Download Intersection of the Bankruptcy Code and IP

Spansion v. Apple
The Intersection of the Bankruptcy Code
and Intellectual Property
AIPLA Spring Meeting
May 2, 2013
Michael R. Lastowski
©2013 Duane Morris LLP. All Rights Reserved. Duane Morris is a registered service mark of Duane Morris LLP.
Duane Morris – Firm and Affiliate Offices | New York | London | Singapore | Los Angeles | Chicago | Houston | Hanoi | Philadelphia | San Diego | San Francisco | Palo Alto | Baltimore | Boston | Washington, D.C.
Las Vegas | Atlanta | Miami | Pittsburgh | Newark | Boca Raton | Wilmington | Cherry Hill | Lake Tahoe | Ho Chi Minh City | Duane Morris LLP – A Delaware limited liability partnership
www.duanemorris.com
11 U.S.C. § 365 – Executory Contracts
Definition – a contract as to which each party has obligations that
are sufficiently material so that a failure to perform those obligations would
relieve the other party from performance.
Examples – supply contracts, license agreements, leases, etc.
Property of the estate – under 11 U.S.C. § 541, these contracts
are property of the debtor/property of the estate.
Executory contracts, from a business perspective, may be beneficial or
burdensome (i.e., the debtor’s benefits under an executory contract may
be above or below “market”).
www.duanemorris.com
Assumption of Beneficial Executory Contracts
11 U.S.C. § 365(a) permits assumption or
rejection of executory contracts.
Under 11 U.S.C. § 365(b), a contract may not
be assumed unless the debtor:
Cures existing defaults ;
Provides adequate assurance
of future performance.
www.duanemorris.com
Rejection of Burdensome Executory Contracts
The debtor is deemed to be in material breach of its obligations as of the
date it filed for bankruptcy (the “Petition Date”).
The non-debtor party has a claim for rejection damages (i.e., damages for
breach of contract).
The claim is a general unsecured claim (often pennies on the dollar).
The contract is not “terminated.” The debtor may still be bound by
provisions of the executory contract (e.g., a covenant not to compete).
The non-debtor party is relieved from future performance.
www.duanemorris.com
Treatment of Intellectual Property
Under the Bankruptcy Code
11 U.S.C. § 101(35A) provides:
The term “intellectual property” means:
(A) trade secret;
(B) invention, process, design or plan under title 35;
(C) patent application;
(D) plant variety;
(E) work of authorship protected under title 17; or
(F) mask work protected under chapter 9 of title 17
to the extent protected by applicable non-bankruptcy law.
Note the omission of trademarks.
www.duanemorris.com
Rejection of Intellectual Property
Licenses Under the Bankruptcy Code
If the debtor, as licensor, rejects an intellectual property
license, the non-debtor licensee has the ability to elect to:
Treat the license as terminated (note the difference
between “rejection” and “termination”); or
Elect to continue to “retain its rights” under the
executory contract and any “agreement supplementary to
such contract” for the duration of the contract and any
extension period.
www.duanemorris.com
If the licensee elects to retain its rights,
•
The licensee may enforce any exclusivity provision in the agreement
with the debtor.
•
The licensee is required to pay royalties under the agreement, without
the benefit of setting off any damages arising from the debtor’s
performance of its obligations.
•
The licensee forfeits its right to seek rejection damages.
•
The debtor is required to deliver to the licensee any intellectual
property relating to the license.
•
The debtor is barred from interfering with the rights of the licensee
under the license.
www.duanemorris.com
The Spansion/Apple Litigation
•
The case has its genesis in Spansion’s commencement of
litigation against Samsung for patent infringement.
•
Spansion filed a patent infringement action in District
Court.
•
Spansion also initiated an action before the International
Trade Commission (“ITC”), seeking an order barring the
import of certain consumer goods incorporating Samsung
flash memory chips.
•
In the ITC action, Spansion named as respondent’s
purchasers of Samsung chips, including Apple.
www.duanemorris.com
The Letter Agreement
•
Spansion and Apple entered into a Letter Agreement
under which Spansion agreed to dismiss the ITC action
against Apple and not to “re-file the ITC action or another
action related to one or more of the same patents against
Apple.”
•
In exchange, Apple agreed that “Spansion will remain
primary-supplier on current platforms where Spansion is
qualified for the life-time of the product and will also be
considered for future platforms . . .”
www.duanemorris.com
The Rejection/Termination
of the Letter Agreement
•
Spansion filed a motion to reject the Letter Agreement.
•
The bankruptcy court granted the motion and entered an
order which, among other things, stated that the Letter
Agreement was “terminated.”
•
Apple thereafter filed a “notice of election” under § 365(n).
•
Spansion moved to strike the election in light of the
language in the order providing for “termination.”
www.duanemorris.com
The Bankruptcy Court Ruling
• The order granting the motion to reject was
amended to exclude any reference to
“termination.”
• The notice of election was stricken in light of
the absence of any evidence that Spansion
and Apple had a continued business
relationship.
www.duanemorris.com
The District Court Ruling
•
The bankruptcy court’s decision to amend its prior order to
exclude any reference to termination was affirmed.
•
The bankruptcy court’s striking of the notice of election
was reversed – the absence of a continuing business
relationship between Spansion and Apple does not
prevent the covenant not to sue from being enforced as a
license.
•
The United States Court of Appeals for the Third Circuit
affirmed the District Court.
www.duanemorris.com