What is at Risk When Bankruptcy is Filed?
Bankruptcy law gives debtors broad powers to reject, assume, or assign contracts, including IP licenses. These rights are governed by Section 365 of the Bankruptcy Code, and they can create serious uncertainty for IP holders, particularly if you’re a licensee relying on technology or brand rights you don’t technically own.
Not All IP Is Treated Equally
The Bankruptcy Code defines “intellectual property” under Section 101(35A) — and while it includes patents, copyrights, trade secrets, and mask works, it does not include trademarks.
Before 2019, courts were split on whether licensees could keep using a trademark after a debtor rejected the license. That changed with the Supreme Court’s decision in Mission Product Holdings v. Tempnology, which held that rejection of a trademark license is a breach, not a termination. That means licensees may keep using the trademark under the original agreement, subject to state law enforcement rights.
What If You’re a Licensee and the Licensor Files for Bankruptcy?
You have two options if your license is considered an executory contract and the licensor rejects it.
- Treat it as terminated and file a claim for damages.
- Retain your rights under the license and continue paying royalties
This right comes from Section 365(n) of the Bankruptcy Code, but it only applies if your license covers IP as defined in the statute (again, trademarks are excluded).
If you want to keep your rights, you must act. Bankruptcy moves fast, and silence may be interpreted as a waiver.
What If You’re the Licensor and the Licensee Files?
You may be able to object to the debtor’s attempt to assume or assign the license, especially if applicable law prohibits assignment without your consent. How courts handle this depends on the jurisdiction, which may apply one of several tests (known as the hypothetical test, actual test, or Footstar approach).
What Happens in a Sale?
IP rights are often transferred in Section 363 sales, sometimes “free and clear” of any interests, including licenses. That’s why it’s critical to negotiate clear language in license agreements and consider recording your rights or using strategies like source code escrows, NDAs, or contractual carveouts to protect ongoing use.
Cross-Border Caution: Chapter 15
If you’re dealing with a foreign licensor or licensee, bankruptcy protections may not extend to you unless a U.S. court recognizes the proceeding under Chapter 15 and applies Section 365(n). Not all foreign courts treat licensees as favorably as the U.S. Bankruptcy Code does.
Key Takeaways for IP Holders in Distress
- Not all IP is treated the same.
- The status of your license (executory vs. non-executory) will determine your rights.
- Draft licenses carefully to reference Bankruptcy Code protections.
- If bankruptcy is filed, move quickly to assert your rights.
- Seek legal advice to evaluate risks in 363 sales, cross-border cases, or assumption attempts
Understanding how bankruptcy law interacts with patents, copyrights, trademarks, and trade secrets is critical to protecting your rights and your business.
