Protecting and Enforcing IP Rights in Bankruptcy: Five to Thrive (For Starters)

19 February 2020 Manufacturing Industry Advisor Blog
Authors: Michael J. Small

When entering into a joint venture or other ongoing contractual relationship in which intellectual property (“IP”) is central to the value proposition, parties should hope for the best and plan for the worst. Bankruptcy for either the investor or funding recipient, buyer or seller, vendor or customer, can materially threaten that value proposition. While there is really no such thing as “bankruptcy-proof,” risks can be reduced by a number of approaches. What follows are not mutually exclusive, but the availability of any or all will depend on the specific circumstances and the relative strengths and concerns of the parties involved.

Security interests - If one is counting on fulfillment of obligations by an owner/holder of IP, then a security interest in that IP can provide advantages if there is an owner/holder solvency problem in the future. Conflicting security interests by the granting party’s lenders need to be considered. Obligations under contracts, in addition to those calling for payments, can be secured. Note that attachment and perfection of security interests vary depending on the collateral in question. Getting both elements right is important. Bankruptcy isn’t a war of all against all, but it can resemble an axe fight.  Show up prepared.  Patents, copyrights, trademarks and the personal property interests related to them have their separate respective trajectories in statute and case law. Knowing the differences will help you navigate.

Bankruptcy “remote” structures - There are two fundamental elements to address when thinking about using this tool, 1) asset protection and 2) asset owner governance. Each has a role to play, and each has different effectiveness in a practical way.

IP Escrows - These have been common in connection with source code for software, but need not be restricted to that sphere. The idea is to shield access to the IP ahead of time in a manner that reduces bankruptcy related risks associated with IP being “property of the estate” of a debtor.

Bankruptcy Code related contractual provisions – The Bankruptcy Code and case law interpreting it establish a baseline of premises that drive whether and how treatment of IP rights in the bankruptcy process will proceed. Contractual language and facts “on the ground” can be managed in a manner that reduces the risk of uncertainty. Recitals by parties and direct reference to relevant Bankruptcy Code sections can create a more efficient evidentiary and legal path if the parties later find themselves in a bankruptcy setting.

Understanding Executory Contracts – Whether a contract (license or otherwise) is an “executory contract” (as that term is used in the Bankruptcy Code) will affect the relative rights and obligations of the parties in a bankruptcy. Again, patents, copyrights and trademarks vary in their respective treatment.

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