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.

10 thoughts on “Licenses and Bankruptcy: My Version of a Section 365(n) Provision”

  1. Two questions unrelated to each other:

    1/ Agreed that the parties cannot make a statute apply to a contract by saying it applies. But by saying the statute applies, don’t the parties adequately express their intention that the statute apply?

    2/ To what category of contract language does each of the two final sentences belong? (‘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)’.)

    • Regarding your first question, I think it’s for the best to remind the parties what the dynamic is.

      Regarding your second question, the first sentence is language of policy, and so is the second (see MSCD 3.29).

  2. There is pending legislation in the Senate (S. 1137) and House (H.R. 9) to amend section 365(n). There is a reasonable prospect for passage since it is attached to legislation addressing patent trolls — a topic that has major lobbying effort and a lot of money behind it.
    The changes codify the result of the Qimonda case — which is quite helpful. The changes also include trademark licensee protections sought by the International Trademark Association — which are a good or bad idea depending on your point of view.
    One problem with the changes is that the concept of “royalties” is eliminated from the statute in favor or a requirement that the licensee making a 365(n) election must continue to make all payments contemplated under a license. This is maybe OK for trademark licenses where advertising, franchise fees, and other payments that are not strictly “royalties” must continue to be paid to the debtor licensor to obtain the benefits of section 365(n). However, if enacted the statute will require major changes in pharmaceutical collaboration agreements and other types of patent licenses that include milestone payments and other payments for services as well as “royalties”. With the new statute, the cost of exercise of 365(n) rights for many types of licenses will dramatically increase. This may force changes in contract drafting to isolate the “services” component of license collaborations from the IP licensing component.

  3. Ken:

    Did you consider a no-contest provision to bolster your language of intention int he first sentence? Or did you conclude that, in a bankruptcy scenario, a promise not to contend blah-de-blah won’t be enforceable?

    Alternately, do you think that there is any value in trying to find magic language to constitute an admission against interest, or do you think the language of intention does the trick?


    • May I throw in 200 words?

      No-contest provisions are always problematic. Forgive the non-bankruptcy example.

      If an agreed independent contractor agrees never to contend that she is an employee, the obvious issue — as you said — is practical enforceability. A court may decline to ignore a party’s legal and factual arguments, even if the party promised not to make them.

      But one can get around the ban and call a court’s eyes to an issue without making a contention:

      ABEL: ‘May it please the court, Abel has agreed not to contend that she is an employee, and does not so contend, but the court may wish on its own to consider that Baker directly controlled every part of Abel’s work’.

      That stinks of bad faith so badly that a court may take against Abel for saying it, but it’s hard to call it an outright violation of the no-contest provision. So no-contest provisions may be worthless.

      As for the alternative, admission against interest, it makes my head spin to argue that Abel may not contend X because Abel has already admitted against interest that X is not so. The problem I see is, if X is supposedly against Abel’s interest, why is Abel arguing X?


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