International Bankruptcy Issues in IP Transactions Jeffrey D. Osterman September 2012
INTRODUCTION 1
The World of Bankruptcy 2
Agenda Overview of Bankruptcy Law Risks to IP Licensees Case Study In re Qimonda AG Mitigation Strategies 3
Bankruptcy The purpose of bankruptcy and insolvency law in most jurisdictions is to provide a legal mechanism to address the collective satisfaction of the outstanding claims against, or interests in, the debtor from assets (whether tangible or intangible) of the debtor. In jurisdictions that provide for reorganization (as opposed to only liquidation), can give companies a fresh start. 4
Overview of Bankruptcy Initial proceeding commenced: Frequently, but not always, in center of main commercial interest. Can be filed by directors of local insolvent subsidiaries. Commencement of case provides certain protections: Freezing creditors collection efforts. Grants administration powers to the debtor or administrator. Process for coordinating multiple cases In the U.S., Chapter 15. 5
Overview of Bankruptcy Chapter 15 Effective in 2005. Based on Model Law on Cross Border Insolvency. Allows U.S. courts to issue subpoenas, orders to turn over assets and empowering administration of the debtor s assets. General policy of comity toward the foreign proceeding, but: Interests of creditors and other interested parties, including the debtor, must be sufficiently protected. Court allowed to refuse to take any action governed by Chapter 15 if the action would be manifestly contrary to the public policy of the United States. 6
Rejection of Executory Contracts Bankruptcy Legal mechanism to address the collective satisfaction of the outstanding claims against, or interests in, the debtor from assets (whether tangible or intangible) of the debtor. Can give companies a fresh start. Contract Law A process for allowing parties to bind themselves today to perform promises in the future. Allows parties to make investments knowing that their counterparties must comply with their obligations or pay damages. 7
U.S. Rejection of License Agreements Under Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, 756 F.2d 1043 (4 th Cir. 1985), rejection of a license agreement caused loss of license rights. Cf. Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC. US Bankruptcy Code amended in 1988 to add Section 365(n). Allows licensees to elect to retain their license rights following licensor rejection. Freezes license rights as they exist on the date of filing. 8
Case Study: In re Qimonda, AG Infineon spun off from Siemens April 1, 1999. Qimonda spun off from Infineon May 1, 2006. At the time, Qimonda was the second largest DRAM company worldwide. 10,000 patents ( 4,000 U.S. patents). Filed for insolvency in Munich January 23, 2009. Filed a petition on June 15, 2009 in E.D. Va. seeking recognition of the German proceeding as the foreign main proceeding. Extensive cross licensing of portfolio. 9
Case Study: In re Qimonda, AG Court initially ordered that Section 365 would be applicable in the U.S. proceeding. Administrator then filed motion to modify the order to effectively exclude the application of 365(n) to allow him to reject Qimonda s license agreements. After an initial judgment and appeal, on remand the bankruptcy court held that failure to apply Section 365(n) under the circumstances of this case and this industry would severely impinge an important statutory protection accorded licensees of U.S. patents and thereby undermine a fundamental U.S. public policy promoting technological innovation. 10
Case Study: In re Qimonda, AG U.S. case only applies to U.S. patent licenses On appeal. Not crafted as a broad determination, but fact- and industry-specific. Proceedings in parallel in the German main proceeding to determine if Qimonda can avoid its licensing obligations. 11
Beyond Borders Worldwide Licensing Differential treatment of license agreements. Sample countries: U.S.: Protected Canada: Protected U.K.: Rejectable under some circumstances Germany: At risk (see Qimonda) France: May be cancelled Complex choice of law analysis Jurisdiction of main bankruptcy case Jurisdiction of licensee Jurisdiction of subject IP 12
What to do? 13
Deal Alternatives Sale/license back: Licensor sells IP to licensee, possibly for installment payments. Licensee grants back an exclusive license with the right to enforce and grant sublicenses. Move IP to a bankruptcy-remote entity: Licensor sells the IP to a bankruptcy remote entity and then that entity licenses the IP. Structural measures usually appropriate to reduce the risk of bankruptcy of the new licensor. 14
Deal Alternatives Security interest in or pledge of IP: Licensee takes a security interest in the licensed IP. Provides greater protection if the licensor attempts to reject the agreement and sell the underlying IP. Record license in appropriate IP offices. 15
Bankruptcy Issues in IP Transactions September 2012