Many of you would recognize the moniker CBGB from t-shirts and slogans, but would be unaware that it refers to a legendary Manhattan music venue. Moreover intriguing is the fact that the club has been inactive since 2006. However, the investors who acquired it did so for the naming rights, not for the club. These rights, known as intellectual property rights, are currently the subject of an investor-filed Chapter 11 bankruptcy. What happens to these intellectual property rights during a Chapter 11 bankruptcy filing?
In a typical Chapter 11 bankruptcy, the following procedures are followed: 1) the rejection or assumption of executory contracts; 2) the transfer of assets; 3) the adjudication of claims; and 4) litigation. This article focuses exclusively on the first issue, the executory contract. A contract is deemed executory if one or both parties remain obligated to fulfill the terms that served as the basis for engaging into the contract. The Bankruptcy Courts have determined that non-exclusive intellectual property licenses cannot be assumed and assigned absent consent. Cadtrack Corp, 89 F.3d (9th Cir. 1996); Everett Systems, Inc. v. Cadtrack Corp, 89 F.3d (9th Cir.
Let's place ourselves in the position of a person who has licensed intellectual property from a licensor who subsequently declares bankruptcy. In this scenario, if the license is exclusive, it is regarded as a legally binding contract. Neither the licensor nor the licensee may transfer these rights to a third party or cease paying royalties. See Encino Bus. Management, Inc. v. Prize Frize, Inc. Section 365(n) of the Chapter 11 Bankruptcy Code states that if the trustee or the Chapter 11 Debtor rejects """"an executory contract under which the debtor is a licensor of a right to intellectual property"""", the licensee may:
1) consider the license as terminated and assert a claim for breach of contract; or 2) continue to use the license.
2) choose to retain its rights to use the intellectual property as they existed immediately prior to the filing of the bankruptcy petition, or for the duration of the contract. 11 U.S.C. 365(n)(1)(B)
Therefore, regardless of their decision, the licensee must be permitted to exercise either of its rights and must continue to make payments for the duration of the contract.
It is essential to note, however, that Section 365(n) does not apply to ALL contracts that contemplate intellectual property or involve it. Instead, the contract must stipulate that the debtor is a """"licensor of an intellectual property right"""".
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