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Bankruptcy and Intellectual Property

If you are thinking about filing bankruptcy and you have any kind of intellectual property (i.e. a patent, copyright, trademark, or trade secret), it is very important to understand the affects filing bankruptcy may or may not have on your intellectual property.

Section 365(n) of the United States Bankruptcy Code provides specific protections for licenses, but does not provide any protection for trademarks. All other types of intellectual property (patents, copyrights and trade secrets) are generally determined to be an executory contract and are treated as such in bankruptcy.

If it is the licensor who is filing bankruptcy, then they have the right to either assume or reject the license. If they choose to assume the license, then they must meet the very specific requirements for assuming an executory contract in bankruptcy. In order to assume an executory contract while in bankruptcy, the debtor licensor must cure all outstanding defaults and make sufficient assurances for continued performance moving forward. If both of these criteria are met, the licensee generally will not take issue with the assumption as long as the debtor licensor actually performs. If the licensor chooses to reject the license, safe guards have been put in place to prevent the licensee from losing their rights to use the intellectual property. Specifically, the licensee has the ability to choose to keep its rights to the intellectual property, but must make any mandatory royalty payments.

If it is the licensee who files bankruptcy, then an exception to the rule applies that a license, which is treated as an executory contract in bankruptcy, can be assumed and assigned to a third party as long as defaults are cured and sufficient assurances are made for performance in the future. The exception is that if relevant law prevents a license from being assigned without consent of a non-filing party, then it cannot be assigned or assumed.

Bottom line, you should seek the advice of an experienced bankruptcy attorney who is very familiar with the affects bankruptcy has on intellectual property. Regardless of whether you are the licensor, licensee, debtor, or non-debtor party you need to make sure your rights to your intellectual property have been perfected before a bankruptcy filing. By making sure your interest has been perfected, you will receive all available protections should a bankruptcy become necessary.

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