Chapter 11 bankruptcy – What effect will it have on intellectual property?

by IP Blawg on June 19, 2012

Below is a blog post regarding intellectual property and bankruptcy under US law.

Have you noticed the name CBGB on the shirts? It has originated from a renowned music place in Manhattan. The club has got closed since the year 2006. Yet, the investors bought it for the naming rights. These rights are known as intellectual property rights and are now in the middle of Chapter 11 bankruptcy that has been filed for the investors. You may ask mortgage questions and answers to the lenders if you have purchased your property by taking out a mortgage loan. Thus, the question may arise as to what will happen to the intellectual property rights during a Chapter 11 Bankruptcy.

A chapter 11 bankruptcy case is controlled in the following ways:

assumption or denial of executory contracts

settlement of the claims

sale of property

legal action

A contract is said to be executory if there is an outstanding compulsion by one or both the parties that are involved with the contract, for which the clauses were the reasons to enter into the contract. The bankruptcy courts have found out that the non-exclusive licenses of the intellectual property cannot be assigned and taken for granted unless there is an approval.

Going back, think about the individual who has licensed the intellectual property and became bankrupt afterwards. In this circumstance, if the license is a special one, then it is considered to be an executory contract. The licensor cannot sell the rights to anyone else. But if the license is non-exclusive, Section 365(n) of Chapter 11 Bankruptcy states that the debtor of Chapter 11 or the trustee declines an executory contract in which the debtor is a licensor of the right to intellectual property. However, the licensee under the contract may consider the license as ceased and, as such, declare for a claim for violation of the contract. Or, it may elect to preserve its rights of using the intellectual property as these rights survived immediately before the beginning of the bankruptcy or the time period of the contract. The licensee must be permitted to exercise either of the rights and it should continue to make the payments for the rights it is licensing during the time period of the contract.

Intellectual property – What is it?

Intellectual property is the formation of the mind which consists of the inventions, symbols, creative works, images and designs that have been used for business purpose. Intellectual property or IP has been divided into two types – the first being the industrial property that consists of the industrial designs, trademarks and geographic indications of source and the second is Copyright which includes the literary works like poems, plays, films, novels, paintings and photographs.

It is important to note that Section 365(n) is not applicable to all the contracts that engage intellectual property. As such, the contract should be one in which the debtor is considered as the licensor of the right to intellectual property.

Author Bio: Gabriel Knight has vast experience in the mortgage industry, and has been associated with the MortgageFit Community as a mentor. Not only does he provide suggestions in the community forums, but he also contributes various articles on mortgage, property, and finance.

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