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Exclusive and Non-exclusive IP Licenses and Executory Contract Assumption and Assignment Does Exclusivity Matter

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Licenses of intellectual property (IP) are generally considered executory contracts under Bankruptcy Code §365 and the traditional Countryman test. See In re Access Beyond Technologies Inc., 237 B.R. 32, 42-43 (Bankr. D. Del. 1999); In re CFLC Inc., 89 F.3d 673, 677 (9th Cir. 1996). Section 365(a) permits the trustee or debtor-in-possession (DIP) to assume or reject an executory contract, subject to the court's approval and certain exceptions, including the exception of §365(c). In addition, §365(f)(1) provides that "except as provided in subsection (c) of this section," an executory contract may be assigned after it is assumed even though the contract, lease or applicable law otherwise prohibits, restricts or conditions the assignment.

The §365(c)(1) exception looms large in debtor IP licensee cases. That section provides:

(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 DIP, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties; and
(B) Such party does not consent to such assumption or assignment...

Several cases have held that federal intellectual property common law is such "applicable law" under §365(c)(1)(A), and that, because a non-exclusive patent license is personal and not assignable under federal common law, a non-exclusive patent license cannot be assigned. See In re Alltech Plastics Inc., 71 B.R. 686 (Bankr. W.D. Tenn. 1987); In re CFLC Inc., 89 F.3d 673 (9th Cir. 1996); In re Access Beyond Technologies Inc., 237 B.R. 32 (1999).

The rationale of these cases is premised on the fundamental policy of intellectual property law. As one court stated:

The fundamental policy of the patent system is to encourage the creation and disclosure of new, useful and non-obvious advances in technology and design...allowing free assignability...of non-exclusive patent licenses would undermine the reward that encourages invention...

In re CFLC Inc. at 679 (citations omitted). Another court stated:
Free assignability of a non-exclusive patent license without the consent of the patent-holder is inconsistent with patent monopoly and thus inconsistent with federal policy.

In re Access Beyond Technology Inc. at 45.

Non-exclusive copyright licenses have also been held to be non-assignable. See In re Patient Education Media Inc., 210 B.R. 237 (Bankr. S.D.N.Y. 1997); In re Golden Books Family Entertainment Inc., 269 B.R. 311 (Bankr. D. Del. 2001).

The result is that a debtor with valuable non-exclusive intellectual property licenses may not be able to realize that value, notwithstanding that a major policy goal of the Code is to preserve or recover value for creditors. In these cases, the policy behind the bankruptcy laws loses out to the policy that informs intellectual property law.

The cases that discuss these issues also frequently discuss whether there is a federal common law as to IP license assignments. Ordinarily, common law is a creature of state law. See Erie RR Co. v. Tompkins, 304 U.S. 64 (1938) (the law of a state applies in federal court because there is no such thing as federal common law). However, the Seventh Circuit Court of Appeals has ruled, in a case that has generally been followed, that patent assignments are an exception to the Erie rule:

The long-standing federal rule with respect to assignability of patent license agreements provides that those agreements are personal to the licensee and not assignable unless expressly made so in the agreement.

Unarco Industries Inc. v. Kelley Co. Inc., 465 F.2d 1303, 1306 (7th Cir. 1972) (cert. denied); see, also, PBG Industries Inc. v. Guardian Industries Inc., 597 F.2d 1090 (6th Cir. 1979), and In re CFLC Inc., 89 F.3d 673, 679 (9th Cir. 1996). This federal common law has also been followed with respect to copyrights.

Sale/Assignment vs. License/Executory Contract

Many cases start out on the assumption that the agreement at issue is an executory contract. See In re Catapult Entertainment Inc., 165 F.3d 747, 750 (9th Cir. 1999). In other cases, the first argument of debtors, their lenders and the putative acquirers (who are attempting to accomplish a transaction) is that the agreement at issue is not an executory contract but a completed sale, assignment or transfer, and therefore §365 does not apply. The cases are far from clear as to what is a sale, assignment or outright transfer (or how a court distinguishes between them). However, courts do not have difficulty in reviewing the agreements at issue to find sufficient performance due each side such that failure of either to complete performance would constitute a material breach excusing the performance of the other, thereby fulfilling the Countryman test of what constitutes an executory contract. See In re Access Beyond Technologies Inc., at 42-43, and In re Golden Books Family Entertainment Inc., 269 B.R. 300, 308-309 (Bankr. D. Del. 2001).

The patent statute is said to grant to patents "the attributes of personal property" and to patent-holders the rights to assign, grant or convey the patent. A patent assignment is said to be a transfer of the entire patent monopoly, while a license ordinarily grants only limited rights, including the right not to be sued for infringement. In re Alltech Plastics Inc., 71 B.R. 686, 689 (W.D. Tenn. 1987).

An agreement is a sale (or assignment) of patent rights only if it conveys:

  1. the whole patent, comprising the exclusive right to make, use and sell the invention;
  2. an undivided share of that exclusive right; or
  3. an exclusive right to practice the invention within a specified territory.
"Unless the writing conveys some or all of the right to exclude others from practicing the invention, it will not convey an interest in the patent, but is a mere license." Access Beyond Technologies Inc., 237 B.R. 32 at 44, citing Waterman v. Mackenzie, 138 U.S. 252, 255-256 (1891). Based on the application of these factors, the Access Beyond Technologies court concluded that the agreement at issue was not a sale, but a license.

In In re Supernatural Foods LLC, 268 B.R. 759 (Bankr. M.D. La. 2001), the agreement at issue granted the debtor the right, exclusive of all others, to "make, have made, use, sell and import licensed products" and use the patented process with regard to specified food categories. The court first concluded that the agreement was not a non-exclusive license, and then considered whether the agreement was an outright assignment rather than merely an exclusive license, based on the Waterman v. McKenzie principles. Because the agreement limited the use of the patent to certain types of foods, the court concluded it was not an assignment, but merely an exclusive license.

With respect to copyrights, a copyright owner has the exclusive right to exploit or authorize the exploitation of a copyrighted work. In re Patient Media Education Inc., 210 B.R. 237, 240 (Bankr. S.D.N.Y. 1997) (citing 17 U.S.C. §106, which enumerates six exclusive uses). A "transfer of copyright ownership," however, has been held to include the grant of an exclusive license. Id., citing 17 U.S.C. §101. Especially with respect to copyrights, the issue has been whether the license is exclusive or non-exclusive.

Exclusive vs. Non-exclusive Licenses

Exclusivity matters because exclusivity is more likely to mean assignability (but, see below). As the holder of an exclusive license is entitled to all the rights and protections of the copyright owner, the licensee under an exclusive license may freely transfer her rights, and the licensor cannot transfer the same rights to someone else. A non-exclusive licensee, on the other hand, is said to have only a personal and not a property interest that cannot be assigned unless the owner authorizes assignment. In re Patient Education Media Inc., 210 B.R. 237, 240 (Bankr. S.D.N.Y. 1997), citing 17 U.S.C. §201(d)(2) and I.A.E. Inc. v. Shaver, 74 F.3d 768, 775 (7th Cir. 1996); In re Golden Books Family Entertainment Inc., 269 B.R. 300, 309 (Bankr. D. Del. 2001).

Courts look to both as to whether the agreements describe themselves as exclusive or non-exclusive as well as to the economic rights granted. In In re Golden Books Family Entertainment Inc., 269 B.R. 300 (Bankr. D. Del. 2001), the court made the determination that a copyright license was non-exclusive primarily based on language in the license saying it was non-exclusive. The license included an acknowledgement that "this agreement is a license of the type described by §365(c)(1) of the Bankruptcy Code and may not be assigned without the prior written consent of the licensor."

In the companion case (In re Golden Books Family Entertainment Inc., 269 B.R. 311 (Bankr. D. Del. 2001) (Golden Books II, dealing with a different license agreement), the court found a license to be "exclusive" even though it was limited in term and in geographical extent and even though the licensee could not, under the agreement, assign the agreement without the licensor's consent. As in the Patient Education Media case, the court looked to §201(d) of the Copyright Act (17 U.S.C. §201(d)) for the conclusion that exclusive licenses are assignable under federal copyright law. After concluding the license was exclusive, the court referred to Code §365(f)(1) to avoid an anti-assignment provision in the contract.

Does Exclusivity Matter?

To complicate the law further, two more recent cases conclude that even exclusive licenses of IP are not assignable. The Golden Books II case, which held that an exclusive copyright license is assignable, did so by rejecting the holding of Gardner v. Nike, 110 F. Supp. 2d 1282 (C.D. Cal 2000). That case held that an exclusive licensee of a copyright was not an "owner" under §201(d) of the Copyright Act, and therefore did not have the right to assign its interest. However, Gardner v. Nike has now been upheld on appeal. See Gardner v. Nike Inc., 279 F.3d 774 (9th Cir. 2002). Thus, in the Ninth Circuit at least, even an exclusive license likely is not assignable.

Similarly, in a recent patent case, exclusivity of the patent license did not exclude the license from the application of §365(c). In re Hernandez, 285 B.R. 435 (Bankr. D. Ariz. 2002). After first concluding that the patent license at issue was "exclusive" (because it granted the licensee numerous rights, well beyond the mere right not to be sued for infringement), the court concluded that an exclusive license may vest the licensee with standing to sue to protect the patent from infringement, but that does not mean the patent is assignable. Id. at 439.

It is an understatement to suggest that the law in this area is unpredictable. Much can turn on the specific language of a license agreement. However, the licensee of IP faces an uphill battle in attempting to preserve value for creditors based on intellectual property licenses.

Journal Date: 
Saturday, February 1, 2003

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