A petition for writ of certiorari in the ongoing dispute between bankrupt Qimonda AG and certain licensees has been filed in the U.S. Supreme Court and briefing on the petition was recently completed. On Dec. 3, 2013, the U.S. Court of Appeals for the Fourth Circuit affirmed[1] the U.S. Bankruptcy Court for the Eastern District of Virginia’s decision holding that § 365(n)[2] should be applied in chapter 15 cross-border cases to protect the interests of nondebtor licensees where the debtor/licensor seeks termination of licenses on U.S. patents in foreign insolvency proceedings.
Brief Background[3]
Qimonda was a German manufacturer of semiconductor memory devices whose primary assets were comprised of patents, including approximately 4,000 U.S. patents.[4] Many of Qimonda’s patents were cross-licensed with its competitors — a common practice in the industry that was designed to reduce litigation and other disputes.[5] In January 2009, Qimonda filed an application for insolvency in Germany and subsequently appointed Dr. Michael Jaffé as the insolvency administrator[6] and he sought recognition of the Qimonda German insolvency proceedings in the bankruptcy court.[7] The bankruptcy court entered an order recognizing the German proceedings, together with a separate order making § 365(n) applicable in the proceedings before the bankruptcy court. [8] Dr. Jaffé filed a motion to modify the § 365(n) order seeking, inter alia, either removal of the § 365 reference or clarification that § 365(n) would not apply in the event Dr. Jaffé terminated the licenses under German law, which does not provide § 365(n) protections.[9] The bankruptcy court granted the motion over the opposition of several licensees.[10]
The licensees appealed to the district court, which remanded it to the bankruptcy court to determine whether restricting the applicability of § 365(n) was contrary to public policy and whether the licensees would be sufficiently protected if § 365(n) did not apply.[11] The bankruptcy court applied a balancing test and held that preservation of the licensees’ § 365(n) rights in the U.S. patents was necessary to protect their interests as required by § 1522(a).[12] The court further held that the absence of § 365(n) protections under German insolvency law and the resulting uncertainty on licensees’ rights “‘severely impinge’ an important statutory protection afforded [to] licensees of U.S. patents and thereby undermine a fundamental U.S. public policy promoting technological innovation,” [13] thereby implicating § 1506(a), which permits courts to not act if the act would be manifestly contrary to public policy.[14]
Dr. Jaffé appealed the bankruptcy court decision and sought a certification from the district court of a direct appeal to the Fourth Circuit, which was granted.[15] The Fourth Circuit affirmed the bankruptcy court’s decision, holding that the court did not abuse its discretion in applying a balancing analysis under § 1522(a) to find that § 365(n) was applicable.[16] The Fourth Circuit declined to rule on the bankruptcy court’s public policy holding.[17]
Petition for Writ of Certiorari
On April 30, 2014, Dr. Jaffé filed a petition for writ of certiorari. The petitioner’s question was “[w]hether the court of appeals erred in construing § 1522(a)’s sufficient protection requirement to permit denial of comity based on an open-ended balancing of competing bankruptcy regimes, without regard to the demanding public policy standard of § 1506.”[18] In addition to arguing that the lower court’s decision was erroneous, the petitioner argued that the certiorari should be granted because the decision abrogated Congress’s purpose for enacting chapter 15, which “was to mandate comity to the main bankruptcy proceeding — ensuring uniform application of a single body of law — subject only to a narrow public policy exception.”[19] The petitioner further argued that the Fourth Circuit decision threatened U.S. interests internationally by discouraging reciprocal cooperation by other nations,[20] and that allowing it to stand would discourage foreign representatives from invoking chapter 15 in the future.[21]
On July 2, 2014, the respondents filed a brief in opposition to the petition for writ of certiorari.[22] The respondents’ question was “[w]hether, based on the specific facts found following a four-day evidentiary hearing, the bankruptcy court properly exercised its discretion under 11 U.S.C. § 1522(a) to ensure that ‘the interests of creditors and other interested entities, including the debtor, are sufficiently protected,’ before modifying an award of discretionary relief requested by the foreign representative in a Chapter 15 insolvency case.”[23] In addition to arguing that there was no error in the underlying decisions, the respondents argued that a review was unnecessary because (1) the bankruptcy court’s decision was fact-specific;[24] (2) there was no split of authority in interpreting § 1522(a);[25] (3) the petitioner’s arguments in support of certiorari were based on erroneous interpretations of the provisions of chapter 15;[26] (4) the petitioner’s concerns regarding comity were unfounded as the bankruptcy court did not deny comity to the German insolvency proceedings;[27] (5) there was no clear conflict between U.S. and German law;[28] and (6) a decision by the Court on this issue would have been premature as it was based on specific facts rather than a circuit split that would have involved a variety of factual contexts.[29]
On July 15, 2014, the petitioner filed a reply brief addressing the arguments raised by the respondents against granting certiorari. The petition and the related briefing were distributed the next day for conference of Sept. 29, 2014. It remains to be seen whether the Court will deem the Qimonda decision to be “cert. worthy.”
[1] Jaffé v. Samsung Electronics Co. Ltd. 737 F.3d 14 (4th Cir. 2013).
[2] Section 365(n)(1) generally provides that in the event of rejection of an intellectual property license by a debtor/licensor, the nondebtor licensee may either treat the license as terminated or retain its rights, excluding any right under nonbankruptcy law to specific performance. See 11 U.S.C. § 365(n)(1).
[3] For a full summary and analysis of the Qimonda case, see Dylan G. Trache and John T. Farnum, “Qimonda: Patent Protections Upheld in Cross-Border Case,” XXXIIII ABI Journal 3, 54-55, 91, March 2014.
[4] In re Qimonda AG, 462 B.R. 165, 168-69 (Bankr. E.D. Va. 2011).
[5] Id. at 169-75.
[6] Id. at 168.
[7] Id.
[8] Id.
[9] Id.
[10] Id. at 168.
[11] Id. at 168-69.
[12] Id. at 182.
[13] Id. at 185.
[14] 11 U.S.C. § 1506.
[15] Jaffé, 737 F.3d at 23.
[16] Id. at 31.
[17] Id. at 32.
[18] Petition for a Writ of Certiorari at i, Jaffé v. Samsung Electronics Co. Ltd., No. 13-1324, 2014 WL 1725846 (U.S. Apr. 30, 2014).
[19] Id. at *3. See also id. at *17-22.
[20] Id. at *22-24.
[21] Id. at *25.
[22] Respondents’ Brief in Opposition, Jaffé v. Samsung Electronics Co. Ltd., No. 13-1324 (U.S. July 2, 2014), available at http://assets.law360news.com/0556000/556796/SamsungBrief1.pdf (last visited July 29, 2014.
[23] Id. at i.
[24] Id. at 1, 13.
[25] Id. at 1, 13.
[26] Id. at 20-26.
[27] Id. at 26-31.
[28] Id.
[29] Id. at 33.