A win for innovation: Supreme Court’s denial of review of Jaffe v. Samsung Electronics Co. preserves U.S. rights of licensees of Chapter 15 foreign debtors

BACKGROUND

On Monday, October 6, 2014, the U.S. Supreme Court denied a petition for writ of certiorari in Jaffe v. Samsung Electronics Co.,¹ thereby preserving the U.S. rights of creditor-licensees of foreign debtors if those foreign debtors file under Chapter 15 of the Bankruptcy Code (the “Code”).

The Court denied review of a decision by the U.S. Court of Appeals for the Fourth Circuit, which had considered whether, under Chapter 15, a bankruptcy court must enforce an order from a foreign insolvency proceeding.² The debtor, a German corporation named Qimonda AG, had filed proceedings both in Germany and under Chapter 15 in the U.S. The debtor’s foreign representative, Dr. Michael Jaffe, filed for Chapter 15 relief in the Bankruptcy Court for the Eastern District of Virginia (the “Bankruptcy Court”), requesting that the Bankruptcy Court recognize the German proceeding as a “foreign main proceeding.” Specifically, Jaffe requested that the Bankruptcy Court permit him, under Section 1521(a)(5) of the Code, to administer the debtor’s 4,000 U.S. patents, among other assets within the U.S.

Under the German Insolvency Code and the German court’s order, Jaffe was permitted to reject the debtor’s licenses and reissue them to licensees on new, more favorable terms. The Bankruptcy Court considered whether the German provision and order applied to creditor-licensees of the debtor’s U.S. patents. The Bankruptcy Court, on remand from the district court, held that the creditor-licensees were entitled to retain their rights under section 365(n) of the Code.³ Although it recognized the German proceeding as a foreign main proceeding, it conditioned Jaffe’s requested discretionary relief by requiring that the creditor-licensees be afforded the same treatment they would have received under the Code.

THE FOURTH CIRCUIT UPHOLDS THE BANKRUPTCY COURT’S DECISION

In affirming the lower court’s decision, the Fourth Circuit—like the Bankruptcy Court— analyzed the issue both by (1) weighing the interests of the creditor-licensees and the debtor pursuant to Section 1521, and (2) considering public policy implications pursuant to Section 1506.

In balancing the interests of the creditor-licensees and the debtor, the Fourth Circuit found that, although application of Section 365(n) would result in less value to the debtor’s estate, the patent portfolio itself would still have value and be able to be monetized. Balanced against this interest of the debtor, the Fourth Circuit agreed with the Bankruptcy Court’s analysis that the creditor- licensees would, having made substantial investments in the licenses, suffer “broad-ranging ill effects” if the licenses were rejected.

With regard to public policy implications, the Fourth Circuit agreed that allowing the licenses to be rejected would be “manifestly contrary to U.S. public policy,” referencing the legislative history of Section 365(n), which states that denying licensees the right to use their licensed IP would “impose a burden on American technological development that was never intended by Congress.”

Thus, in affirming the Bankruptcy Court’s decision, the Fourth Circuit echoed the Bankruptcy Court’s findings 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 licenses]” and would threaten to “slow the pace of innovation.”

TAKE-AWAY FROM THE SUPREME COURT’S DENIAL OF REVIEW

Notably, the Fourth Circuit stopped short of expressing a fixed rule, as its decision was based on the balancing of the parties’ interests and public policy. Still, the Supreme Court’s denial of the petition, coupled with the fact that no other circuit has yet disagreed with the Fourth Circuit’s position on this issue,⁴ should give licensees of foreign debtors some comfort that their U.S. rights will be protected should those foreign debtors file insolvency proceedings in the U.S. under Chapter 15. Those licensees may still face issues related to foreign patents. Foreign licensors that have licensed IP in  the U.S. should also note the implications of the Supreme Court’s denial if they elect to seek Chapter 15 relief, as it is uncertain whether orders from their home countries will be enforced by U.S. courts.

These interest groups should further be alert for action by Congress that would cement this protection. A bill passed by the House on December 5, 2013, and currently under review by the Senate Judiciary Committee, would allow licensees to retain their rights to licensing agreements (and other IP) of a foreign entity notwithstanding that the license was rejected in a foreign court.⁵