Transfer Pricing Associates



Countries have different regulations towards intellectual property in the event of bankruptcy or insolvency. U.S. bankruptcy law is very different from many other countries, especially about intellectual property.

U.S. Bankruptcy Act

In 1988, U.S. Congress drafted the Intellectual Property act of 1988 and incorporated into the Bankruptcy Code at Section 365 (n). Congress formulated this addition to the Bankruptcy Code in order to “correct the perception of some courts that section 365 was ever intended to be a mechanism for stripping innocent licensee[s] of rights central to the operation of their ongoing business….” Although the purpose of the Intellectual Property Act is to balance the interests of licensor and licensee, this act offers some advantages to the debtor/licensor. When a debtor/licensor rejected the intellectual property license, section 365 (n) gave two options to the licensee. First choice for licensee is to terminate the contract and bring a claim for breach of the contract. The claim will be treated as unsecured creditor. Or the licensee can choose to retain the rights under the contract; however, the debtor/licensor has no additional obligations to the licensee other than refraining from interfering with the licensee’s use of the license. Debtor/ licensor will be hold accountable by rejecting the intellectual property contract, but its obligations under the rejected contract will be terminated. Moreover, obligations, such as providing upgrades of the technology, fixing any problems or glitches that arise, or providing additional training are no longer required.

Intellectual Property

“Intellectual Property” based on section 365 (n) includes trade secrets, inventions, processes or designs protected under patent law, patent application, works of authorship protected under the copyright laws, and mask works. Please notice that trademarks, service marks and trade name licenses are not included in the definition.

Executory Contract

Executory contract is not defined in the Bankruptcy code, but generally the standard for determination is whether “the obligations of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete the performance would constitute a material breach excusing the performance of the other.”  The ongoing obligation in the intellectual property contract is used to distinguish the executor contract from a sale from transferring the substantial ownership rights to licensee. Thus, the Intellectual property contract is usually considered as executor contract. For a non-exclusive contract,

Exclusive Licenses v. Non-Exclusive Licenses

Once the intellectual property law is deemed as executor, it is important to define whether the contract is exclusive or not. Under federal copyright law, the assignability of a license depends on whether the license is exclusive or non-exclusive.


Under section 365(c) (1) a debtor cannot assign a contract if the non-debtor party would not be required to accept performance from a third party under applicable law. Thus, consent from non-debtor party is needed. Several courts have suggested that intellectual property licenses are transferable where the agreement provides that the licensor may not withhold consent under certain conditions, as long as those conditions are met. However, if the licensor reasonably withholds its consent to the debtor/licensee’s assumption of a non-exclusive license, the debtor/licensee will be compelled to reject the license.

More information can be found at: Issues in Bankruptcy.pdf