A Summary of Intellectual Property Infringement and Bankruptcy

The Bankruptcy Code, in its current form, anticipates the inclusion of intellectual property (IP) within the property of an estate. Not only is IP defined [1] in the Bankruptcy Code, it is also explicitly considered in terms of executory contracts. [2] While “executory contract” is not specifically defined in the Code, the U.S. Supreme Court has previously stated that the term was intended to mean “a contract ‘on which performance is due to some extent on both sides.’” [3]

Generally, IP agreements are executory contracts, with the exception of trademarks. [4] Section 365 provides functions in which the licensee has several options if the contract with the debtor-licensor is rejected in the course of the bankruptcy proceedings. Section 365(n) was enacted based on previous court decisions that had “interpret[ed] that Section 365 [had] imposed a burden on American technological development that was never intended.” [5] The Code explicitly considers IP issues in the executory contracts capacity, but by the time a bankruptcy petition is filed, there may be outstanding liability from IP infringement.

Jurisdiction of the Bankruptcy Court

Without a previous judgment, IP infringement claims may be brought as adversary proceedings against debtors. An IP infringement proceeding is not necessarily a non-core proceeding; a bankruptcy court needing to apply patent laws is not determinative of this. A bankruptcy court could have jurisdiction under the “related to” standard if the infringement claim would affect the estate. [6]

Additionally, once a proof of claim has been filed, the party has invoked the core jurisdiction, and the party has no Seventh Amendment right to a jury trial. [7] Thus, it is possible for an IP infringement claim to be heard in a bankruptcy court with a bench trial.

Nondischargeability: Infringement as a Willful and Malicious Injury

IP infringement claims often will become relevant to a bankruptcy case by way of an adversary proceeding. This is not a new issue, and previous judgments for IP infringement have previously been held in different courts as being nondischargeable as a willful and malicious injury under 11 U.S.C. § 523(a)(6).

There is a stark difference, however, in the standard for willfulness relative to a discharge and the standard for establishing IP infringement. The Code specifically considers a willful and malicious injury, whereas a willful IP infringement claim could be based on intentional behavior or even just reckless behavior. [8] The Supreme Court, in Geiger, held that injuries from reckless behavior are not sufficient to be considered willful injuries under 11 U.S.C. § 523(a)(6). [9] For a nondischargeability action to succeed, a bankruptcy court would need to be able to determine whether the underlying infringement judgment was based not on reckless behavior, but on intentional, willful behavior. However, if the bankruptcy court can find that the infringement was willful, it may be held to be nondischargeable. [10]

What if the Infringement Continues?

It would not be unheard of for the IP infringement to continue after a bankruptcy is filed. These claims can be filed as administrative claims against a bankruptcy estate. Multiple types of claims fall within the Code’s definition of administrative expenses, including tort claims, trademark infringement, patent infringement and breach of contract. [11] An administrative claim can be filed if the claim meets the “traditional definition of ‘administrative expenses’ so long as they arose from transactions that occurred … after the petition for bankruptcy.” [12] Of course, there is also the more common mechanism of seeking relief from the automatic stay to pursue IP infringement litigation outside of the bankruptcy court.

However, if the IP infringement continues post-discharge, a debtor can still be held liable for post-discharge acts of infringement, as “each act of patent infringement gives rise to a separate cause of action.” [13] Paired with the discharge lifting the automatic stay, the discharge enjoins a party to continue or commence an action to collect on a debt that a debtor’s personal liability was discharged. However, both §§ 362 and 524 only apply to actions that arose before the date of discharge. [14] Thus, continuing IP infringement actions are not barred by a debtor’s discharge.

It is clear that bankruptcy is not the end of the line for parties seeking relief regarding IP infringement. Rather, it allows for multiple avenues of recovery despite the status of the IP infringement litigation.