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Technology: When tech companies file for Chapter 11 bankruptcy

5 special considerations to maximize recovery

Kodak’s recent filing for Chapter 11 bankruptcy saw a pillar of the American experience seek protection due to falling victim to the world’s digital revolution, and its demise will be followed by many more business failures from high-tech companies, both large and small.

Indeed, as our economy continues to become more technology-based, bankruptcies in which high-tech assets and issues predominate will become far more common. And because our technology-based economy is an incubator for both business success and failure, issues common to high-tech bankruptcies should be known by business lawyers, creditors, investors and management.

3. Selling disputed IP. Chapter 11 may not necessarily help a company sell disputed intellectual property. Section 363 is a great tool for selling an asset free of the claims of creditors, but usually it can’t help if the company’s title to the asset is disputed. Generally, the debtor can only sell what it owns, and a sale free and clear of creditor claims will not sidestep the question of ownership. Thus, if a technology company is embroiled in a dispute over its right to certain intellectual property, the bankruptcy judge may not be much help in getting that question resolved.

4. Benefits for licensees. Licensees of intellectual property can enjoy the benefits of their licenses even though their licensor files for Chapter 11. Generally, a licensee of intellectual property can enforce its right to use that license even though the licensor files for Chapter 11. Section 365 of the Bankruptcy Code greatly minimizes the legal effect on the licensee if the licensor walks away from the license (by rejection—a bankruptcy term of art) or simply fails. Protection for the licensee is not unlimited.

Contributing Author

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Andrew Jillson

Andrew Jillson is a partner at Hunton & Williams. Over the course of Andy's legal career, he has represented a wide range of parties in...

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