My Intellectual Property Licensor Is Bankrupt – Now What?

Bankruptcy presents risks for, among many others, intellectual property ("IP") licensees. Fortunately, there is a provision in the federal bankruptcy law that is designed to protect IP licensees when a licensor becomes insolvent.

The Intellectual Property Licenses in Bankruptcy Act was passed in 1988. It was added to Chapter 11 of the Bankruptcy Code as Section 365(n). Before the addition of Section 365(n), when an IP licensor went bankrupt, it could reject its IP licensing agreements and withdraw the authorizations it had previously granted to use its IP. This caused substantial harm to licensees' businesses when they were structured around licensed IP.

Section 365(n) protects IP licensees, under certain conditions, by creating an option to continue using IP after a bankrupt licensor rejects an agreement.