Licenses and Bankruptcy: My Version of a Section 365(n) Provision

Today I spent some time considering section 365(n) of the U.S. Bankruptcy Code.

If in bankruptcy the debtor or trustee rejects a license, under section 365(n) a licensee can elect to retain its rights to the licensed intellectual property. For more on that, see this post by Bob Eisenbach on his In the (Red) blog. (You might recall that Bob joined me as one of the co-authors of this nifty article on termination-on-bankruptcy provisions.)

It’s not necessary that you address by contract issues relating to section 365(n) in order for a licensee to claim its rights under the Bankruptcy Code. But whenever a party intends for a given contract circumstance to fall within the scope of a given statute, it’s best to say as much in the contract. For one thing, if it’s a close call, making that intent explicit might sway a court. And it’s also best to have the parties be clear as to what’s they have in mind.

So naturally, my thoughts turned to how to address section 365(n) most effectively in a contract.

Here’s the core language I’d use:

Bankrupcty. The parties intend that all licenses that Acme grants the Licensee under this agreement are, for purposes of section 365(n) of the Bankruptcy Code, licenses of rights to “intellectual property,” as that term is defined in section 101 of the Bankruptcy Code. [The parties intend that all payments under section __ constitute “royalties” within the meaning of section 365(n).] Nothing in this agreement limits the Licensee’s rights under section 365(n). The Licensee is not in this agreement making an election under section 365(n).

Here’s what makes my take different from what you’d find dumpster diving on EDGAR:

  • I don’t say when section 365(n) applies. Section 365(n) is what it is, and it applies when it says it applies. I don’t think it’s worth devoting a sentence to that. (Here’s how one such I saw begins: “Acme hereby acknowledges that in the event of bankruptcy, if it, as a debtor-in-possession, or if the trustee in
    bankruptcy rejects this license or any agreement supplemental thereto ….”)
  • I use language of intention for the first sentence. The parties cannot simply by saying so in a contract make the licenses under the contract fall within the scope of the statute. The best they can say is that it’s what they intend.
  • The sentence in brackets is might not apply.
  • I don’t say retain [or preserve] all of its rights and elections. For one thing, use of the verb elect in the Bankruptcy Code isn’t reason to use the noun election in the related contract language: if the licensee has the option to elect something, you can safely refer to that as a right.
  • And it’s simpler and clearer to say that nothing in the contract limits those rights.

If you’re dealing with a software license agreement that provides for a software escrow, you wouldn’t need to arrange for a copy of the intellectual property to be delivered to the licensee. If that’s not the case, here’s a basic version of language that does that:

After a Bankruptcy Event occurs with respect to Acme, unless Acme elects to continue to perform all of its obligations under this agreement, in which case after rejection of this agreement by or on behalf of Acme, Acme shall at the written request of the Licensee promptly deliver to the Licensee a complete duplicate copy of, or promptly give the Licensee access to, all “intellectual property” (as defined in section 101 of the Bankruptcy Code) that is the subject of licenses granted under this agreement and all embodiments of that intellectual property.

I’m not keen on “embodiments,” but no alternative comes to mind. I think you have to say something, given how limited the definition of “intellectual property” is in the statute. If I actually have to use such language, I’d explore this further. In particular, I’ve seen versions on EDGAR that go on for an entire page; I’d check whether they contain anything useful.

If the contract containing the section 365(n) language isn’t the only contract that’s relevant for purposes of the licenses in question, you should refer to any other such contract:

The parties intend that the [specify contract] is “an agreement supplementary to” this agreement, as that phrase is used in section 365(n) of the Bankruptcy Code.

That should include any escrow agreement.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.