Daniel A. Nolan Iv, a ?fundamental? Problem: the Vulnerability of Intellectual Property Licenses in Chapter 15 and the Meaning of § 1506

• Publication year: 2011

A “FUNDAMENTAL” PROBLEM: THE VULNERABILITY OF INTELLECTUAL PROPERTY LICENSES IN CHAPTER 15 AND THE MEANING OF § 1506

INTRODUCTION

Congress enacted chapter 15 of the Bankruptcy Code (Code)1 in 2005 to provide clear procedures for American courts’ cooperation in cross-border bankruptcy cases.2 Chapter 15 provides a procedural framework for courts dealing with the bankruptcy of a multinational company, and it was intended to work within fundamental United States policies and existing case law.3 Specifically, it provides for recognition of proceedings taking place in another country that have an impact on parties or property within the United States.4 In cases where there is a conflict between foreign law and United States law,5 the principle of international comity6 typically guides the court, and the law of the debtor’s country should control any ancillary proceedings in the United States.7 Despite this presumption, courts should deny comity, and United States law should govern a chapter 15 proceeding, when granting comity would be manifestly contrary to public policy. Consider the following hypothetical:

Happy Technology, Inc. (Happy) is a United States corporation dedicated to the manufacture and sale of semiconductors throughout the world. Happy holds a nonexclusive license to a United States patent, held by Mytech, Inc. (Mytech), that permits Happy to manufacture a critical component covered by

1 11 U.S.C. §§ 1501–1532 (2006).

2 See id. § 1501(a).

1. U.N. COMM'N ON INT'L TRADE LAW, UNCITRAL MODEL LAW ON CROSS-BORDER INSOLVENCY WITH

   GUIDE TO ENACTMENT, at pt. 2, para. 20, U.N. Sales No. E.99.V.3 (1997), available at http://www.uncitral. org/pdf/english/texts/insolven/insolvency-e.pdf [hereinafter MODEL LAW ON CROSS-BORDER INSOLVENCY].

2. See, e.g., 11 U.S.C. § 1501(a)(1), (3) (stating that the purpose of chapter 15 is to promote cooperation

   between courts of the United State and courts in foreign countries to foster the “fair and efficient administration of cross-border insolvencies that protects the interests of all creditors, and other interested entities, including the debtor”).

3. For the purposes of this Comment, the relevant U.S. law consists of title 11 of the United States Code.

   Unless otherwise noted, all statutory references are to title 11.

4. “Comity” is defined as “[a] practice among political entities (as nations, states, or courts of different jurisdictions), involving esp. mutual recognition of legislative, executive and judicial acts.” BLACK’S LAW

DICTIONARY 303 (9th ed. 2009).

7 In re Qimonda AG, No. 09-14766-RGM, 2009 WL 4060083, at *1 (Bankr. E.D. Va. Nov. 19, 2009),

aff’d in part, remanded in part, 433 B.R. 547 (E.D. Va. 2010).

the patent. Mytech is a German technology company that holds thousands of patents, both in the United States and around the world. Unfortunately, Mytech’s business has not been properly managed, and it has declared bankruptcy in the German insolvency court. Hermann Wissenschaft, Mytech’s representative appointed by the German court, files a petition for recognition of the German insolvency proceeding as the foreign main proceeding under chapter 15, which the United States court grants. As part of its plan for reorganization, Mytech has chosen to reject the license with Happy pursuant to German insolvency law. Happy knew it would still be able to manufacture the component under American law but discovers, much to its dismay, that German law does not allow a licensee to continue using intellectual property once the license is rejected. The German court approves Mytech’s rejection. With no other statutory option, the United States court applies principles of international comity and prohibits Happy from continuing to use the technology under the Mytech license. Without the right to manufacture the critical component, Happy is no longer able to manufacture semiconductors.

As a result, Happy must also file for bankruptcy.8

As this hypothetical demonstrates, chapter 15 allows a foreign court to control the administration of a foreign debtor’s bankruptcy in the United States and provides a procedure for the cooperation with that foreign court. While it may seem as though chapter 15 compels an American court to follow a foreign

court’s decisions, there is a narrow exception.9 Chapter 15 grants courts a

limited amount of policy-based discretion in § 1506 when considering whether to grant a petition for recognition under chapter 15. Section 1506 allows a

8 These facts are based on those in Micron Technology, Inc. v. Qimonda AG (In re Qimonda AG Bankruptcy Litigation), 433 B.R. 547 (E.D. Va. 2010). The district court remanded the case for a consideration of whether applying German law to the patent licenses would be manifestly contrary to public policy. Id. at

571. On October 28, 2011, the bankruptcy court, after a rehearing on the issue of whether § 1506 precluded the application of German insolvency laws, held that § 365(n) should control the treatment of the patent licenses. In re Qimonda AG, No. 09-14766-SSM, 2011 BL 278371, at *33–34 (Bankr. E.D. Va. Oct. 28, 2011).

However, the court focused on the question of whether applying German law would severely impinge on the value of a constitutional or statutory right. Id. at *29–30. The court found that the “failure to apply § 365(n) under the circumstances of this case and this industry would ‘severely impinge’ an important statutory protection accorded licensees of U.S. patents and thereby undermine a fundamental U.S. public policy promoting technological innovation.” Id. at *34. Therefore, the court held “that deferring to German law, to the extent it allows cancellation of the U.S. patent licenses, would be manifestly contrary to U.S. public policy.” Id. at *34. However, the court did not attempt to define what it means for a policy to be “fundamental,” a necessary consideration for whether foreign law would be “manifestly contrary to public policy.” H.R. REP. NO. 109-31(I), at 88 (2005), reprinted in 2005 U.S.C.C.A.N. 88, 172. Therefore, while this court reached the correct result based on the facts, it does not change the need for a definition of “fundamental.”

9 See 11 U.S.C. § 1506.

court to deny a foreign representative’s petition if granting recognition would be “manifestly contrary to . . . public policy.”10 Both chapter 15 and the United Nations Model Law on Cross-Border Insolvency (Model Law) on which chapter 15 is based warn that this provision should be interpreted narrowly,

restricting the exception to only apply in circumstances where a “fundamental policy” of the United States is threatened.11 This Comment will explain that advancing intellectual property growth is a fundamental policy of the United States, and licensing is a critical component of encouraging such innovation. Therefore, United States law should govern intellectual property12 licenses in cross-border insolvencies where foreign law fails to protect the rights of the licensee. Such foreign law should not be recognized pursuant to § 1506

because doing so would introduce uncertainty into the licensing market and impede the development of science and technology in contravention of a fundamental policy of the United States.

The fundamental policies of the United States guide the creation of domestic laws, including the Code. Specifically, American bankruptcy law protects the fundamental policy of encouraging the growth of intellectual property by protecting intellectual property licenses from the trustee’s power to

reject executory contracts.13 Encouraging the growth of science and technology

is a fundamental policy based in part on language in Article I, Section 8, Clause 8 of the Constitution, which directs Congress to protect such growth by “securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”14 Congress created patent and copyright protections to encourage investment in developing science and technology; these protections provide an economic incentive for inventors to invest time and money into developing technological and artistic creations.15

The patent and copyright systems provide a means for these creators to derive

1. Id.

2. See H.R. REP. NO. 109-31(I), at 88; see also MODEL LAW ON CROSS-BORDER INSOLVENCY, supra note

   3, at pt. 2, para. 89.

3. The Code defines “intellectual property” to include trade secrets, patents, patent applications, plant varieties, and copyrights, but not trademarks. 11 U.S.C. § 101(35A). As used in this Comment, the term

   “intellectual property” refers to those categories of intellectual property included in § 101(35A).

4. As discussed further infra in Part I.A, an executory contract is a contract where the obligation of both parties are incomplete such that the failure by one party to complete performance would excuse performance by the other. See Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 MINN. L. REV. 439, 460 (1973).

5. U.S. CONST. art. I, § 8, cl. 8.

6. Peter S. Menell, Bankruptcy Treatment of Intellectual Property Assets: An Economic Analysis, 22 BERKELEY TECH. L.J. 733, 741 (2007).

   profits from their beneficial activities by granting limited monopoly rights to inventors. The ability to license intellectual property is an essential component of patent and copyright holders’ ability to make money from their creations because it allows third parties to use the inventors’ works while providing

   inventors with compensation for use of their ideas.16 The opportunity for these

   profits through licensing provides inventors with greater financial incentives to pursue innovation.17

   
   

   Additionally, licensing puts those creative works in the hands of parties who are often able to further develop and improve the inventions in ways the inventors may not have anticipated.18 Therefore, licensing is vital to advancing science and the arts because it provides critical opportunities for inventors to

   make money from their works and promotes an ideal environment for the refinement of intellectual property.19 To secure...