Bankruptcy court is the “court of broken promises,” and that’s especially true, it seems, when intellectual property is among the assets that go up for grabs as a company founders.
That’s according to U.S. Bankruptcy Judge C. Ray Mullins of the Northern District of Georgia, who spoke at a continuing legal education seminar at the Four Seasons Hotel in
Atlanta on Wednesday.
Mullins, along with King & Spalding intellectual property partner Katrina M. Quicker and certified public accountants Brian Lee Blonder and Keith F. Cooper from FTI Consulting, dissected what happens to a company’s copyrights, patents and trademarks during a reorganization.
The valuation and disposition of intellectual property and other intangible assets such as customer lists and goodwill is an increasingly relevant issue for attorneys and their clients as the nation’s weak economy pushes more and more companies into bankruptcy.
In the past, Mullins said, companies “had to really justify to a court … that [they] had to do a [Section] 363 sale [of assets], because Chapter 11 was supposed to be a reorganization.”
Now, he said, in a bad economy where the debtor-in-possession financing need to keep a company afloat is almost impossible to get, companies are going out of existence and selling off their assets very quickly.
He cited Circuit City, which sold its e-commerce business and ceased to exist in a matter of weeks, as an example.
Cooper, the FTI consultant moderating the discussion, cited companies such as The Sharper Image, London Fog, Mervyns and The Bombay Company, all of which chose to sell their assets rather than reorganize them. The purchasers of those assets then relaunched the brands online or now market them—without a brand-specific brick-and-mortar presence—through retailers such as Wal-Mart.
But when reorganizing companies sell their intellectual property—which may include not just what they own but also what they have licensed—a number of thorny legal issues arise.
As King & Spalding’s Quicker said, “There’s a definite tension between bankruptcy law … and intellectual property law.
“What happens in bankruptcy law is free assignability and that’s contrary to intellectual property law … because the innovator loses control over who has access to technology,” she said.
As an example, FTI’s Cooper asked, what happens when a debtor has a license to manufacture and sell a product and, during bankruptcy, wants to assign the rights to that intellectual property to one of the licensor’s competitors?
The answer, the panelists all agreed, is complex because under the bankruptcy code, the ability to assign or assume such rights is subject to non-bankruptcy law. Also, the answer differs depending on the type of intellectual property—copyright, trademark, patent—involved, and on whether the license is exclusive or not.
Depending upon which test the court applies, Cooper said, a company’s license could effectively end if the licensor—regardless of the original agreement—refuses to allow the bankrupt company to continue to use or assign the license.
“In technical terms,” Mullins said, “you’re hosed.”
And that, he went on, is part of what makes bankruptcy court the court of broken promises. “So,” he said, “look at whether there’s anything you can do ahead of time to protect your client in anticipation of bankruptcy.”