Can a Foreign Bankruptcy Upset the License Of a U.S. Patent? A Court of Appeals Says “No”

By Thomas Carey. Chair of the Business Practice Group

Since 1988, section 365(n) of the U.S. Bankruptcy Code has protected licensees of intellectual property from having their licenses rejected by an insolvent licensor. While this statute addresses certain contingencies and exceptions, the basic rule is that an insolvent licensor is not free to terminate (or ‘reject’) an intellectual property license the way it is free to shed itself of other contracts.

But what if the licensor is based overseas and licenses U.S. patents? In Jaffe v. Samsung Electronics Company, the Fourth Circuit Court of Appeals recently addressed that first-of-its-kind question.

Chapter 15 of the Bankruptcy Code includes a procedure, based upon a model law promulgated by the UN, by which the administrator of a foreign bankrupt company can ask a U.S. bankruptcy court for permission to control the bankrupt company’s U.S. assets and for an array of other privileges, including the right to prevent creditors from taking actions that would frustrate the foreign proceeding and the right to examine witnesses and seek the production of documents. In weighing such a request, a U.S. bankruptcy court is authorized to consider the interests of the insolvent, its creditors, and others affected by the request.

In 2009, Qimonda AG, a large German semiconductor manufacturer, filed for bankruptcy in Germany. Its principal asset was a portfolio of about 10,000 patents, roughly 4,000 of which were U.S. patents. These patents were subject to cross-license agreements with other industry players. Dr. Michael Jaffe was appointed as the German bankruptcy administrator for Qimonda.

Dr. Jaffe applied to the U.S. bankruptcy court for recognition under Chapter 15 of the Bankruptcy Code and for powers within the U.S. that a bankruptcy trustee in a U.S. proceeding would ordinarily have. The court granted the request, but made it conditional on compliance with section 365.

With Qimonda basically out of business, it had nothing to gain from the incoming license rights that it had obtained in the cross-licenses. Dr. Jaffe undertook to monetize the patent portfolio by notifying all parties to the cross-license agreements that the licenses were being terminated under the German bankruptcy proceeding. Dr. Jaffe’s plan was to re-license these patents for the benefit of Qimonda’s creditors, replacing the in-kind cross-licenses with royalty-bearing licenses.(More)