Because intellectual property is considered a "hot" area of practice, it seems likely that the resolution of intellectual property disputes will become increasingly important to the re-organization efforts of companies in chapter 11. The two decisions discussed in this article highlight the present difficulty for patent holders in anticipating whether the bankruptcy court will protect patented technology in a sale pursuant to a confirmed plan of reorganization.

For the most part, patent licenses are contracts subject to interpretation under state law. However, federal common law controls the assignability of patent licenses depending on whether the license is "exclusive" or "non-exclusive." A non-exclusive patent license creates only a personal interest in the patent that cannot be assigned without the express permission of the patent holder.

A patent license is an agreement allowing the licensee to use the patent but not transferring any ownership interest in the patent. In most circumstances, a patent license is an "executory contract" under §365 that confers broad assumption and assignment powers to the trustee and debtor. It is the underlying bankruptcy policy of "free" assignability, as an essential aspect of reorganization, which is at odds with the fundamental policy of the federal patent system to ensure the inventor the exclusive right to the invention for a period of years.

The Ninth Circuit examined this dichotomy in In re CFLC Inc., 89 F.3d 673 (9th Cir. 1996). The debtor had paid a lump sum fee for a royalty-free, world-wide, non-exclusive license to use certain computer graphics technology. The license agreement specified that the license was non-transferable; that it extended to any company more than 50 percent owned by the debtor; that it conferred on the debtor no right to sublicense; that it could be terminated by the patent holder upon an event of bankruptcy; and that the license agreement was to be construed in accordance with California law. Id. at 674-75.

During the course of its chapter 11 proceeding, the debtor sold off certain divisions, foreign subsidiaries and assets. Thereafter, the debtor received approval to sell substantially all of its remaining assets to a third party. Pursuant to the sale agreement, the parties sought the assumption and assignment of certain designated executory contracts, including the computer graphics technology license; but the patent holder/licensor objected to the assignment. The bankruptcy court denied the motion for assumption and assignment, and was affirmed by the district court.