A recent bankruptcy court decision from the Eastern District of
Virginia suggests that U.S. licensees of U.S. intellectual property
from a foreign owner may lose their rights in a foreign insolvency
proceeding even though the U.S. Bankruptcy Code was long-ago
amended to eliminate that result. Twenty-five years ago, in the
infamous Lubrizol decision (Lubrizol Enters. Inc. v.
Richmond Metal Finishers (In re Lubrizol) 756 F.2d 1043 (4th
Cir. 1985)), the Fourth Circuit ruled that an owner of intellectual
property might in bankruptcy reject licenses it had previously
granted, and that upon rejection the licensees would no longer have
rights to practice the intellectual property. This decision was
quickly remedied by Congress with the addition of Section 365(n) to
the U.S. Bankruptcy Code. Section 365(n) permits a licensee under a
rejected intellectual property license to elect to continue to
enjoy existing rights in return for which it must make royalty
payments under the license. The legislative history roundly
excoriates the decision in Lubrizol. In In re Qimonda,
AG, 2009 WL 4060083 (Bankr. E.D.Va. 2009), the Bankruptcy
Court threatens to resuscitate the Lubrizol result for
U.S. licensees of foreign entities.
Qimonda, a German company active in random access memory, had
granted numerous patent licenses throughout the world prior to
entering a German insolvency proceeding. The insolvency
administrator in that proceeding sought recognition of the German
proceeding under Chapter 15 of the U.S. Bankruptcy Code, which
provides for ancillary cases in the U.S. to assist in the
administration of a foreign insolvency. Without objection, the U.S.
court entered an order granting such recognition and provided that
various provisions of the U.S. Bankruptcy Code would apply.
(Chapter 15 is quite flexible and permits application of provisions
of the U.S. Bankruptcy Code as the Court finds appropriate.)
The initial order specifically provided that Section 365, which
permits rejection of executory contracts, but contains the special
intellectual property license protections found in Section 365(n),
would apply. Thereafter, the German administrator became concerned
that this might result in a conflict between German and U.S. law
regarding the availability and effect of rejection or similar
doctrines. Over objection, the U.S. Bankruptcy Court amended its
order to eliminate any reference to Section 365. The court reasoned
that German law should govern the license rights owned by the
debtor, as Germany was the debtor's center of main interest.
Although acknowledging that the rights in question actually arose
in the U.S. and that a relevant license agreement was expressly
governed by U.S. law and referenced the protections of Section
365(n) of the U.S. Bankruptcy Code, the court concluded that
applying Section 365(n) would run counter to Chapter 15's
intent to aid foreign insolvency provisions and could result in an
inconsistent patchwork of license rights and obligations around the
world. Curiously, on what is essentially a critical choice of law
ruling, the court cited no authority in its opinion other than the
general statutory language. The court expressly did not rule on an
apparent dispute over the availability and result of a
rejection-like remedy under German law.
Licensees of intellectual property from companies with their center
of main interest outside the U.S. should take particular note of
the Qimonda decision. While it is subject to appeal, it
suggests that licensees cannot rely on Section 365(n) of the
Bankruptcy Code to protect their rights in the U.S. and must
carefully investigate the applicable foreign law and that choice of
U.S. and/or U.S. forum provisions may not be sufficient to assure
the benefit of Section 365(n).
O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.
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