Scooby Doo and Powder Puff Girls vs. Madeline: What Intellectual Property Licenses Are Assignable in Bankruptcy?

By Nathan, Bruce S. | Business Credit, October 2002 | Go to article overview

Scooby Doo and Powder Puff Girls vs. Madeline: What Intellectual Property Licenses Are Assignable in Bankruptcy?


Nathan, Bruce S., Business Credit


businesslaw

Introduction

This is the Business Credit issue dedicated to the Internet. So, the writer has decided to get with the program and go high tech! And with all of the recent telecom and high technology bankruptcies, the time is right. Even more interesting-we are throwing into the mix a little copyright and some cartoon characters to boot! Only in Business Credit!

Over the past few years, the high technology and telecommunications industries have been on a roller coaster. They went from the highs of the go-go years of the roaring 90s to an ongoing financial crisis beginning in 2000 and continuing to date. just look at your 401 K and retirement and college savings portfolios.

The scenario is all too familiar to credit grantors. A company developed a form of technology promoted to "revolutionize" a particular industry. The company created a complicated financial structure to develop, maintain and market this new technology. The cost of developing, maintaining and marketing the technology was expected to exceed the company's revenues for a time after the company's inception requiring the availability of huge amounts of capital. But not to worry: the company satisfied its capital needs by borrowing substantial sums, incurring substantial trade credit and attracting substantial investment capital. And then sales would take off and there would be profits galore-at least that was what management had promised.

Then what happened? The projected revenues never materialized. Investments dried up.

Bank loans, bond debt and trade credit were tapped out. The company finally collapsed under the weight of its huge debt burden and was left with no alternative but to file for bankruptcy.

The company's assets may include valuable intellectual property licenses, such as licenses of patents and copyrights. The company's ability to continue and assume and/or assign the licenses may be critical to the company's ability to reorganize and exit from Chapter 11 as a going concern. Or if the licenses could be sold, they may be a source of cash available for distribution to creditors.

However, certain licenses of intellectual property may not be assumable by a Chapter 11 debtor-in-possession or a bankruptcy trustee or assignable to a third party. So where does that leave the debtor's creditors? Possibly in the cold with no ability to share in the value of key intellectual property licenses and with little or no prospect for recovery.

The recent decisions of the United States Bankruptcy Court for the District of Delaware, in In re Golden Books Family Entertainment Inc., dealt with the assignability of copyright licenses in a Chapter II where the debtor is the licensee and the nondebtor licensor objects to the assignment. The bankruptcy court had approved the assignment of exclusive copyright licenses, but refused to approve the assignment of nonexclusive copyright licenses, over the licensor's objections. Why the distinction? Read on and you will see.

A Brief Overview of Intellectual Property

Intellectual property is defined as a category of intangible rights protecting commercially viable products of the human intellect. They include copyrights, patents, trademarks and trade secrets.

An inventor of a new product may seek to protect the invention by applying for a patent. A patent grants the inventor a monopoly over the invention that precludes others from exploiting it during the life of the patent. A copyright is similar. A copyright owner, such as an author or recording artist, is granted a monopoly to exploit the work on an exclusive basis during the life of the copyright. Both patents and copyrights are governed by federal law.

Intellectual property can be transferred by assignment or license. An assignment is a transfer of the entire interest of the owner in the intellectual property. A license is a transfer of less than the owner's entire property interest. …

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