Protecting Yourself When Your Intellectual Property Licensor Declares Bankruptcy

If you license intellectual property (IP) from a third-party company, it can be a real heart-stopping moment when you receive notice the company has filed for bankruptcy. The decisions the licensor makes in its bankruptcy case can have long-term consequences for your business. Here's how you can protect yourself when your intellectual property licensor goes into bankruptcy.

Preventing Rejection of License

One major decision the licensor will have to make during its bankruptcy proceedings is whether or not to approve executory contracts. These are contracts where both parties must perform specific duties. For instance, the licensor must take steps to protect the intellectual property from infringement and the licensee must pay royalties. A licensor's rejection of a licensee's executory contract ends the licensee's ability to use the intellectual property.

However, the bankruptcy code does provide a way for licensees to protect themselves in this situation. You can retain your right to use the property by submitting a written statement to the bankruptcy court detailing your intention to hold the licensor to the contract. This letter must be filed promptly after the licensor (or bankruptcy trustee) rejects the executory contract. If you wait too long, you'll lose your rights. Additionally, you must continue holding up your end of the contract. Failing to do so will also terminate your rights to the intellectual property.

When the Licensor Sells the Intellectual Property

Another potentially business-ending thing that can occur during the licensor's bankruptcy is the intellectual property gets sold to a third-party. As the purpose of bankruptcy is to find a way for the petitioner to pay off his or her debts, the licensor may or may not have a say about this action.

Regardless, if the IP asset is sold to another party, that party could also revoke the licensee's rights to use the property. One option to prevent this is to raise an objection to the sale in bankruptcy court. At the hearing to discuss your objection, you can request that the sale of your licensee contract include provisions protecting your rights to the intellectual property including the ones bestowed upon you by bankruptcy law.

Both of these options require you to pay attention and stay on top of what's happening with the licensor's bankruptcy case. This can be difficult to do when you're busy trying to run your business. If you receive a bankruptcy notice from your licensor, contact an attorney, like those at FactorLaw, as soon as possible to discuss the matter and to develop a strategy to protect your interests.