First published in LES Insights
Under U.S. bankruptcy laws, the trustee of a bankrupt party often has the ability to terminate existing contracts that negatively impact the value of the assets of the bankrupt entity. But the bankruptcy code provides special protection for patent licensees in the event that a patent licensor files for bankruptcy. Specifically, the law allows licensees to retain their rights under a patent license even if the patent owner enters bankruptcy and seeks to terminate the license. This protection afforded by U.S. law is not, however, found in the laws of many other countries. Thus, questions can arise as to whether the protections afforded by U.S. law should apply to a foreign licensor of U.S. patents who files for bankruptcy protection under the laws of another country. In Jaffé v. Samsung Elec. Co.,1 the U.S. Court of Appeals for the Fourth Circuit recently found that a bankruptcy court did not abuse its discretion by applying these protections to a foreign company and preventing a foreign administrator from unilaterally terminating prior cross-licenses in favor of new royalty-bearing licenses.
In 2009, Qimonda AG, a German semiconductor manufacturer, filed for insolvency in Germany. Ancillary to the German insolvency proceeding, Dr. Jaffé, the insolvency administrator, requested that the Bankruptcy Court for the Eastern District of Virginia, under 11 U.S.C. § 1521(a)(5), entrust him with the administration of Qimonda's assets within the territorial jurisdiction of the United States, which largely consisted of 4,000 U.S. patents. These patents were subject to cross-license agreements with Qimonda's competitors in the semiconductor industry.
Contemporaneously with the Chapter 15 proceeding, Jaffé sent letters to licensees under Qimonda's patents declaring that, under the German Insolvency Code, the licenses "are no longer enforceable." Jaffé later testified before the bankruptcy court that he intended to re-license Qimonda's patents for the benefit of Qimonda's creditors, replacing cross-licenses with royalty-bearing licenses. The bankruptcy court granted Jaffé the discretionary relief he requested under § 1521(a)(5), thereby providing him control over Qimonda's U.S. patent portfolio.
The licensees appealed the order to the district court, which remanded the case to the bankruptcy court to consider the requirement, under 11 U.S.C. § 1522(a), that the bankruptcy court ensure that "the interests of the creditors and other interested entities, including the debtor, [were] sufficiently protected."
On remand, the bankruptcy court conditioned control over the portfolio to Jaffé affording the licensees the treatment they would have received under 11 U.S.C. § 365(n), which limits a trustee's ability to unilaterally reject licenses to a debtor's intellectual property and gives licensees the option to retain their rights under the licenses. According to the bankruptcy court, the application of § 365(n) was necessary to ensure that the licensees were "sufficiently protected," even though it would adversely affect Qimonda's estate. The bankruptcy court also concluded that allowing Jaffé to unilaterally cancel Qimonda's licenses "would be manifestly contrary to the public policy of the United States."
The Fourth Circuit's Decision
On appeal, the Fourth Circuit determined that the bankruptcy court properly construed Chapter 15 and did not abuse its discretion in applying it. First, the Fourth Circuit held, the bankruptcy court's consideration of § 1522(a) was appropriate when authorizing relief under § 1521. It dismissed Jaffé's argument that § 1522(a) applied only to relief granted under§ 1521, which may be requested only by the foreign representative. According to the Fourth Circuit, the bankruptcy court must consider the question of sufficient protection under § 1522(a) when awarding discretionary relief under § 1521.
Second, the sufficient protection requirement of § 1522(a) calls for a particularized analysis balancing the "interests of the creditors and other interested entities, including the debtor," and, in this case, a weighing of the interests of the foreign representative (the debtor) in receiving the requested relief against the competing interests of those who would be adversely affected by the grant of that relief (here, the licensees). The court found support for this interpretation in the Model Law on Cross-Border Insolvency, on which Chapter 15 was based. According to the Court, Chapter 15 does not require a U.S. bankruptcy court to bind itself to the costs that awarding such relief would impose on others under the rule of the foreign insolvency courts and, instead, anticipates the provision of particularized protection, as stated in§ 1522(a).
Third, the Fourth Circuit found no abuse of discretion in the bankruptcy court's balancing analysis under § 1522(a), concluding that attaching the protection of § 365(n) was necessary when granting Jaffé the power to administer Qimonda's U.S. patents. Acknowledging the outcome of the balancing analysis to be a close one, the Court found the bankruptcy court's thorough examination of the parties' competing interests to have been both comprehensive and eminently reasonable. In particular, the Fourth Circuit determined, the bankruptcy court was justified in its skepticism of Jaffé's claim that the licensees' interests would be "sufficiently protected" by his commitment not to charge them an exorbitant rate if re-licensed.
Finally, the Fourth Circuit acknowledged that, by affirming the bankruptcy court's application of § 365(n) following its balancing analysis under § 1522(a), it also indirectly furthered the public policy underlying § 365(n). Citing the Senate Report accompanying the bill that became § 365(n), the Court recognized the goal of protecting licensees' strong interests in maintaining their right to use intellectual property following a licensor's bankruptcy. After weighing the respective interests of the licensees and the licensor/debtor here, the bankruptcy court found that without the protection of 365(n), the risk of harm to the licensees would be very real, impairing the "design freedom provided [them] by the cross-license agreements." This potential harm would, in turn, threaten to "slow the pace of innovation" in the United States, to the detriment of the U.S. economy. Thus, according to the Fourth Circuit, the bankruptcy court's findings, which were focused on the licensees' interests, furthered the public policy underlying § 365(n).
Strategy and Conclusions
This decision highlights the importance of the interplay between the bankruptcy laws of the country of incorporation of the insolvent party and the countries where that parties' assets are located. If those assets include U.S. patents, cross-licensees to those patents (or, potentially, even licensees with low royalty rates) may find protection under U.S. bankruptcy law, which restricts a bankrupt patent owners ability to terminate existing licenses.