IP and seek damages for holdover’s
exploitation of IP after “rejection.”

14. Rejection –Section 365(n)
Options Available to New Owner Subsequent to a
Purchase of IP After Rejection of License
– If license rejected included trademark rights,
holdover’s continued use of trademark could amount
to counterfeiting under the Lanham Act – provides
special remedies for owner of trademark.
– Could initiate civil action against holdover in State or
Federal Court.

15. Assumption/Assumption and
Assignment – Section 365(a)
Perspective Well-settled bankruptcy law permits debtor to assume
and assign an executory contract over the objection of
the owner (Sections 365(a)&(f))
 Debtor must:
(1) Cure existing defaults/assurances
(2) Compensate for monetary losses caused by
existing defaults/assurances
(3) Adequate assurances that contract will be
performed on prospective basis

16. Assumption/Assumption and
Assignment – Section 365(a)
– However, if IP license is “non-exclusive,” need
to look at license assignability - to be
effective, the assignment will likely need the
owner’s consent.
– If the IP license is “exclusive,” may be
assignable without licensor/owner’s consent.

17. Assumption/Assumption and
Assignment – Section 365(a)
 Patents
• Non-exclusive – no assignment w/o consent
• Exclusive – less than clear
 Copyrights
• Non-exclusive – no assignment w/o consent
• Exclusive – usually assignable w/o consent
 Trademarks
• Non-exclusive – not assignable w/o consent
• Exclusive – not assignable w/o consent

18. Other Issues to Consider
 TRADE SECRETS
– Potential Problems
• Disclosure in bankruptcy proceedings without
appropriate retrictions may likely kill “secret” nature
of Trade Secret
• May then be unable to enforce against any third
parties

19. Avoiding Bankruptcy Pitfalls
 Pre-bankruptcy drafting tips:
– Think through the issue of exclusive/non-
exclusive license
– Assignability – bigger deal than you think
– Bankruptcy/insolvency as trigger for
termination?

20. Questions?
Mike Annis
(314) 345-6432
mike.annis@huschblackwell.com