Supreme Court’s Denial of Certiorari Strengthens Intellectual Property Licensees’ Protections in Cross-Border Insolvency Cases

by Pepper Hamilton LLP
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Chapter 15 of the Bankruptcy Code provides mechanisms for dealing with cases of cross-border insolvency. On Oct. 6, 2014, the U.S. Supreme Court, in Jaffé v. Samsung Electronics Co., Ltd., denied review of a decision of the U.S. Court of Appeals for the Fourth Circuit, upholding a bankruptcy court’s determination that a foreign debtor in a Chapter 15 case could not terminate its intellectual property licenses under German law, where such action would deprive the licensees of the debtor’s U.S. patents the protection they would have received in the United States under section 365(n) of the Bankruptcy Code. The Court’s denial of certiorari effectively leaves undisturbed the Fourth Circuit’s reasoning and decision, and as such, provides critical protection to intellectual property licensees of a Chapter 15 foreign debtor.

In Jaffé, the debtor filed an insolvency proceeding in Germany and a Chapter 15 case in the United States. In the Chapter 15 case, the debtor’s foreign representative requested that under section 1521(a)(5) of the Bankruptcy Code, the bankruptcy court entrust to him the administration of the debtor’s assets within the territorial jurisdiction of the United States, which largely consisted of 4,000 U.S. patents. Contemporaneously with the Chapter 15 filing, the foreign representative sent letters to licensees of the debtor’s patents, declaring that pursuant to the German Insolvency Code, the licenses granted under the patents were no longer enforceable.

The bankruptcy court granted the foreign representative the relief requested under section 1521(a)(5), but conditioned it on the foreign representative affording the licensees of the debtor’s U.S. patents the protection they would have received in the United States under section 365(n) of the Bankruptcy Code, which limits a trustee’s ability to unilaterally reject the debtor’s intellectual property license agreements by giving licensees the option to retain their rights under the licenses. The bankruptcy court concluded that affording this protection was necessary to ensure that the licensees were “sufficiently protected” as required under section 1522(a), and also concluded that the “public policy exception” contained in section 1506 provided an independent ground for applying section 365(n), because allowing the foreign representative to unilaterally terminate the licenses “would be manifestly contrary to U.S. public policy promoting technological innovation.”

On direct appeal to the Fourth Circuit Court of Appeals, the foreign representative argued that section 1522(a) was merely a procedural protection to ensure that all creditors could participate in the bankruptcy distribution on equal footing, not a shield from the substantive bankruptcy law that would otherwise apply in the foreign main proceeding. The Fourth Circuit disagreed, finding that section 1522(a) requires a balancing of the respective interests of the debtor and its creditors based on the relative harms and benefits in light of the circumstances presented: “Chapter 15 does not require a U.S. bankruptcy court, in considering a foreign representative’s request for discretionary relief under section 1521, to blind itself to the costs that awarding such relief would impose on others under the rule provided by the substantive law of the state where the foreign insolvency proceeding is pending.” Moreover, section 1506’s public policy exception does not foreclose the employment of a balancing test. The Fourth Circuit concluded that by affirming the bankruptcy court based on its section 1522(a) analysis, the court also furthered the public policy of technological innovation underlying section 365(n).

With the Supreme Court’s denial of certiorari, intellectual property licensees can comfortably point to the Fourth Circuit’s decision in Jaffé to argue that Chapter 15 does not trump section 365(n), regardless of what result foreign law would support.

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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