Intellectual Property Licenses in Bankruptcy: Can Lubrizol, § 365(n), and Sunbeam Be Reconciled?

Vol. 6 No. 1

By

Marcelo Halpern is a partner at Perkins Coie LLP in Chicago, Illinois, and a member of the firm’s technology transactions and privacy group. He focuses his practice on technology and intellectual property transactions. Mr. Halpern can be reached at mhalpern@perkinscoie.com.

In virtually any modern enterprise, intellectual property assets are among the most valuable of all business assets.1 This holds true for technology and media companies that make a business out of developing and marketing intellectual property works as well as for businesses that rely on technology, trade secrets, and other proprietary information to operate and gain competitive advantage and/or trademarks, trade dress, and works of authorship to distinguish their products from those of competitors. Intellectual property licenses have become indispensable parts of most businesses. It is therefore no surprise that the bankruptcy of a licensing partner can be a daunting prospect for either party to a licensing arrangement.2 It is a particularly troublesome scenario for licensees whose businesses may depend on intellectual property licensed from a bankrupt licensor.

In 1985, the Fourth Circuit’s decision in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc.3 changed the world of intellectual property licensing by putting licensees at high risk of losing their licenses upon a licensor’s bankruptcy. Congress reacted to this threat by enacting § 365(n) of the Bankruptcy Code4 to establish specific bankruptcy protections for some, but not all, licensees.

Conspicuously absent from § 365(n), however, is protection for trademark licensees. That has left trademark licensees at risk of losing their licenses in the event of the licensor’s bankruptcy. It also put trademark licensors in a position to use their bankruptcy status to squeeze licensees for more favorable terms in exchange for allowing the licenses to continue.

The Seventh Circuit’s recent decision in Sunbeam Products, Inc. v. Chicago American Manufacturing,5 however, may turn the tide back in favor of trademark licensees by challenging the legacy of Lubrizol and questioning the reasoning underlying § 365(n).

This article begins with a general explanation of the treatment of intellectual property licenses under U.S. bankruptcy law, examines the reasoning of Lubrizol and the congressional “fix” of § 365(n), and explores the potential impact of Sunbeam on the future of intellectual property licensing.

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