How Intellectual Property is Affected When Bankruptcy is Filed

Intellectual property, commonly abbreviated as IP, is the term used to describe intangible but valuable items that a company owns. Intellectual property includes such items as inventions, literary works, artistic works, symbols, names, logos, images, slogans, or any other type of item that a company uses to set itself apart from its competitors. Intellectual property has a tangible value that can be considered part of a bankruptcy estate, and it is important for a debtor to understand intellectual property bankruptcy rules. 

Intellectual Property Bankruptcy Rules

Intellectual property is defined to include the following:

• Trade secrets
• Patents
• Patent applications
• Creative works 
• Copyrights

When intellectual property exists, sometimes there is significant value attached to it. For example, think about the computer code to a popular website or the copyright of a best selling book. A company that is declaring bankruptcy, thus, has to factor in the value of their intellectual property when deciding what chapter of bankruptcy to file and has to consider what happens to intellectual property when bankruptcy is filed.

In a chapter 7 bankruptcy, many assets can and are sold, and this can include intellectual property rights in some instances. When intellectual property rights do have to be sold as part of a liquidation bankruptcy in order to pay creditors, placing a value on the intellectual property can be very complex, and an intellectual property lawyer may need to work closely with a bankruptcy attorney. 

When a chapter 11 or chapter 13 is filed, on the other hand, a debtor does not have to turn over his or her assets in order to file bankruptcy. This usually means that intellectual property rights remain with the company. 

Intellectual Property Licensing

Provision 365(n) of the U.S. Bankruptcy Code also provides guidance on what should be done in a bankruptcy when intellectual property rights are licensed. This rule applies to most types of intellectual property, but the provision does not mention trademarks as a type of property covered under this rule. According to these rules, when a licensee declares bankruptcy and the licensor has given ownership of the intellectual property to the licensee through a formal license agreement, the ownership of the licensed intellectual property is generally returned to the licensor. The licensor is then free to issue a license for ownership to another entity, and the licensee usually gives up all ownership to this intellectual property.

When a licensor declares bankruptcy, the licensor has the option to approve or deny ownership of the licenses given to other companies. When a license is denied by the licensor, the licensee is protected under the U.S. Bankruptcy Code by provision 365(n), which states that the licensee can retain ownership of the intellectual property provided that the licensee continue to make royalty payments to retain said ownership. The potential affects to the licensee when a licensor declares bankruptcy are greater, then, because if the licensor declares ownership of the intellectual property, the licensee may be at risk of losing a piece of property that is vital to company operation. This could include the loss of a trade secret or mission essential operation that keeps the company going. 

Getting Help

If you are involved in bankruptcy and intellectual property is a major issue, you should strongly consider speaking with  qualified attorney. Your lawyer can help you to understand what is likely to happen to your property and how your intellectual property will be dealt with during the course of the bankruptcy proceedings.