Technology: Understanding the intersection of bankruptcy law and technology licensing

How to avoid bankruptcy surprises

This series addresses the needs the legal community has for technology licensing knowledge by laying out basic concepts, identifying traps for the unwary and offering drafting and negotiating tips. Click here to read parts one, two and three.

The bankruptcy of a party to a license agreement can have a profound impact on the parties to that agreement. Counsel need to have a basic understanding of how license agreements are treated in bankruptcy, and draft accordingly.

vThe statutory language and case law regarding Section 365, however, can lead to what some might consider a perverse result for the licensee. Depending on whether the applicable court follows the actual or hypothetical tests for evaluating the right to assume a non-exclusive license, a debtor-in-possession licensee may be blocked, not only from assigning to a third party, but also from assuming and continuing its own operations under its non-exclusive licenses. This problem follows generally from the theory that the debtor-in-possession is considered to be a separate legal entity from the pre-petition debtor.

  • Drafting Tip for Licensees: Try, at a minimum, to get the right to assign to a successor in a corporate restructuring or reorganization situation and, if possible, the right to assign to a successor pursuant to an acquisition
  • Drafting Tip for Licensors: Be careful using a “consent not to be unreasonably withheld” clause. Some courts have held this to change the default common law rule of no assignment by the licensee and, therefore, give the trustee or debtor-in-possession the right to assign. Something like “consent in the sole and absolute discretion of the licensor” would be the ideal.

Protection for licensees when the licensor files


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Mark Malven

Mark Malven is the leader of the technology transactions practice at Dykema Gossett PLLC and immediate past chair of the IT Law Section of the...

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