License Rights and Bankruptcy: No “Silver Linings”

Greenberg Glusker LLP

Greenberg Glusker LLP

[co-author: Benjamin Ruskin]

The Third Circuit’s decision in Spyglass Media Company v. Cohen has added to what is already a tangled web of cases dealing with the rights of licensees and licensors when one of them becomes a debtor in bankruptcy. In Spyglass, Bruce Cohen, the producer of the acclaimed film Silver Linings Playbook, had entered into a work-for-hire agreement with a predecessor in interest to the Weinstein Company, whereby Cohen relinquished all rights to the film’s intellectual property. In return, Cohen was paid $250,000 up front and received the rights to roughly 5% of the movie’s future profits. Cohen delivered a hit, but was never paid his share of the profits, equal to $400,000.

The Weinstein Company then ran into well-documented problems and sought to sell its assets to Spyglass. To facilitate the sale, the Weinstein Company filed for Chapter 11 bankruptcy. It sold its assets free and clear of interests under section 363 of the Bankruptcy Code and sought to assume and assign its executory contracts to the buyer under section 365 of the Code. The issue that arose was whether the Cohen agreement was executory because, if it was, then Cohen was entitled to be paid $400,000 as a prerequisite to the assumption and assignment to Spyglass. If it was not executory, then the debtor/seller’s rights under the contract could be acquired by the buyer, but all existing obligations of the seller through the date of closing would not become obligations of the buyer. The bankruptcy court ruled in favor of the buyer, meaning that Spyglass had no obligation to pay the $400,000, and the district court affirmed. Cohen appealed.

In the easy-to-understand style he is known for, Circuit Judge Ambro agreed with the lower courts, concluding that Cohen’s work-for-hire contract was not executory. As a result, the outcome – that the buyer had no obligation to cure the $400,000 default under the agreement – followed automatically. This very close case could just have easily been decided the other way. Despite acknowledging Cohen’s “forceful” argument, the Third Circuit seemed to have a particular result in mind when making its findings.

First, the Third Circuit simply decided, without significant analysis or justification, that Cohen’s remaining obligations under the contract were an “ancillary boilerplate provision.” Second, it decided that even though the contract contained a clause that arguably reflected the parties’ intent to make these provisions material, the intention of the parties to make otherwise ancillary provisions material had to be expressed “clearly and unambiguously.” According to the Third Circuit, even though Cohen’s failure to abide by the provisions would have released the licensee from its material obligation to pay him, this intent was not expressed clearly enough.

This conclusion could reflect a result-oriented approach, as the opposite conclusion could easily have been reached on the identical facts.  The Court could have concluded that the parties did, in fact, clearly and unambiguously reflect their intent to make the provisions material.  The provisions were expressly called out as requirements which prevented the licensee from terminating its only remaining obligation under the contract.  However, the Court chose not to go in that direction.

So where does this leave a licensor that does not want its future agreement treated as non-executory? There is no easy answer. Taking a security interest in the licensed rights is the best means of ensuring licensor protection. Unfortunately, doing so is often impractical, as it requires significant bargaining power.  “Clearly and unambiguously” expressing which provisions of the agreement are material is a more realistic starting point. Recognizing that simply labeling an otherwise unimportant obligation as material could be ineffective, the licensor also should ensure that the contract provides that the licensor has specific ongoing obligations of real demonstrable value to the licensee, such that a failure to perform actually would cause substantial injury to the other party. Based on the Third Circuit’s pro-debtor ruling, only then might a court be compelled to find that an agreement is truly executory.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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