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The use of licensed IP when the licensor is in bankruptcy

Most businesses are not the owners of all of the intellectual property that they use. Some of their IP rights are obtained from people or other entities under license agreements, which gives them the right to use the IP but does not give them ownership. Some California licensees, however, might want to be prepared for what happens if the licensors file for bankruptcy.

When the owners of licensed intellectual property file for bankruptcy, they have the right to reject their executory contracts, which includes IP licenses if they and the licensees still have responsibilities to fulfill and if not fulfilling those responsibilities would create a breach of contract. However, section 365(n) under the Bankruptcy Code protects licensees from losing their right to use the property in such situations.

If the license is executory, the licensees could consider that their contracts are terminated or keep their rights in the contracts along with supplementary agreements for the length of the contracts. The agreements may include specific performance exclusions, and the licensees may take advantage of extensions under their contracts.

Bankruptcy courts have the authority in determining whether this section of the Code applies to the IP. However, licensees can use clear, explicit language in their contracts to persuade the courts in their favor. The contracts must specify that the licenses are meant to grant intellectual property rights as defined in the Bankruptcy Code, that section 365(n) should apply to the licenses and that nothing limits the rights of the licensees under this section.

Despite using this language, bankruptcy courts could still terminate the contracts. Due to this, licensees may need to seek other methods of ensuring that they can continue to use in-licensed IP. The licensees might consult with a team of attorneys to ensure that their rights are protected as much as possible.

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