SECTION 365 (N) OF THE
UNITED STATES BANKRUPTCY CODE

(Executory Contracts that License Intellectual Property)

1. If the Trustee rejects an executory contract under which the debtor is a licensor of a right to intellectual property, the licensee under such contract may elect –

A. to treat the contract as terminated by such rejection if such rejection by the Trustee amounts to such a breach as would entitle the licensee to treat such contract as terminated by virtue of its own terms, applicable non-bankruptcy law, or an agreement made by the licensee with another entity; or

B. to retain its rights (including a right to enforce any exclusivity provision of such contract, but excluding any other right under applicable non-bankruptcy law to specific performance of such contract) under such contract and under any agreement supplementary to such contract, to such intellectual property (including any embodiment of such intellectual property to the extent protected by applicable non-bankruptcy law), as such rights existed immediately before the case commenced for

i. the duration of such contract; and

ii. any period for which such contract may be extended by the licensee as of right under applicable non-bankruptcy law.

2. If the licensee elects to retain its rights, as described in paragraph (1) (B) of this subsection, under such contract –

A. the trustee shall allow the licensee to exercise such rights;

B. the licensee shall make all royalty payments due under such contract for the duration of such contract and for any period described in (1) (B) of this subsection for which the licensee extends such contract; and

C. the licensee shall be deemed to waive –

i. any right of setoff it may have with respect to such contract under this title or applicable non-bankruptcy law; and

ii. any claim allowable under section 503(b) of this title arising from the performance of such contract.

3. If the licensee elects to retain its rights, as described in paragraph (1) (B) of this subsection, then on the written request of the licensee the Trustee shall –

A. to the extent provided in such contract, or any agreement supplementary to such contract, provide to the licensee any intellectual property (including such embodiment) held by the Trustee; and

B. not interfere with the rights of the licensee as provided in such contract, or any agreement supplementary to such contract, to such intellectual property (including such embodiment) including any right to obtain such intellectual property (or such embodiment) from another entity.

4. Unless and until the trustee rejects such contract, on the written request of the licensee the Trustee shall –

A. to the extent provided in such contract or any agreement supplementary to such contract

i. perform such contract; or

ii. provide to the licensee such intellectual property (including any embodiment of such intellectual property to the extent protected by applicable non-bankruptcy law) held by the trustee; and

B. not interfere with the rights of the licensee as provided in such contract, or any agreement supplementary to such contract, to such intellectual property (including such embodiment), including any right to obtain such intellectual property (or such embodiment) from another entity.

11 U.S.C. § 365n. (Emphasis added).

NOTES: Intellectual property law governs commercially valuable creations of the intellect including copyrights (works of creative expression), trademarks (brand names, and service marks), trade secrets, and patents (federally registered inventions), as well as an individual’s rights of publicity (the right to determine how to use one’s name, image and likeness for profit).

Under the Bankruptcy Code, many executory contracts, including “intellectual property” licenses may be assumed and / or assigned with only the consent of the debtor (and not the non-debtor). To determine whether an intellectual property license is assignable in bankruptcy, examine three things: (1) the nature of the intellectual property; (2) whether the contract sought to be assigned is exclusive or non-exclusive and (3) whether the contract is assignable on its face.

Copyright licenses should be carefully scrutinized to determine which of the exclusive copyrights are being transferred (transfer, copy, prepare / perform the work publicly and create derivative works).

It is important to note that the Bankruptcy Code’s definition of “intellectual property” intentionally omits trademarks. 11 U.S.C. ‘ 101 (35A). This is because trademark licensors must exercise quality control over the goods or services offered by their licensees under the licensed mark(s). When the automatic stay takes effect in a bankruptcy, a licensor loses its ability to enforce its quality control provisions, thus thwarting a main function of trademark law (having uniform quality of all similar goods / services offered under the same mark).

Some courts have applied Section 365n as if it included trademarks, despite the omission of trademarks from the definition of “intellectual property” in the Bankruptcy Code. Moreover, parties to a trademark license can attempt to contractually subject the agreement to the provisions of 365n, although the bankruptcy court may not concur and is not likely bound by such a provision.

A California bankruptcy court recently held that trademark licenses are NOT subject to Section 365n protection, allowing the licensor to terminate the license and limiting the licensee’s remedy to a claim for damages. See Centura Software Corp., 281 B.R. 660, Bankr. N.D. Cal., 2002.