Enter to open, tab to navigate, enter to select
Section 365(n) Protects IP Licensees in Chapter 15 Bankruptcy: Fourth Circuit
Practical Law Legal Update 4-552-2865 (Approx. 5 pages)
Section 365(n) Protects IP Licensees in Chapter 15 Bankruptcy: Fourth Circuit
by Practical Law Intellectual Property & Technology
| Published on 17 Dec 2013 • USA (National/Federal) |
On December 3, 2013, the US Court of Appeals for the Fourth Circuit affirmed a bankruptcy court decision holding that Section 365(n) of the Bankruptcy Code applied to protect US patent licensees in a Chapter 15 case with a foreign debtor.
In Jaffé v. Samsung Electronics Co., Ltd., the US Court of Appeals for the Fourth Circuit affirmed a decision by the US Bankruptcy Court for the Eastern District of Virginia, holding that Section 365(n) of the Bankruptcy Code applied in a Chapter 15 case involving a foreign debtor (Qimonda) seeking to terminate US patent licenses under Section 365 (No. 12-1802, (4th Cir. Dec. 3, 2013)). Notably, this December 3, 2013 decision suggests that, at least in the Fourth Circuit, US courts may protect licensees by applying Section 365(n) when a foreign entity’s representative seeks assistance from US bankruptcy courts. However, the court declined to rule on whether failing to apply Section 365(n) would be contrary to US public policy, leaving this an open question.
Qimonda, a German semiconductor device manufacturer, filed for insolvency proceedings in Germany in 2009. Qimonda’s principal assets were approximately 10,000 patents, including about 4,000 US patents. In 2009, Qimonda’s foreign representative, Dr. Michael Jaffé, filed under Section 15 of the Bankruptcy Code to obtain US recognition of the German proceeding as a foreign main proceeding. The bankruptcy court granted recognition and issued a supplemental order:
- Granting Jaffé Section 1521(a)(5) discretionary relief, empowering Jaffé to administer all of Qimonda’s US assets (11 U.S.C. § 1521(a)(5)).
- Providing, among other things, that Section 365 of the Bankruptcy Code would apply to the case.
After US licensees asserted Section 365(n) to retain their patent license rights, Jaffé filed a motion for an order that Section 365(n) does not apply in the Chapter 15 case. The analogous provision to Section 365 in the German Insolvency Code (Section 103) does not have a provision similar to Section 365(n). The bankruptcy court's first decision in the case agreed with Jaffé and granted the motion. On appeal, the US District Court for the Eastern District of Virginia remanded the case, directing the bankruptcy court to:
- Balance the relief granted to Jaffé and the interests of those affected by the relief, as Section 1522(a) of the Bankruptcy Code requires.
- Consider, under Section 1506 of the Bankruptcy Code, whether subordinating Section 365(n) to the German Insolvency Code would be "manifestly contrary" to US public policy.
Considering these issues on remand, the bankruptcy court held that:
- Section 365(n) should be applied in the US licensees' favor because the licensees’ interests outweighed Qimonda’s interests (11 U.S.C. § 365(n)).
- Applying German law, to the extent it would cancel US patent licenses, would be contrary to US public policy.
On direct appeal, the Fourth Circuit affirmed the bankruptcy court’s decision solely on its application of Section 1522(a) and without reaching the Section 1506 question.
Specifically, the Fourth Circuit rejected Jaffé's arguments that the bankruptcy court:
- Erred in applying 1522(a)'s balancing test to Section 365(n). Jaffé argued that Section 1522(a) only applies to relief requested by a foreign representative under Section 1521 and Jaffé did not request application of Section 365(n). The Fourth Circuit instead found that when Section 1521(a) grants discretionary relief, the creditors' and debtor’s interests must also be sufficiently protected under Section 1522(a).
- Applied the wrong test in its Section 1522(a) analysis. Jaffé argued that Section 1522(a) is only a procedural protection to ensure that all creditors can participate in the foreign proceeding equally and cannot change the substantive outcome. The Fourth Circuit disagreed, holding that Section 1522(a) requires a balancing of interests before granting discretionary relief.
- Incorrectly balanced the interests. Specifically, Jaffé contended that the bankruptcy court overstated the risks to the licensees, particularly because he'd offered to re-license the patents at a RAND (reasonable and non-discretionary) royalty rate. The Fourth Circuit agreed with the bankruptcy court’s analysis, considering:
- the risks to investments already made;
- the threat of infringement litigation; and
- that the RAND proposal would not sufficiently protect the licensees' interests.
Update: On October 6, 2014, the US Supreme Court denied review of the Fourth Circuit's decision.