protect intellectual property before threat of bankruptcy looms
Tuesday, February 24
With a staggering number of U.S.-based companies facing dire financial scenarios and the threat of bankruptcy looming for both large and small corporations, it is increasingly important for companies to protect their technology and related licensing agreements. According to Michael N. Spink, a shareholder in the Ann Arbor office of Brinks Hofer Gilson & Lione, one of the largest intellectual property law firms in the U.S., technology licensing agreements are surprisingly vulnerable to loss during bankruptcy proceedings, regardless of whether it’s the licensor or licensee of the technology facing bankruptcy.
“If the owner of a technology licenses-out its intellectual property to a licensee that goes into bankruptcy, the licensee may be able to keep its license through bankruptcy. Furthermore, if the licensor is not prompt in objecting, the licensee may even be permitted to transfer the license to an undesirable third party,” explains Mr. Spink. “Another concern arises when a company is licensing-in a critical piece of technology; the owner/licensor might be able to cut off those rights if either company enters into bankruptcy.”
Mr. Spink stresses the importance of addressing these issues during the negotiation of a license to technology and to closely monitor any bankruptcy proceedings to ensure that timely objections can be raised. The application of bankruptcy laws to technology licenses has evolved into a rather complex analysis. There are specific rules that apply depending on whether one is the licensor or licensee and whether the technology involves patents, trademarks, copyrights or trade secrets. Outcomes are also highly dependent on which bankruptcy court is hearing the case. For example, the law regarding the ability of a licensee in bankruptcy to keep its license is being interpreted and applied differently by courts across the country.
“Generally, the bankruptcy provisions are designed to maximize the value of the bankruptcy debtor’s estate,” says Mr. Spink. “There are special provisions that control the handling of technology licenses. Under these provisions, the debtor can usually assume (keep) the license if it is still valuable to the company or reject the license if it is not.”
That doesn’t mean that if a licensor of technology goes into bankruptcy the licensor can reject the license and cut off the licensee’s access to the technology. Special provisions were enacted by Congress to deal with this situation. If a licensor rejects a license, the non-bankrupt licensee can either treat the contract as breeched and become a creditor or keep its license rights and pay ongoing royalties.
“There may be downsides to both choices,” acknowledges Mr. Spink. ”If you become a creditor, you may only recover a small portion of the damages you’ve suffered. If you keep your rights, the bankrupt licensor will be excused from any terms of the license that require them to take action. In other words, they may not be required to perform technical assistance, maintain the technology (e.g. software), or transfer know-how or future developments.”
If a licensee is in bankruptcy, it will not always be able to assume the license and keep the technology. Generally, if that license was non-exclusive and personal -- meaning that the licensor chose that licensee and retained the right to exercise control over who else is licensed and whether the licensee could transfer its license -- then the owner/licensor of the technology may be able to prevent the licensee (in bankruptcy) from keeping the license.
Mr. Spinks says that the best time to protect intellectual property is before any threat exists. “Strategies for intellectual property protection are best sought during the development and introductory phase of any new technology or product. This helps avoid numerous problems that can arise from bankruptcy and other unanticipated events,” concludes Mr. Spink.
Founded in 1917, Brinks Hofer Gilson & Lione is based in Chicago with five additional offices across the country, including Ann Arbor, serving the intellectual property needs of clients from around the world. The firm is one of the largest IP law firms in the country, with more than 180 attorneys, scientific advisors and patent agents specializing in intellectual property litigation and all aspects of patent, trademark, copyright, trade secret, unfair competition, intellectual asset management, and technology and licensing agreements. Brinks routinely handles assignments in fields as diverse as electrical, chemical, mechanical, biotechnology, pharmaceutical, nanotechnology, Internet and computer technology, as well as in trademarks and brand names for a wide variety of products and services. For more information, visit www.usebrinks.com.
