Exclusive and Non-exclusive IP Licenses and Executory Contract Assumption and Assignment Does Exclusivity Matter

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Feb 2003

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Licenses of intellectual property (IP) are generally considered executory contracts under Bankruptcy Code
§365 and the traditional Countryman test. See <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re Access Beyond Technologies Inc., 237 B.R. 32, 42-43
(Bankr. D. Del. 1999)</a>; <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=8… re CFLC Inc., 89 F.3d 673, 677 (9th Cir. 1996)</a>. Section 365(a) permits the
trustee or debtor-in-possession (DIP) to assume or reject an executory contract, subject to the court's
approval and certain exceptions, including the exception of §365(c). In addition, §365(f)(1) provides that
"except as provided in subsection (c) of this section," an executory contract may be assigned after it is
assumed even though the contract, lease or applicable law otherwise prohibits, restricts or conditions the
assignment.

The §365(c)(1) exception looms large in debtor IP licensee cases. That section provides:
<blockquote>
(c) The trustee may not assume or assign any executory contract or unexpired lease of the debtor,
whether or not such contract or lease prohibits or restricts assignment of rights or delegation of
duties, if‹
<blockquote>
(1)(A) Applicable law excuses a party, other than the debtor, to such contract or lease from
accepting performance from or rendering performance to an entity other than the debtor or
the DIP, whether or not such contract or lease prohibits or restricts assignment of rights or
delegation of duties; and 
(B) Such party does not consent to such assumption or assignment...</blockquote>
</blockquote>

Several cases have held that federal intellectual property common law is such "applicable law" under
§365(c)(1)(A), and that, because a non-exclusive patent license is personal and not assignable under federal
common law, a non-exclusive patent license cannot be assigned. See <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=7… re Alltech Plastics Inc., 71 B.R.
686 (Bankr. W.D. Tenn. 1987)</a>; <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=8… re CFLC Inc., 89 F.3d 673 (9th Cir. 1996)</a>; <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re Access Beyond
Technologies Inc., 237 B.R. 32 (1999)</a>.

The rationale of these cases is premised on the fundamental policy of intellectual property law. As one
court stated:
<blockquote>
The fundamental policy of the patent system is to encourage the creation and disclosure of new,
useful and non-obvious advances in technology and design...allowing free assignability...of
non-exclusive patent licenses would undermine the reward that encourages invention...
</blockquote>

In re CFLC Inc. at 679 (citations omitted). Another court stated:

<blockquote>
Free assignability of a non-exclusive patent license without the consent of the patent-holder is
inconsistent with patent monopoly and thus inconsistent with federal policy.
</blockquote>

In re Access Beyond Technology Inc. at 45.

Non-exclusive copyright licenses have also been held to be non-assignable. See <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re Patient Education
Media Inc., 210 B.R. 237 (Bankr. S.D.N.Y. 1997)</a>; <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re Golden Books Family Entertainment Inc., 269
B.R. 311 (Bankr. D. Del. 2001)</a>.

The result is that a debtor with valuable non-exclusive intellectual property licenses may not be able to
realize that value, notwithstanding that a major policy goal of the Code is to preserve or recover value for
creditors. In these cases, the policy behind the bankruptcy laws loses out to the policy that informs
intellectual property law.

The cases that discuss these issues also frequently discuss whether there is a federal common law as to IP
license assignments. Ordinarily, common law is a creature of state law. See <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=3… RR Co. v. Tompkins, 304
U.S. 64 (1938)</a> (the law of a state applies in federal court because there is no such thing as federal common
law). However, the Seventh Circuit Court of Appeals has ruled, in a case that has generally been followed,
that patent assignments are an exception to the Erie rule:

<blockquote>
The long-standing federal rule with respect to assignability of patent license agreements provides
that those agreements are personal to the licensee and not assignable unless expressly made so in
the agreement.
</blockquote>

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=4… Industries Inc. v. Kelley Co. Inc., 465 F.2d 1303, 1306 (7th Cir. 1972)</a> (cert. denied); see, also,

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=5… Industries Inc. v. Guardian Industries Inc., 597 F.2d 1090 (6th Cir. 1979)</a>, and <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=8… re CFLC Inc., 89
F.3d 673, 679 (9th Cir. 1996)</a>. This federal common law has also been followed with respect to
copyrights.

<h3>Sale/Assignment vs. License/Executory Contract</h3>

Many cases start out on the assumption that the agreement at issue is an executory contract. See <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=1… re
Catapult Entertainment Inc., 165 F.3d 747, 750 (9th Cir. 1999)</a>. In other cases, the first argument of
debtors, their lenders and the putative acquirers (who are attempting to accomplish a transaction) is that the
agreement at issue is not an executory contract but a completed sale, assignment or transfer, and therefore
§365 does not apply. The cases are far from clear as to what is a sale, assignment or outright transfer (or
how a court distinguishes between them). However, courts do not have difficulty in reviewing the
agreements at issue to find sufficient performance due each side such that failure of either to complete
performance would constitute a material breach excusing the performance of the other, thereby fulfilling the

Countryman test of what constitutes an executory contract. See In re Access Beyond Technologies Inc., at
42-43, and <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re Golden Books Family Entertainment Inc., 269 B.R. 300, 308-309 (Bankr. D. Del. 2001)</a>.

The patent statute is said to grant to patents "the attributes of personal property" and to patent-holders the
rights to assign, grant or convey the patent. A patent assignment is said to be a transfer of the entire patent
monopoly, while a license ordinarily grants only limited rights, including the right not to be sued for
infringement. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=7… re Alltech Plastics Inc., 71 B.R. 686, 689 (W.D. Tenn. 1987)</a>.

An agreement is a sale (or assignment) of patent rights only if it conveys:

<ol>

<li>the whole patent, comprising the exclusive right to make, use and sell the invention;
</li><li>an undivided share of that exclusive right; or
</li><li>an exclusive right to practice the invention within a specified territory.
</li></ol>
"Unless the writing conveys some or all of the right to exclude others from practicing the invention, it will
not convey an interest in the patent, but is a mere license." <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… Beyond Technologies Inc., 237 B.R. 32
at 44</a>, citing <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=1… v. Mackenzie, 138 U.S. 252, 255-256 (1891)</a>. Based on the application of these
factors, the Access Beyond Technologies court concluded that the agreement at issue was not a sale, but a
license.

In <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re Supernatural Foods LLC, 268 B.R. 759 (Bankr. M.D. La. 2001)</a>, the agreement at issue granted
the debtor the right, exclusive of all others, to "make, have made, use, sell and import licensed products"
and use the patented process with regard to specified food categories. The court first concluded that the
agreement was not a non-exclusive license, and then considered whether the agreement was an outright
assignment rather than merely an exclusive license, based on the Waterman v. McKenzie principles.
Because the agreement limited the use of the patent to certain types of foods, the court concluded it was
not an assignment, but merely an exclusive license.

With respect to copyrights, a copyright owner has the exclusive right to exploit or authorize the
exploitation of a copyrighted work. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re Patient Media Education Inc., 210 B.R. 237, 240 (Bankr.
S.D.N.Y. 1997)</a> (citing 17 U.S.C. §106, which enumerates six exclusive uses). A "transfer of copyright
ownership," however, has been held to include the grant of an exclusive license. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…;, citing <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=1… U.S.C.
§101</a>. Especially with respect to copyrights, the issue has been whether the license is exclusive or
non-exclusive.

<h3>Exclusive vs. Non-exclusive Licenses</h3>

Exclusivity matters because exclusivity is more likely to mean assignability (but, see below). As the
holder of an exclusive license is entitled to all the rights and protections of the copyright owner, the
licensee under an exclusive license may freely transfer her rights, and the licensor cannot transfer the same
rights to someone else. A non-exclusive licensee, on the other hand, is said to have only a personal and not
a property interest that cannot be assigned unless the owner authorizes assignment. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re Patient Education
Media Inc., 210 B.R. 237, 240 (Bankr. S.D.N.Y. 1997)</a>, citing <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=1… U.S.C. §201(d)(2)</a> and <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=7…. Inc. v.
Shaver, 74 F.3d 768, 775 (7th Cir. 1996)</a>; <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re Golden Books Family Entertainment Inc., 269 B.R. 300,
309 (Bankr. D. Del. 2001)</a>.

Courts look to both as to whether the agreements describe themselves as exclusive or non-exclusive as well
as to the economic rights granted. In <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re Golden Books Family Entertainment Inc., 269 B.R. 300 (Bankr.
D. Del. 2001)</a>, the court made the determination that a copyright license was non-exclusive primarily based
on language in the license saying it was non-exclusive. The license included an acknowledgement that "this
agreement is a license of the type described by §365(c)(1) of the Bankruptcy Code and may not be assigned
without the prior written consent of the licensor."

In the companion case (<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re Golden Books Family Entertainment Inc., 269 B.R. 311 (Bankr. D. Del.
2001)</a> (Golden Books II, dealing with a different license agreement), the court found a license to be
"exclusive" even though it was limited in term and in geographical extent and even though the licensee
could not, under the agreement, assign the agreement without the licensor's consent. As in the Patient
Education Media case, the court looked to §201(d) of the <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=1… Act (17 U.S.C. §201(d)</a>) for the
conclusion that exclusive licenses are assignable under federal copyright law. After concluding the license
was exclusive, the court referred to Code §365(f)(1) to avoid an anti-assignment provision in the contract.

<h3>Does Exclusivity Matter?</h3>

To complicate the law further, two more recent cases conclude that even exclusive licenses of IP are not
assignable. The Golden Books II case, which held that an exclusive copyright license is assignable, did so
by rejecting the holding of <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=1… v. Nike, 110 F. Supp. 2d 1282 (C.D. Cal 2000)</a>. That case held that
an exclusive licensee of a copyright was not an "owner" under §201(d) of the Copyright Act, and therefore
did not have the right to assign its interest. However, Gardner v. Nike has now been upheld on appeal. See
<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… v. Nike Inc., 279 F.3d 774 (9th Cir. 2002)</a>. Thus, in the Ninth Circuit at least, even an exclusive
license likely is not assignable.

Similarly, in a recent patent case, exclusivity of the patent license did not exclude the license from the
application of §365(c). <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re Hernandez, 285 B.R. 435 (Bankr. D. Ariz. 2002)</a>. After first concluding that
the patent license at issue was "exclusive" (because it granted the licensee numerous rights, well beyond the
mere right not to be sued for infringement), the court concluded that an exclusive license may vest the
licensee with standing to sue to protect the patent from infringement, but that does not mean the patent is
assignable. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…; at 439</a>.

It is an understatement to suggest that the law in this area is unpredictable. Much can turn on the specific
language of a license agreement. However, the licensee of IP faces an uphill battle in attempting to preserve
value for creditors based on intellectual property licenses.

Journal Authors

David I. Cisar

Journal Date

Saturday, February 1, 2003 - 12:00

Bankruptcy Rule

2003