An effect of licensor bankruptcy clause is used for the licensee's benefit to express the parties' intent that the subject matter of the agreement be, and be deemed by the courts to be, a license to "intellectual property" (as defined in section 101(35A) of the Bankruptcy Code) that is subject to the licensee's rights of election and continued enjoyment under section 365(n) of the Bankruptcy Code.

An effect of licensor bankruptcy clause typically includes terms that set out:

An effect of licensor bankruptcy clause concerning the licensee's rights under section 365(n) of the Bankruptcy Code is not binding. Any determination of whether a license is an executory contract, and, if so, whether the non-debtor party may retain its putative IP license rights under section 365(n), is made independently by the bankruptcy court.

However, licensees typically include this provision in license agreements to show the court the parties' understanding and intent that their agreement (and any related escrow agreement) be, and be treated as, a license of IP under the Bankruptcy Code.

For more information on how IP licensees are treated in bankruptcy proceedings generally, see Practice Note, IP Licenses and Bankruptcy: Protections for Non-debtor Licensees of Rejected Licenses.

The Bankruptcy Code's definition of IP does not include trademarks, service marks, trade dress or other designations of source, origin, association or sponsorship. As a result, most courts have ruled that section 365(n) protections are unavailable to a licensee of trademarks under an agreement rejected by the debtor licensor.

For this reason, an effect of bankruptcy clause setting out the parties' intent that section 365(n) apply is not typically included in license agreements solely concerning trademarks or other source identifiers. However, a recent decision from the US Court of Appeals for the Seventh Circuit allowed a trademark licensee to retain its license, not by ruling the trademark to be "intellectual property" for section 365(n), but rather, on the basis that rejection under section 365(a) does not terminate a licensee's license rights under the contract (see Legal Update, Trademark Licensee Retains Right to Use Trademark After Debtor Licensor Rejects License in Bankruptcy: Seventh Circuit).

Depending on the importance of the licensed IP to the licensee's business or operations, the IP's anticipated shelf life and the costs and burdens of obtaining equivalent IP substitutes, the licensee may wish to deposit the licensed technology into escrow under a technology or source code escrow agreement with the licensor and a third-party escrow agent (see Practice Note, Software Source Code Escrow Agreements: Initial Considerations).

To help ensure that the escrow agreement and its escrow release provisions are enforceable against the IP licensor if the licensor enters into bankruptcy, the licensee should expressly provide that the escrow agreement is:

For more information on the effect of bankruptcy on IP license and escrow agreements, see Practice Notes, IP Licenses and Bankruptcy: Protections for Non-debtor Licensees of Rejected Licenses and Software Source Code Escrow Agreements. For the terms of a sample source code escrow agreement and explanatory notes, see Standard Document, Software Source Code Escrow Agreement.