Recent Court Decisions Bolster IP Protections in Bankruptcy

For companies holding intellectual property licenses or pursuing infringement claims, finding out the other party has entered bankruptcy can raise concerns. In two recent decisions, federal appellate courts strengthened the IP protections available during bankruptcy.

With regard to ongoing IP litigation, the 6th Circuit held that bankruptcy’s automatic stay may not protect a debtor from a pending trademark infringement lawsuit. The ongoing litigation involved a temporary restraining order against the debtor to stop using certain trademarks and service marks. The court reasoned that allowing the application of the automatic stay would essentially give the debtor the green light to continue his infringing conduct.

With regard to licensees, the 7th Circuit held that a bankrupt licensor’s rejection of a license does not terminate the licensee’s right to use any licensed copyrights, trademarks, and patents. Although Congress amended the Bankruptcy Code in 1988 to expressly allow licensees to continue using the intellectual property after rejection (provided they meet certain conditions), trademarks were not included in the definition. Therefore, it is still unclear whether rejection of an IP license ends the licensee’s right to use trademarks.

The 7th Circuit ultimately concluded that rejection of a license during bankruptcy constitutes a breach of such contract. The court reasoned that a licensor’s breach does not generally terminate a licensee’s right to use intellectual property and, therefore, the same should apply in bankruptcy.

In its opinion, the 7th Circuit rejected Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985). In a widely criticized opinion, the 4th Circuit had determined that when an intellectual property license is rejected in bankruptcy, the licensee loses the ability to use licensed IP rights.

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