This presentation was given at the American Bankruptcy Institute Annual Spring Meeting on April 26, 2014. We address pre-petition and post-petition issues where intellectual property assets are owned or licensed by the debtor.

1. IP ISSUES IN
BANKRUPTCY
ABI ASM 2014

2. Panelists
Steve Darr
Senior Managing Director, Mesirow Financial
Jil Mazer-Marino
Partner, Meyer Suozzi English & Klein, P.C.
Jay Silverberg
Partner, Sills Cummis & Gross P.C.
Gabe Fried
CEO, Hilco Streambank

3. Definitions: IP – What is it?
• GAAP & the Balance Sheet
• Internally generated intangibles are expensed
• Acquired intangibles are valued at cost
• Categories of IP
• patents
• trademarks
• copyrights
• IP addresses/spectrum
• Foreign vs. Domestic
• License Agreements
• Bankruptcy definition of intellectual property

4. Definitions: What IS Bankruptcy IP?
• Defined in Bankruptcy Code Section 101(35A)
• Trade Secret
• Invention, process, design, or plant protected under title
35 (patent)
• Patent application
• Plant variety
• Work of authorship protected under title 17 (copyright)
• Mask work protected under chapter 9 of title 17

5. Definitions: What is NOT Bankruptcy IP
• Bankruptcy Code Section 101(35A) Excludes
• Trademarks
• Trade dress
• Domain names
• Overseas intellectual property not covered by treaty
• Why are trademarks excluded?

6. Bankruptcy Tools To Realize Value
• Section 363 – Use, Sale or Lease of Property
• Section 364 – Financing
• Section 365 – Executory Contracts and Unexpired Leases

7. Bankruptcy Code Section 363 - Sales
• Section 363 is used to sell assets in which debtor has
property interest as opposed to contract right
• Section 363(f) is mechanism for selling assets free and
clear of liens, claims, encumbrances and interests
• Question of fact whether exclusive, perpetual license is
property right that is sold under Section 363 or executory
contract that is assumed and assigned.
• Potentially Section 363(f) can be used to sell IP free and
clear of burdensome license agreements.

8. Maximize Value of Sale
• Understanding the strategic value
• Protect your IP through the Sale Process
• Monitor deadlines for PTO filings
• Monitor filings of PTO for trolls
• Prosecute infringers
• Preventing collusion in sale
• When the sum of parts > whole
• Mimicking a going concern sale

9. Section 364 – DIP/Lending Issues
• Secured lending in non-bankruptcy context
• Perfection of Liens Against IP
• IP Issues in Loan Documentation and Origination
• Enforcement Issues
• DIP Financing

10. Valuation Issues
Intellectual property value arises from (a) monopoly rights
(right to exclude others) or (b) signal of quality for consumers
• How bankruptcy impacts IP values
• (OLV, FLV vs FMV)
• Comparable Value Problem
• Infrequent, Out of Context, Unique Assets
• As much art as science
• Where valuation matters
• Financing/Adequate Protection
• Plan confirmation
• Fraudulent Conveyance
• Drawbacks of traditional methods of valuation

11. Section 365 – Executory Contracts Generally
• What is an executory contract
• Not defined in bankruptcy code
• Countryman definition
• Functional definition
• Underlying purpose of Section 365 is to maximize value of
contracts and permit estate to shed burdensome
obligations

12. Section 365 - Tools and Options
• Assumption: Permits debtor to benefit from favorable
contract. Debtor agrees to be bound by executory
contract
• Assumption and Assignment: Debtor assumes
executory contract and sells contract to third party
• Rejection: Frees debtor from burdensome contracts.
Contract is treated as material breach by debtor that
occurred the day before the date of the filing of the
bankruptcy petition

13. Section 365 - Intersection of IP and
Executory Contracts
• Lubrizol Enterprises, Inc. v. Richmond Metal Finishers,
Inc. (In re Richmond Metal Finishers, Inc.), 756 F.2d 1043
(4th Cir. 1985)
• Leads to the enactment of 365(n), which protects
licensees of bankruptcy IP from harsh consequences of
contract rejection

14. Section 365(n) Rejection of
Bankruptcy IP License
• Upon rejection, election by licensee:
• to treat license as terminated, or
• retain its rights (including a right to enforce any exclusivity
provision) under the license for duration of contract and any
extension period

15. Section 365 - Licensee Elects to Retain
Rights
• Obligations of Licensor
• allow licensee to exercise rights under license
• provide any intellectual property (including such embodiment) held
by licensor
• not interfere with rights of licensee
• Obligation of Licensee
• make all royalty payments
• waive setoff rights
• waive administrative expense claim arising from licensee’s
performance

16. Section 365 - Rejection of Non-
Bankruptcy IP Licenses
(i.e., Trademark Licenses)
• No 363(n) election
• Split of authority regarding whether licensee may continue
to use trademark notwithstanding rejection of trademark
license

17. Section 365 - Assumption of Licenses
• No distinction between bankruptcy IP and trademark
• Assumption by licensor is treated like any other executory
contract: must cure defaults and provide adequate
assurance of future performance.
• Assumption by licensee may be prohibited by Section
363(c)(1) depending on venue of case

18. Language of 365(c) (1)
(c) The trustee may not assume or assign any executory
contract or unexpired lease of the debtor, whether or not
such contract or lease prohibits or restricts assignment of
rights or delegation of duties, if--
(1)(A) applicable law excuses a party, other than the
debtor, to such contract or lease from accepting
performance from or rendering performance to an entity
other than the debtor or the debtor in possession,
whether or not such contract or lease prohibits or restricts
assignment of rights or delegation of duties; and
(1)(B) such party does not consent to such assumption or
assignment;

19. Section 365 - What does “assume or
assign” mean
• Section 365(f) (2) requires a debtor to assume a contract
before assigning a contract
• Does “assume or assign” in 365(c) mean
• “assume and assign” (i.e., 365(c) only applies if the contract is
ultimately being assigned), or
• “assume or assume and assign” (i.e., it applies whether the debtor
intends to assume the contract and exploit the IP itself or ultimately
assign to a third party ).

20. Interpretations of 363(c)
• Majority View. Hypothetical Test: If, hypothetically speaking, the debtor
could assign a license to a third party, then, the debtor cannot assume
the contract. This is true regardless of whether or not the debtor or
trustee intends to assign the contract.
• Minority View. Actual Test: Is the non-debtor party actually being forced
to accept performance from someone other than the party with which it
actually contracted? That is, is the debtor intending to assume and
assign the contract as opposed to assuming the contract for the debtor’s
continued use. The court should not presume that the trustee is a legal
entity materially distinct” from the prepetition debtor. Instead, the court’s
inquiry should be whether in assuming the contract, the trustee is able
to provide its non-debtor contracting counterpart with “the full benefit of
its bargain.
• S.D.N.Y. View. “Footstar Test”: The prohibition in § 365(c)(1) operates
to restrict a chapter 7 or chapter 11 trustee from assuming a contract but
does not restrict the assumption of a contract by a debtor in possession.

21. QUESTIONS?

22. The Takeaway
• Prepetition contract and financing issues can impact value
in bankruptcy.
• Bankruptcy rules can be helpful in re-organizing
unprofitable IP contracts and licenses but venue choice is
important until there is uniform law
• Because IP is generally considered a strategic asset,
value may be difficult to ascertain immediately and sale
process is exceptionally important.