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Licensing Intellectual Property and Technology From Start-up Companies and Companies "At Risk" of Bankruptcy

By Pouya Ziapour

I. Introduction

Imagine you are a licensing attorney. Last year your client Caramel Apple Inc., a consumer electronics corporation, contacted you to ask for your services. Caramel Apple Inc. had invested a lot of research and development time and money to develop a revolutionary multimedia and Internet-enabled mobile phone. Unfortunately for Caramel Apple Inc., the functionality of its mobile phone utilized and depended on patented technology owned by Macrohard Corporation, an unprofitable Silicon Valley start-up company. Since Macrohard Corporations patented technology was very advanced and expensive to develop, there were no technological substitutes, and Caramel Apple Inc. was not in a position to develop its own substitute.

As a result, you negotiated and drafted a license agreement with Macrohard Corporation for Caramel Apple Inc. Caramel Apple Inc., thereafter, released its mobile phone and its mobile phone became one of the years hottest products. Last month, however, Macrohard Corporation filed for chapter 11 bankruptcy. As a result, the license agreement you prepared has fallen within Macrohard Corporations bankruptcy estate, the Bankruptcy Court has imposed a stay on collection efforts against Macrohard Corporation, and Macrohard Corporation, acting as the debtor in possession, is considering rejecting, assigning, or renegotiating its license agreement with Caramel Apple Inc. To say that Macrohard Corporations bankruptcy has negatively impacted Caramel Apple Inc.s business would be an understatement. What are Caramel Apple Inc.s options? Are there any pre-bankruptcy strategies you could have implemented to put Caramel Apple Inc. in a better position than it currently is?

The example above illustrates the very real risks licensees face when entering into intellectual property and technology license agreements with start-up companies that may end up filing for bankruptcy, which may change, if not terminate, the parties pre-bankruptcy license agreements. Less than one new business in 1, 000 ever goes public.[1] Those with venture money have a much better chance - one in ten.[2] The stark reality is that sixty percent of venture-funded companies go bankrupt.[3] One California bankruptcy attorney estimated that in a six-month period spanning 2000 and 2001, he handled as many as 150 dot-com bankruptcies.[4] These risks are not exclusive to start-up company licensors, but are also relevant and present for licensees entering into license agreements with financially-troubled companies, which consequently are at risk of bankruptcy.[5] Although there is no perfect solution that completely eliminates such risks, the licensee can assess the risks inherent in entering into such a transaction with a start-up or financially-troubled company licensor and implement and execute strategies during the initial stages of the transaction to minimize such risks and improve its bargaining position during the licensors bankruptcy.

Accordingly, this Comment starts by providing a general overview of chapter 11 of the Bankruptcy Code. It then explains the risks inherent in licensing intellectual property and technology from a financially-troubled or start-up company. Subsequently, it provides guidance and practice tips for the basic and enhanced protections provided by the Bankruptcy Code. Such practice tips include (1) defining the intellectual property in the license agreement broadly;[6] (2) defining the events of default in the license agreement;[7] (3) including a liquidated damages clause in the license agreement;[8] (4) clearly defining narrow royalty payments in the license agreement;[9] (5) including a right to improvement and enhancement provision in the license agreement;[10] and (6) placing portions of the intellectual property and technology in an escrow account.[11] The Comment then suggests various strategies to further minimize such risks and improve the licensees bargaining position during the licensors bankruptcy. Such strategies include (1) structuring the transaction as something other than a license;[12] (2) transferring the intellectual property and technology title to a trust;[13] (3) transferring the intellectual property and technology title to a bankruptcy remote entity;[14] and (4) taking a perfected security interest in the intellectual property and technology.[15]

I.A. Overview of Chapter 11 of the Bankruptcy Code

Chapter 11 of the Bankruptcy Code has two overarching goals that are not mutually exclusive. The first goal is to provide the debtor[16] with an opportunity to reorganize[17] its business or financial affairs or to engage in an orderly liquidation of its property.[18] This goal embodies a policy that it is generally preferable to enable a debtor to continue to operate and to reorganize its business rather than simply to liquidate a troubled business.[19] The rationale for this policy is that the continued operation can save the jobs of employees, can maintain the tax base of communities, may enable the debtor to preserve any positive difference between the going-concern value[20] of the business and the liquidation value, [21] and generally will reduce the upheaval that can result from termination of a business.[22] The second goal is to maximize payments to creditors. Although these two goals are not mutually exclusive, the focus of the Bankruptcy Code and Bankruptcy Courts tends to be on protection of the debtor rather than of the creditors.

The Bankruptcy Code provides a debtor with certain attractive features to facilitate its reorganization and to encourage a debtor to commence its case at a time when it can still realistically be reorganized.[23] At the same time, however, chapter 11 also provides substantial protection for creditors.[24] Table I.A.-1 below lists examples of how chapter 11 benefits both debtors and creditors.

The hallmark of chapter 11 is its flexibility.[41] The Bankruptcy Code and the Bankruptcy Court offer the debtor in possession[42] considerable discretion in the operation of the business, constrained generally only by a business judgment rule.[43] In addition, the plan negotiation process is intended to lead normally to a consensual plan under which the debtor and a majority of creditors have agreed to both business and financial plans that offer some realistic chance of success. Furthermore, the Bankruptcy Court is given considerable discretion in evaluating a debtors proposed use of property, offer of adequate protection, proposed borrowing, and other business decisions.[44]

I.B. Effect of Commencement of Case

The commencement of a case creates a bankruptcy estate, [45] triggers an automatic stay, [46] and automatically makes the debtor a debtor in possession.[47] The objective of these proceedings is to bring all of the debtors property and all of the claims against the debtor into one proceeding, where the debtor can be maintained as a going concern and the claims can be resolved collectively.[48]

I.B.1. Creates Bankruptcy Estate

The commencement of a case creates a bankruptcy estate, which includes all of the debtors legal and equitable interests in property as property of the bankruptcy estate.[49] The Bankruptcy Code encompasses and includes both tangible and intangible property, choses in action, [50] and essentially anything of value in which the debtor has a legal or equitable interest as part of the bankruptcy estate.[51]

I.B.2. Triggers Automatic Stay

The commencement of a case triggers an automatic stay.[52] The automatic stay operates as a stay[53] on all actions that might be taken to collect pre-petition claims from the debtor or to control or interfere with property of the estate.[54] The stay is broad and powerful.[55] The purpose of the stay is to provide the debtor with breathing space to enable it to begin to formulate a reorganization plan.[56] In addition, the stay protects against secured creditors and judgment creditors racing to seize and sell the debtors assets in order to obtain satisfaction of their claims, without regard to the interests of other creditors or the value of keeping assets together in an operating business.[57] Furthermore, the stay prevents piecemeal liquidation of the business, offering the chance to maximize the value of the business.[58]

Creditors with a pre-petition claim from the debtor need to go to the Bankruptcy Court to obtain relief from the stay in order to obtain satisfaction of their claims. Bankruptcy Code section 362(d) provides that a party in interest may obtain relief from the stay (1) for cause, including a lack of adequate protection of an interest in property, or (2) when the stay is of an act against property, if the debtor has no equity in the property and the property is not necessary for an effective reorganization.[59]

I.B.3. Debtor Automatically Becomes Debtor in Possession

Upon the commencement of a chapter 11 case, the debtor automatically becomes a debtor in possession.[60] The Bankruptcy Code defines a debtor in possession as the debtor, except when a person that has qualified under Bankruptcy Code section 322 is serving as a trustee in the case.[61] Pursuant to Bankruptcy Code section 103(g), the definition of debtor in possession is, with one narrow exception, [62] applicable only in chapter 11 cases.[63] It has no meaning in cases filed under other chapters of the Bankruptcy Code.

The debtor will remain a debtor in possession until such time, if any, as the court orders the appointment of a chapter 11 trustee and a trustee qualifies to serve in the case under section 322.[64] Bankruptcy Code section 1104 provides that the court may order the appointment of a trustee at any time after commencement of the case but before confirmation of the plan, but only upon request of a party in interest and after notice and a hearing.[65] Trustees in chapter 11 cases are the exception rather than the rule, and in most chapter 11 cases the debtor serves as debtor in possession for the duration of the case.[66]

Bankruptcy Code section 1107(a) sets forth the rights, powers and duties of the debtor in possession.[67] Pursuant to Bankruptcy Code section 1108, a debtor in possession engaged in business may continue to operate the business without an order of the court.[68] If no trustee is appointed in the chapter 11 case, the debtors tenure as debtor in possession will continue until the case is converted or dismissed or a plan is confirmed.[69] Upon the effectiveness of a confirmed plan, the chapter 11 estate is terminated and the debtor is no longer a debtor in possession.[70]

I.C. Reorganization Plan

The object in a chapter 11 reorganization case is normally to formulate a restructuring or reorganization plan that will enable the debtor to emerge from bankruptcy as a viable, profitable enterprise.[71] A debtor in a chapter 11 may also formulate a plan for an orderly liquidation, often as a going concern.[72] The plan generally provides for the treatment of claims against and interests in the debtor and its property, and, if the debtor is reorganizing, a plan for the continuation of the business after confirmation.[73] Table I.C.-1 below summarizes provisions that must be included in the reorganization plan pursuant to Bankruptcy Code section 1123[74] and provisions that may be included in the reorganization plan.

II. Basic Protections Provided by the Bankruptcy Code Section 365 to Any Non-Debtor Party to a Pre-bankruptcy Executory Contract with Debtor

The first, and most important, question for the non-debtor/licensee is whether the intellectual property and technology it licensed from the debtor/licensor is included in the debtor/owners bankruptcy estate. Courts have generally interpreted the scope of Bankruptcy Code section 541(a) broadly to include all legal or equitable interests of the debtor in property[89] as part of the debtors bankruptcy estate.[90] Consequently, a debtors pre-bankruptcy interest in an intellectual property and technology license falls within the scope of Bankruptcy Code section 541(a) and becomes property of the debtors bankruptcy estate.[91] If the intellectual property and technology is not included in the bankruptcy estate, then the non-debtor/licensee will be unaffected, at least directly, by the debtor/licensors bankruptcy proceeding. If the intellectual property and technology is included in the bankruptcy estate, then the next important question is whether the license agreement is an executory contract, because the debtor in possession/ trustee has the power to assume, assume and assign, or reject this intellectual property and technology license as an executory contract under Bankruptcy Code section 365(a).[92] Moreover, such power gives the debtor in possession/trustee leverage and bargaining power to renegotiate, usually to less favorable terms for the non-debtor/licensee, the license agreement with the non-debtor/licensee.

II.A. Whether Intellectual Property and Technology is Included in Debtor/Owners Bankruptcy Estate

An owner of intellectual property and technology holds a bundle of rights in the property and may (1) transfer[93] the entire bundle of rights through a sale or an assignment or (2) transfer a limited interest in the bundle of rights through a license.[94] Table II.A.-1 below summarizes the differences between a sale of intellectual property and an intellectual property license in a bankruptcy context.

A complete sale or absolute assignment of intellectual property and technology generally includes the transfer of all of the owners exclusive rights in the intellectual property and technology.[95] The intent of the parties and the substance of the transaction determine whether a transfer of intellectual property and technology constitutes a sale sufficient to remove the property from the owner/debtors bankruptcy estate.[96] Thus, if the owner of the intellectual property and technology retains any substantial rights in the property, such as the right to receive royalties or to sue for future infringement, the court will interpret the sale as a disguised license agreement instead of a complete sale.[97] Since a disguised license would not be a sale sufficient to remove the intellectual property and technology from the owner/debtors bankruptcy estate, the parties agreement may be subject to rejection under Bankruptcy Code section 365.

The court interprets transfers of intellectual property and technology short of a sale or an assignment as licenses.[98] If an owner structures a transaction as a license, the owner retains title to the intellectual property and technology. Such property, and the owners interest in the license itself, become property of the owner/debtors bankruptcy estate. The license protects the licensee from an infringement suit by allowing the licensee to use the intellectual property and technology for the purposes specified in the license agreement.[99] The license, however, does not transfer any property interests in the intellectual property and technology to the licensee.[100]

The court, however, may consider an exclusive license as a sale, and thus the intellectual property and technology will not be included in the owner/debtors bankruptcy estate, if the license completely transfers the owners exclusive intellectual property rights and it does not impose obligations on the licensor.[101] The obligation to defend the licensee in infringement suits relating to the licensed property is one example of an obligation that may make the court characterize the exclusive license as an executory contract[102] subject to rejection by a licensor/debtor under Bankruptcy Code section 365.[103] Thus, although an exclusive license possesses traits similar to a sale of the intellectual property, an exclusive license will not provide an intellectual property user the same degree of protection as a sale under the Bankruptcy Code.[104]

II.B. Intellectual Property and Technology License Agreements as an Executory Contract

II.B.1. Whether an Intellectual Property and Technology License Agreement is an Executory Contract

If the intellectual property and technology license agreement is included in the debtors bankruptcy estate, the next relevant question is whether the license agreement is an executory contract. An executory contract is a contract under which the obligations of both the bankrupt party and the other party to the contract are so far unperformed that the failure of either party to complete performance would constitute a material breach excusing performance of the other party.[105] Several courts have expanded this concept and adopted a functional approach that focuses the Bankruptcy Code section 365(a) executory contract analysis on the estate and the course of action most beneficial to the estate and its creditors.[106] This functional approach allows a [debtor in possession/trustee] to reject any contract if such rejection produces a net benefit for the debtors estate and creditors.[107] If one of the parties has completely performed its obligations under the contract as of the date of the debtors bankruptcy petition[108] or the contract terminates by its terms post-petition, [109] the contract is no longer executory and, thus, is not subject to assumption or rejection by the debtor under section 365 of the Bankruptcy Code.[110]

Courts generally characterize intellectual property and technology licenses as executory contracts for purposes of Bankruptcy Code section 365.[111] These courts recognize that in the typical intellectual property and technology license scenario both the licensor and the licensee have obligations that continue until the termination of the license agreement.[112] Such obligations include the licensors duty to forebear from prosecuting the licensee for infringement, [113] the licensors duty to defend and indemnify the licensee in infringement suits relating to the licensed property, [114] and the licensees duty to pay royalties and provide an accounting to the licensor.[115]

II.B.2. A Debtor in Possession/Trustees Decision to Assume or Reject an Executory Contract

In order to reorganize and rationalize its business, the Bankruptcy Code, with the courts approval, [116] provides the trustee or debtor in possession with the authority to assume or reject executory contracts and leases.[117] If applicable non-bankruptcy law excuses the non-debtor party to the license agreement from accepting performance from or rendering performance to an entity other than the debtor, however, the debtor in possession/trustee may not assume or assign that agreement unless the non-debtor party to the agreement consents.[118]

A debtor in possession/trustee must either assume the entire contract cum onere, [119] or reject the entire contract, [120] shedding obligations as well as benefits.[121] Assumption of an executory contract or lease by the debtor in possession/trustee gives the estate the burdens and benefits of the contract or lease.[122] Any liability thereafter will be an expense of administration, [123] including liability for a later rejection.[124] Hence, a debtor in possession/trustee may assume an executory contract when a contract is likely to be profitable or necessary for continuing operations and the debtor in possession/trustee wants to retain its benefits.[125] If the debtor in possession/trustee rejects the contract, the estate is relieved of the debtors remaining obligations under the contract, [126] will lose any benefit from the contract, and will be liable for damages for the breach, which may be allowed as a pre-petition claim[127] and thereby dilute recoveries to other creditors.[128] Hence, a debtor in possession/trustee may reject a contract if a contract or lease is burdensome or likely to result in a loss.[129] In addition, if a contract or lease is in default, the debtor in possession/trustee must cure, or provide adequate assurance of cure, of any defaults, compensate the other party, or provide adequate assurance of compensation, for actual pecuniary loss flowing from defaults, and provide adequate assurance of future performance of the contract or lease before assuming the contract or lease.[130]

The Bankruptcy Code does not provide a standard for courts to apply when evaluating the debtor in possession/trustees decision to assume or reject a contract.[131] Most courts, however, have adopted and applied a business judgment test[132] to debtors in possession/trustees decisions to assume or reject contracts or leases.[133] Outside of bankruptcy, the business judgment rule has been justified on several grounds, including the recognition that even prudent and disinterested directors can make decisions that in hindsight seem improvident, [134] and that directors are better equipped than judges to make business decisions.[135] In the bankruptcy context, courts have advanced much the same rationale for refusing to second-guess business decisions of trustees and debtors in possession/trustees.[136] Courts, however, have gone beyond the traditional corporate law scope of inquiry by superimposing its own business judgment upon debtors in possession.[137]

A Bankruptcy Court reviewing a debtor in possession/trustees decision to assume or reject an executory contract should place itself in the position of the debtor in possession/trustee, [138] examine a contract and the surrounding circumstances, and apply its best business judgment[139] to determine if it would be beneficial or burdensome to the estate to assume the contract.[140] This standard focuses on the benefit derived by the debtors bankruptcy estate and its creditors from the proposed treatment of the executory contract under section 365 of the Bankruptcy Code.[141] In some cases involving a regulated industry or contract, a higher standard may apply.[142] The court should also consider the size of the claim flowing from the breach caused by rejection.[143]

II.B.3. A Non-debtor Partys Rights Prior to Assumption or Rejection

The debtor in possession/trustee has a specified period of time to determine whether to assume or reject the executory contract.[144] The specified period of time is a reasonable time, [145] which the court determines by examining the facts and circumstances of each case.[146] The Bankruptcy Code places an independent duty on the non-debtor to continue the performance of an executory contract until the debtor in possession/trustee assumes or rejects the executory contract.[147] This duty to perform, however, is not reciprocal.[148] A debtor in possession/trustee is not required to perform its contractual obligations until it has elected to assume the contract under Bankruptcy Code section 365.[149]

During the period prior to the debtor in possession/trustees decision to assume or reject the executory contract, the non-debtor generally has only two rights against the debtor.[150] The non-debtors first right is for payment of the non-debtors post-petition services to the debtor as an administrative expense claim under Bankruptcy Code section 503(b).[151] The non-debtors second right is to request the court to compel the debtor in possession/trustee to make its decision to either assume or reject the contract.[152] Otherwise, a debtor in possession/trustee is not required to assume or reject an executory contract and, consequently, is not required to perform its obligations under the contract until the confirmation of a plan of reorganization in the debtors bankruptcy case.[153]

II.B.4. A Non-debtor Partys Rights Upon Rejection of an Executory Contract

Rejection of an executory contract is not equivalent to termination of the contract.[154] Rather, upon rejection of an executory contract, the debtor is deemed to be in breach of the contract immediately prior to the bankruptcy petition date.[155] As a result, the non-debtor party to the rejected contract is entitled to assert a pre-bankruptcy claim for any damages that it sustains as a result of the debtors breach of the executory contract.[156]

III. The Enhanced Protection Provided by Bankruptcy Code Section 365(n) to a Non-debtor Licensee to a Pre-bankruptcy Intellectual Property and Technology License with a Debtor

Congress recognized the detrimental impact that the courts restrictive application of Bankruptcy Code section 365 in the context of intellectual property and technology licenses could have on the technology industry and, as a result, enacted the Intellectual Property Act to add section 365(n).[157] With Bankruptcy Code section 365(n), Congress intended to correct the perception of some courts that Section 365 was ever intended to be a mechanism for stripping innocent licensee[s] of rights central to the operations of their ongoing business and stripping the American licensing system of its dependability and flexibility.[158]

Bankruptcy Code section 365(n)[159] sets forth the rights of intellectual property licensees when a trustee or debtor in possession rejects an executory contract under which the debtor is a licensor of a right to intellectual property.[160] The approach taken in the event of a proposed rejection of the license agreement is to give the licensee the option of treating the contract as terminated by reason of the rejection or of retaining its rights to the license provided under the contract.[161]
Since Bankruptcy Code section 365(n) is limited to licenses of intellectual property, it is important to understand the scope of intellectual property as defined in Bankruptcy Code section 101(35A).[162] Under section 101(35A), the term intellectual property means (A) a trade secret; (B) an invention, process, design, or plant protected under title 35; (C) a patent application; (D) a plant variety; (E) a work of authorship protected under title 17; or (F) a mask work protected under chapter 9 of title 17.[163] What the Bankruptcy Codes definition does not include, however, are other common forms of intellectual property[164] such as false advertising remedies, misappropriation, public rights, trademarks, trade names, service marks, [165] and licenses of technology or content that are not protected by federal copyright or patent law [and] licenses for the use of some database compilations.[166] In addition, since section 101(35A) only identifies categories of property that may constitute intellectual property, it is necessary to refer to the Patent Act, [167] the Copyright Act, [168] and trade secret laws[169] to define the scope of the enumerated categories.

III.A. Protection During the Post-petition, Pre-rejection Period

Bankruptcy Code section 365(n)(4) modifies the principle that a debtor is not required to perform its contractual obligations until a debtor in possession/trustee has elected to assume the contract under Bankruptcy Code section 365.[170] Bankruptcy Code section 365(n)(4) states that unless and until the debtor in possession/trustee rejects the contract, the licensee can make a written request that[171] obliges the debtor in possession/trustee to either (1) perform such contract;[172] or (2) provide to the licensee such intellectual property[173] held by the debtor in possession/trustee.[174] In addition, the debtor in possession/trustee shall not interfere with the rights of the licensee as provided in the contract, or any agreement supplementary to such contract, to the intellectual property (including such embodiment), including any right to obtain such intellectual property (or such embodiment) from another entity.[175]

III.B. Protection Upon Rejection of an Intellectual Property License

Bankruptcy Code section 365(n)(1) states that if the debtor in possession/trustee rejects an executory contract under which the debtor is a licensor of a right to intellectual property, the licensee under the contract may make one of two elections: (1) terminate the contract; or (2) retain the rights of the contract.[176] Section 365(n) deals only with rejection by the licensor and does not deal with the effect of rejection by the licensee or with whether the debtor in possession/trustee may assume or assume and assign the license contract.[177] In addition, in recognition of the fact that under a license agreement the commencement of the term is sometimes contingent upon the occurrence of a future event, such as the issuance of a patent, section 365(n) does not require that the term of the license be commenced in order for the licensee to have the right to retain its rights under the license.[178]

III.B.1. Treating the License as Terminated

First, the licensee may elect to treat the contract as terminated by the rejection if the rejection by the debtor in possession/trustee amounts to such a breach as would entitle the licensee to treat the contract as terminated by virtue of its own terms, applicable non-bankruptcy law, or an agreement made by the licensee with another entity.[179] Thus, the licensee, for example, may treat the contract as terminated, cease performing its obligations under the license, and file a general unsecured claim against the debtor/licensor for damages arising from the debtor/licensors breach of the license agreement under Bankruptcy Code section 502(g).[180] For most intellectual property licensees, however, there are at least two weaknesses to this approach. First, it is often difficult to measure the monetary damage caused by a debtor/licensors rejection of the license agreement.[181] Unlike the situation where, if a debtor/licensee rejects an intellectual property license, the licensor may file a general unsecured claim for the estimated royalties that it would have received from the licensee during the life of the license, a debtor/licensor has no monetary obligations to the licensee.[182] Second, even if a licensee can estimate the damage caused to its business by the [debtor in possession/trustees] rejection of the license, a damage award typically does not give the licensee what it really needs; the licensed property to continue the operation of its business.[183]

III.B.2. Retaining Rights Under the License

Second, the licensee may elect to retain its rights[184] under the contract, and any agreement supplementary to the contract, [185] to the intellectual property, [186] for (1) the duration of the contract;[187] and (2) any extension right available to the licensee under applicable law.[188] In retaining its rights under the contract, the licensee retains the right to use the licensed intellectual property.[189] It does not have, however, the right to seek specific performance of other obligations of the licensor, since continued affirmative performance of the contract by the trustee may be impractical.[190] In addition, when the licensee elects to retain its rights under the license contract, Bankruptcy Code section 365(n)(2)(C) requires the licensee to make all royalty payments[191] due under the contract for the duration of the contract and for any period licensee extends the contract.[192] The right to receive payments attaches to the contract or license itself, not to the underlying intellectual property or technology, which may have been sold during the case.[193]

In addition to having to pay for the use of the intellectual property under the license, if the licensee elects to retain its rights under the contract, the Bankruptcy Code explicitly deems the licensee to waive (1) any right of setoff it may have with respect to the contract under the Bankruptcy Code or applicable non-bankruptcy law;[194] and (2) any claim allowable under Bankruptcy Code section 503(b) arising from the performance of the contract.[195] This protects the estates right to receive royalty payments and is considerably more restrictive as to the licensee than Bankruptcy Code section 365(h), under which a lessee that elects to remain in possession may offset damages occurring after the date of rejection against rent.[196] The right of the licensee to assert a claim for damages remains, but only as an unsecured, pre-petition claim for breach under Bankruptcy Code section 365(g).[197]

Unlike Bankruptcy Code section 365, Bankruptcy Code section 365(n) does impose certain ministerial obligations on the debtor in possession/trustee if the licensee elects to retain its rights under the rejected license.[198] First, the debtor in possession/trustee must allow the licensee to exercise its rights under the rejected license.[199] Second, the debtor in possession/trustee must provide, to the extent provided in the contract or any agreement supplementary to such contract, to the licensee any intellectual property, including such embodiment, held by the debtor in possession/trustee.[200] Third, the debtor in possession/trustee must not interfere with the rights of the licensee as provided in the contract, or any agreement supplementary to the contract, to such intellectual property, including such embodiment, including any right to obtain such intellectual property, or such embodiment, from another entity.[201]

IV. Practice Points for Invoking Bankruptcy Code Section 365(n)

IV.A. Pre-bankruptcy Drafting Tips

IV.A.1. Ensure that the Licensee has Available the Protections of 365(n) by Defining Intellectual Property Broadly

Since Bankruptcy Code section 365(n) is limited to licenses of intellectual property as defined in Bankruptcy Code section 101(35A), while negotiating a license agreement with licensor, the licensee should define intellectual property broadly and specify that all intellectual property under the agreement is intended to be intellectual property within the meaning of Bankruptcy Code section 101(35A) and section 365(n).[202] Additionally, the licensee should add language specifying explicitly that Bankruptcy Code section 365(n) applies and the licensee should refer to rights under section 365(n).[203] As such, the licensee will have the ability to retain certain benefits of the license even if the licensor rejects the contract.[204] Although it is uncertain whether the Bankruptcy Court would follow the licensees intellectual property definition if it includes an intellectual property, such as a trademark, not included by Bankruptcy Code section 101(35A), there is no harm in including the definition if it is acceptable to the licensor.

IV.A.2. Preserve Licensees Right to Terminate by Defining the Term Events of Default

For Bankruptcy Code section 365(n)(1)(A) to provide that the licensee is able to elect to treat the contract as terminated by the rejection, the rejection by the licensor must amount to such a breach as would entitle the licensee to treat the contract as terminated by virtue of its own terms, applicable non-bankruptcy law, or an agreement made by the licensee with another entity.[205] Hence, to preserve the licensees right to terminate the contract, the licensee should define the term event of default to include: (1) the licensors rejection of contract under Bankruptcy Code section 365(n);[206] (2) non-financial events of default that will survive the automatic stay;[207] (3) the licensors breach or failure to perform or observe any of its obligations, covenants, or agreements under the license agreement;[208] and (4) specifically state the licensees right to terminate the agreement as a remedy for these defaults.[209]

IV.A.3. Add Clarity and Make It More Expensive for Licensor to Reject the Contract by Including a Liquidated Damages Clause

Since it would be difficult to ascertain the amount of the licensees damages upon the licensors default under the license agreement, the license agreement should contain a liquidated damages clause.[210] In the license agreement context, the liquidated damages clause serves two purposes. First, a liquidated damages clause would assist the parties in determining the licensees damages upon rejection of the license agreement.[211] Second, a potentially large liquidated damages award in favor of the licensee may discourage the licensor from rejecting the license agreement.[212] The licensee should draft the liquidated damages clause to meet the courts three criteria that distinguishes a valid liquidated damages clause from an invalid penalty clause.[213] First, the parties must intend to provide for damages rather than for a penalty.[214] Second, the injury caused by the breach must be uncertain or difficult to quantify.[215] Third, the sum stipulated must be a reasonable pre-estimate of the probable loss or actual loss.[216]

The license agreement should contain two liquidated damage calculations. First, the license agreement should set forth the licensees damages upon the licensors failure to perform its obligations under the license agreement.[217] This would assist the licensee in asserting a rejection damage claim under section 502(g) of the Bankruptcy Code where the licensor has rejected the license agreement, but the licensor has retained its rights thereunder.[218] Second, the license agreement should set forth the licensees damages upon termination of the agreement.

There is a chance, however, that including a liquidated damages clause may actually be detrimental to the licensee.[219] If the licensed intellectual property is very important to the licensees business, damages from rejection may be all future profits of the licensees business.[220] In calculating compensation for the lost future profits, however, there is a possibility that the liquidated damages clause may not foresee future growth and ask for less compensation, or otherwise provide inadequate compensation, for the licensee.[221]

IV.A.4. Licensee Should Negotiate for Clearly and Narrowly Defined Royalty Payments

If the licensor rejects the contract, the licensee may elect to retain rights under Bankruptcy Code section 365(n) and will only be required to pay royalty fees, as opposed to other fees defined separately.[222] Hence, the licensee should load its royalty payments toward the end of the license term to make it more economical for the licensor to assume the license.[223] In addition, the licensee should negotiate for clearly and narrowly defined royalty payments to decrease its royalty payment amount due.[224] Licensee can accomplish this goal through five techniques.

First, the licensee should clearly segregate royalty fees from fees for other ongoing licensor commitments such as maintenance, service and/or upgrades to reduce these obligations.[225] Second, given the courts broad interpretation of the term royalty payments as used in Bankruptcy Code section 365(n), a licensee should identify the nature and purpose of each of its monetary obligations under the agreement so that the court does not include the monetary obligations under royalty payments.[226] Third, a licensee should structure the royalty provision of the license so that royalty fees are reduced to the extent that the licensor fails to perform collateral obligations.[227] For example, a licensee could structure the royalty provision of the license so that royalty fees are discounted if the licensee loses it rights to future improvements of the licensed property.[228] The downside to including such a provision in a license is that a Bankruptcy Court may characterize the reduction as an unenforceable ipso facto clause under Bankruptcy Code section 365(e).[229] Fourth, a licensee should make licensing/service fees directly contingent upon the licensor fulfilling its servicing and/or research/development obligations so that if the licensor rejects the license agreement and stops performing its obligations thereunder, the condition precedent to the licensor receiving those fees fails and the licensee arguably is released from that monetary obligation.[230] Fifth, the servicing and/or research/development obligations of the licensor could be set forth in a separate agreement to prevent the lumping together of any service fees with the royalty fees set forth in the license agreement.[231]

IV.A.5. Entitle Licensee to Post-petition Improvements by Including Right to Improvement and Enhancement Provision in License Agreement

Since under Bankruptcy Code section 365(n) the licensee is entitled only to the retention of rights as they existed on the bankruptcy petition date, the licensee may not be entitled to licensors post-petition improvements.[232] Thus, a licensee should include a provision in the license agreement that grants it the right to use all improvements of and enhancements to the intellectual property developed by the licensor during the term of the license agreement.[233] Although it is uncertain whether the Bankruptcy Court would enforce such a provision, there is no harm in including the provision if it is acceptable to the licensor.[234]

IV.A.6. Ensure Access to Licensors Intellectual Property and Any Embodiments Thereof by Including an Escrow Agreement

Bankruptcy Code section 365(n) obligates a debtor in possession/trustee, upon the request of a licensee, to turn over to the licensee not only the intellectual property, but also any embodiments thereof to which the licensee is entitled under the license or any supplementary agreements.[235] Thus, to take full advantage of these rights, a licensee should request that the licensor transfer the embodiment of key information, such as source codes, relating to the licensed intellectual property into an escrow[236] account.[237] The escrow agreement[238] should (1) acknowledge that the agreement is a supplement, as the term is used in Bankruptcy Code section 365(n), to the license agreement; and (2) direct the escrow agent to release the escrowed property to the licensee upon events of default by the licensor under the license agreement.[239] Since the escrow agent releases the escrowed property according to the specific terms of the escrow agreement, the licensee should be especially clear and careful when creating the escrow agreement. The licensee, for example, should clearly, carefully, and broadly define the escrowed property and the events of default in the escrow agreement.

The licensee should structure the escrow agreement as two separate agreements to prevent the licensor from rejecting the escrow agreement between the licensee and the escrow agents as an executory contract under Bankruptcy Code section 365.[240] The first agreement is between the licensor and escrow agent. The second agreement is between the licensee and escrow agent. The purpose of the two escrow agreements is that the licensor is obligated to transfer elements of the intellectual property that are necessary to the licensees continued use of the property to the escrow agent and the escrow agent is authorized to release the escrowed property to the licensee upon notification of the licensors breach or failure to perform its license agreement with the licensee.[241]

IV.B. Post-bankruptcy Tips

Immediately upon (1) receiving notice of the licensors bankruptcy petition; and (2) receiving notice of the licensors motion to reject the license agreement, [242] the licensee should serve a written request upon the licensor for three things. First, the licensee should make a written request for the licensors performance of the license agreement. Second, the licensee should make a written request for the licensor to turn over the intellectual property licensed and any related escrowed property. Third, the licensee should make a written request for the licensors compliance with its duty not to interfere with the licensees rights under the license agreement.[243]

V. Enhancing a Licensees Protection of its Intellectual Property Investment: Filling the Gaps Left by Bankruptcy Code Section 365(n)

Although Bankruptcy Code section 365(n) provides a licensee dealing with a financially-troubled or start-up licensor certain protections if bankruptcy ensues, it neither preserves in full the licensees pre-petition rights under the license agreement nor eliminates all adverse effects of the rejection of the license on the licensees business.[244] Moreover, the scope of licenses subject to the protections of Bankruptcy Code section 365(n) is expressly limited by the definition of intellectual property set forth in Bankruptcy Code section 101(35A).[245] To avoid, or at least lessen the impact of, the problems often faced by a licensee in a licensors bankruptcy case, there are a number of steps that the licensee may take pre-petition.[246] These steps generally fall within one of two strategies. First, the licensee could structure the transaction to prevent the intellectual property and any related agreements from becoming property of the debtor/licensors estate under Bankruptcy Code section 541.[247] Second, the licensee could structure the transaction to include disincentives to the licensor/debtor rejecting the license under Bankruptcy Code section 365.[248]

V.A. Excluding the Intellectual Property from the Bankruptcy Estate

The first method that further enhances the non-debtor/licensees protection of its intellectual property interest is to exclude the intellectual property from the debtor/licensors bankruptcy estate. The most effective protection for a party that desires to use the intellectual property of a financially troubled company or startup company is for the party to structure the transaction as either a sale or an absolute assignment.[249] If the original owner of the intellectual property or technology is not willing to make an outright sale or absolute assignment of its intellectual property or technology, however, two alternative approaches are available. First, the non-debtor/licensee could create an intellectual property trust. Second, the non-debtor/licensee could create a bankruptcy remote entity. The three approaches to keep intellectual property out of the original owners potential bankruptcy estate are discussed below.

V.A.1. Acquire Ownership of, Rather Than a License In, the Intellectual Property and Technology

The non-debtors first strategy to keep intellectual property out of the original owners potential bankruptcy estate is for the non-debtor to structure the transaction as either a sale or an absolute assignment.[250] The sale or absolute assignment of the original owners intellectual property and technology to the would-be licensee leads to two important results. First, when the original owner sells or assigns its bundle of rights to the would-be licensee, the original owner divests all its rights[251] to the intellectual property and technology, the original owner eliminates its legal or equitable interest in the intellectual property and technology, and the original owner removes the intellectual property and technology from its bankruptcy estate.[252] Second, since the sale or absolute assignment of the original owners property leaves the original owner without unexecuted obligations to the would-be licensee, the sale or the absolute assignment of the intellectual property and technology no longer would leave the transaction subject to rejection as an executory contract.[253]

There are, however, obstacles to the would-be licensee acquiring ownership in the original owners intellectual property and technology. First, since there are benefits to the ownership of the intellectual property and technology, such as the right to receive royalty payments, the original owner may not be willing to part with ownership of the intellectual property and technology.[254] Second, since the intellectual property and technology may be the original owners most, if not only, valuable asset, this obstacle is especially common among start-up companies, the original owner may be unwilling to sell or assign its intellectual property and technology.[255] Third, since the founder(s) of the start-up company may have invested considerable time, money, and effort to develop the intellectual property and technology, the founder(s) may have an attachment to their creation, which may make them reluctant to divest their rights in their intellectual property and technology.[256]

The non-debtor, however, may avoid these obstacles and induce the original owner to part with ownership by having the original owner sell or absolutely assign the intellectual property and technology to the would-be licensee and then have the would-be licensee license back to the original owner the right to such intellectual property and technology.[257] There are three advantages to this structure. First, the structure accomplishes the would-be licensees main goal; obtaining use of the intellectual property while divesting the original owner of title to such property.[258] Second, since the structure allows the original owner to continue to use and extract some value from the intellectual property in its business operations, the original owner will be more willing to agree to such a transaction.[259] Third, under this structure, the would-be licensee could grant an option to the original owner to repurchase the intellectual property upon the would-be licensees default of its license obligations to the original owner.[260] The risk, however, is that a court could determine that the transaction in substance was merely a license to the would-be licensee and that the original owner retained a sufficient property interest in the intellectual property to bring it into the owners bankruptcy estate under section 541 of the Bankruptcy Code.[261]

V.A.2. Create an Intellectual Property Trust

The non-debtor/licensees second strategy to prevent the original owner of the intellectual property or technology from rejecting the contract is for the original owner of the intellectual property or technology to transfer its ownership to a trust. Thereafter, the trust would license the intellectual property or technology to the non-debtor/licensee. The intellectual property or technology remains part of the original owners bankruptcy estate, [262] but the original owner cannot reject the license agreement because the agreement between the trust and the original owner would be a completed contract rather than an executory contract.[263] Moreover, the trust agreement could be structured to prohibit the trustee of the intellectual property trust from filing a bankruptcy petition or incurring any obligations other than the license agreement.[264] As in the sale/assignment context, however, an owner of intellectual property may not be willing to transfer control of its intellectual property to a trustee or otherwise limit its ability to deal with the intellectual property as required by a trust transaction.[265]

V.A.3. Create a Bankruptcy Remote Entity

The non-debtor/licensees third strategy to keep intellectual property out of the original owners potential bankruptcy estate is to have the original owner transfer title of the intellectual property and technology to a bankruptcy remote entity. Since creating a bankruptcy remote entity may be very expensive and complex, however, the non-debtor/licensee should consider this strategy only if the intellectual property and technology license is more valuable than the potential costs and risks of creating such an entity and it has exhausted its other options. An example of a bankruptcy remote entity is a new corporation established specifically, and solely, for the purpose of owning the intellectual property and licensing it to others.[266] The non-debtor/licensee should also take an additional four steps to ensure the solvency of the corporation and to make the corporation a bankruptcy remote entity.[267]

First, the articles of incorporation and by-laws of the corporation should (1) limit the corporations authority to engage in any business;[268] (2) give the corporation no authority to incur debt or otherwise encumber its assets;[269] and (3) prevent the corporation from filing a voluntary petition for bankruptcy. [270] There is a risk, however, that the Bankruptcy Court would deem a specific prohibition on the corporations ability to file for bankruptcy protection void as against public policy.[271] Two other approaches, however, may accomplish the same result. First, the non-debtor/licensee could take steps to ensure that a strategically calculated number of the corporations directors be independent and that the corporation would need a super-majority[272] vote of its directors for approval of the corporations voluntary petition for bankruptcy.[273] Second, to provide a disincentive to rejection of the license agreement if the [corporation] does file for bankruptcy, the stock of the [corporation] could be utilized to secure its performance of the license agreement with the [non-debtor/licensee].[274]

Second, the non-debtor/licensee should structure the corporation with mechanisms that limit the corporations ability to amend its articles of incorporation or by-laws.[275] For example, the corporations articles of incorporation and by-laws could require super-majority requirements upon the corporation for certain actions, such as filing a voluntary petition for bankruptcy, and entering into other license agreements, and, to exploit the super-majority requirements, the non-debtor/licensee could hold a strategically calculated amount of the corporations voting stock.[276] There is, however, still the risk that the non-debtor/licensee would not be able to control the governance of the corporation in the manner intended or that the super-majority voting requirement, as it relates to the corporations right to file for bankruptcy, would be enforceable.[277]

Third, the non-debtor/licensee should structure the corporation to have different classes of stock that would (1) allow the non-debtor/licensee to have some control over its corporate governance, while (2) allowing the original owner to receive the economic benefits of the intellectual property and technology that the original owner transferred to the corporation.[278]

Fourth, the non-debtor/licensee should take steps that ensure that the corporation implements internal mechanisms to ensure its separateness from the original owner to minimize the risk of the Bankruptcy Court substantively consolidating the corporation with the original owner in a bankruptcy case filed by or against the original owner.[279] For example, the corporation should have separate offices, financial statements, assets, management, and decision-making processes independent from the original owner.[280] In addition, the corporation should make sure that all transactions with the original owner are arms-length transactions.[281]

V.B. Disincentives to Rejection: Creation of a Secured Rejection Claims

The second method that further enhances the non-debtor/licensees protection of its intellectual property interest is for the non-debtor/licensee to structure its transaction with the debtor/licensor to include disincentives for the debtor/licensor to reject its license agreement under Bankruptcy Code section 365. The most effective disincentive is for the non-debtor/licensee to execute a security agreement[282] with the debtor/licensor in conjunction with the license transaction to grant it a security interest[283] in the licensed intellectual property and other property necessary for the utilization of such intellectual property.[284] Although the security agreement does not ensure continued performance of a license agreement, it does have the effect of converting what would otherwise be a pre-bankruptcy general unsecured damage claim[285] to a secured claim[286] upon the rejection of a license agreement.[287]

V.B.1. Advantages of a Secured Claim

In a bankruptcy proceeding, the advantage of a secured claim is that it will allow the secured party/licensee to exert pressure upon the debtor/licensor in at least three ways. First, the secured party/licensee could threaten to move for relief from the automatic stay of Bankruptcy Code section 362[288] to foreclose on its security interests in attempting to satisfy its claims arising from a rejection of its license agreement.[289] Second, if the debtor in possession/trustee does not promptly assume the license agreement, a secured party/licensee could request adequate protection for the debtor/licensors use of the collateral, which cash collateral includes the cash proceeds resulting from the licenses of the intellectual property encompassed in the collateral, [290] pursuant to the provisions of Bankruptcy Code section 361.[291] Third, if the secured party/licensees foreclosure on its security interests makes it impossible for the debtor/licensor to perform the agreements that it entered into with other parties, the debtor/licensor may forego rejecting its license agreement with the secured party/licensee to avoid being forced to breach its agreements with such other parties.[292]

V.B.2. How to Structure the Security Agreement

The secured party/licensee needs to be very careful when drafting the security agreement. Careless or improper drafting of the security agreement could have numerous detrimental consequences for the secured party/licensee including, but not limited to, the unenforceability of the security agreement. Moreover, structuring some of the clauses to be included in the security agreement may result in one partys interest being negatively affected. Thus, when structuring the security agreement, the parties should balance both of their interests. Below are seven practice points for drafting a proper security agreement.

V.B.2.a. Include a Very Specific Collateral Description

First, the parties should make sure that the description of the collateral that secures the debtor/licensors obligations to the secured party/licensee is very specific.[293] Vague collateral descriptions, inaccurate use of buzz words to describe the collateral, [294] and an otherwise improper collateral description will result in the secured party/licensee having an uncertain lien priority status once the debtor/licensor files for bankruptcy.[295] In formulating the collateral description for the security agreement, the parties should consider:

(1) licenses and permits relating to or necessary for use of the intellectual property;[296]

(2) present and future rights to sue for infringement or misappropriation of intellectual property rights;[297]

(3) physical property necessary for the creation and use of the intellectual property in which a security interest is taken;[298] and

(4) rights relating to governmental authorizations and permits and rights arising under foreign laws.[299]

V.B.2.b. Include Representations to Acquire Information Necessary to Perfect and to Protect Licensees Security Interests in the Intellectual Property

Second, the secured party/licensee should include representations in the security agreement to acquire information necessary to perfect and to protect its security interests in the debtor/licensors intellectual property.[300] In the interest of confidentiality, however, the debtor/licensor may be reluctant to disclose certain information that was previously undisclosed in connection with its license agreement.[301] Thus, when structuring the representations to be included in the security agreement, the parties must balance both of their interests.[302] In addition to the usual representations found in a security agreement, the parties should include the following additional representations in their intellectual property security agreement:

(1) title to the intellectual property as being free and clear of all liens and encumbrances;[303]

(2) extent of the licenses and other rights granted in the intellectual property;[304]

(3) no affiliate of licensor has (or will have) any interests in the intellectual property;[305]

(4) licensor not guilty of infringing or misappropriating any other entitys rights in any intellectual property;[306] and

(5) precautions have been (and will continue to be) taken to keep confidential the intellectual property.[307]

V.B.2.c. Include Covenants to Secure Performance of the Security Agreement

Third, the secured party/licensee should include covenants in its security agreement to secure performance of the security agreement by restricting the debtor/licensors use of the collateral.[308] The debtor/licensor, however, may be reluctant to include any covenants that interfere with its desire to conduct its business in the ordinary course.[309] Thus, when structuring the covenants to be included in the security agreement, the parties must balance both of their interests.[310] Examples of covenants that the parties should include in the security agreement are:

(1) a covenant that debtor/licensor will continue to keep information secret and will enter into appropriate confidentiality agreements with employees;[311]

(2) a covenant to notify of the need to take any action to perfect and protect rights and security interests granted;[312]

(3) a covenant that licensor will not create or suffer to exist any mortgage, pledge,

lien, or charge on the collateral;[313]

(4) a covenant to maintain records of proceeds of intangibles and require that such

proceeds be held in trust for secured party/licensee;[314]

(5) a covenant to grant secured party/licensee the right to set off claims arising out

of a breach of the security agreement against monies owing the debtor/licensor under other agreements, such as the license agreement;[315]

(6) a covenant to sign financing statements, filings, applications, assignments, registrations, notices, documents of further assurances, or other documents necessary to perfect or protect rights and security interests;[316]

(7) a covenant to notify secured party/licensee of the development of other intellectual property encompassed within the collateral;[317] and

(8) a covenant to allow secured party/licensee, as agent, to execute documents necessary to perfect or protect rights and security interests.[318]

V.B.2.d. Include Broad Events of Default Linked to Licensors Performance

Fourth, the parties should not draft the security agreement in a manner that conditions the exercise of the secured party/licensees rights and remedies pursuant to the security agreement upon the debtor/licensors commencement of a bankruptcy case or its insolvency.[319] Such an event of default will constitute an unenforceable ipso facto clause under Bankruptcy Code section 365(e) and may be enforceable in Bankruptcy Court as violative of public policy.[320] The secured party/licensee should instead strive to include in the security agreement very broad events of default linked to the licensors performance of the license agreement and security agreement.[321] This may be difficult for the secured party/licensee, because the debtor/licensor will seek a very narrow default clause to assure its financiers and other licensees that it will not be limited in operating its business by the security agreement except in the event of its bankruptcy filing.[322] Consequently, the secured party/licensee should consider events of default based only upon those provisions of the license agreement and security agreement that are most important to it, such as the actual license of the intellectual property.[323]

V.B.2.e. Mitigate Effects of Potential Non-Disturbance Clause

Fifth, since the debtor/licensor may want to license, or already had licensed, its intellectual property to other licensees and those licensees may be concerned that events of default of the security agreement with the secured party/licensee may disturb those licensees licenses, the debtor/licensor may be adamant, or require, that the parties include a non-disturbance clause in the security agreement.[324] The non-disturbance agreement would allow the licensor to enter into license agreements with other parties with the understanding and assurance that the secured party/licensees security agreement will not disturb such license agreements in the event the secured party/licensee exercises its remedies against its security upon the occurrence of an event of default.[325]

Consequently, since the non-disturbance clause will prevent claims from the breach of the other license agreements from occurring upon the exercise of the secured party/licensees foreclosure rights, the non-disturbance agreement also diminishes some of the debtor/licensors disincentive to reject the license agreement with the secured party/licensee.[326] Thus, the secured party/licensee should mitigate the non-disturbance agreements detrimental effect by including the proceeds of the debtor/licensors license agreements with other licensees within the secured party/licensees security agreement collateral description.[327] As a result, in the event of the debtor/licensors bankruptcy filing, the Bankruptcy Court would consider proceeds of such license agreements cash collateral entitled to adequate protection under Bankruptcy Code section 361.[328]

V.B.2.f. Perfect the Security Interest Under Both Applicable State Law and Federal Law

Sixth, the secured party/licensee should take all steps necessary under both applicable state law and applicable federal law to perfect[329] its security interest.[330] The secured party/licensee should perfect its security interest, because failing to prefect its security interest in the debtor/licensors property may allow the debtor/licensor or the bankruptcy trustee to extinguish the secured party/licensees unperfected security interest pursuant to Bankruptcy Code section 544.[331] The secured party/licensee should perfect its security interest under both applicable state law and applicable federal law, because in most instances it is unclear whether applicable state law[332] or applicable federal law[333] is appropriate and failure to comply with the relevant law will provide insufficient protection for the secured party/licensee.[334]

V.B.2.g. Consider Including a Liquidated Damages Clause

Seventh, the secured party/licensee should consider including a liquidated damages clause in its license agreement with the debtor/licensor when establishing its secured claim upon a breach of the license agreement.[335] Although there is no guarantee that the liquidated damages clause will be enforceable, the purpose of including a liquidated damages clause is to protect the secured party/licensee from the possibility that a Bankruptcy Court may estimate the secured party/licensees secured claim at a nominal amount and, as a result, effectively [defeat] the secured party/licensees security interest.[336] When drafting the liquidated damages clause the secured party/licensee should follow the practice tips discussed above in section IV.A.3.[337]

VI. Conclusion

As with any business transaction, there is an inherent risk in a non-debtors decision to use or invest in the intellectual property and technology of a financially-troubled or start-up company. Nevertheless, by taking the proper precautions, a non-debtor may ameliorate the effect of such risks while taking full advantage of the benefits of the transaction.

The non-debtor may enhance the protection of its interests in the license agreement by drafting the license to take full advantage of the protections provided to a non-debtor licensee to an intellectual property license under Bankruptcy Code section 365(n).[338] This Comment suggested six pre-bankruptcy drafting tips for invoking Bankruptcy Code section 365(n).[339] First, while negotiating a license agreement with licensor, the licensee should define intellectual property broadly and should specify that all intellectual property under the agreement is intended to be intellectual property within the meaning of Bankruptcy Code section 101(35A) and section 365(n).[340] Second, the licensee should define the term event of default to preserve the licensees right to terminate the license agreement.[341] Third, the licensee should include a liquidated damages clause in the license agreement to assist the parties in determining the licensees damages upon rejection of the license agreement and to discourage the licensor from rejecting the license agreement.[342] Fourth, the licensee should negotiate for clearly and narrowly defined royalty payments that are loaded toward the end of the license term to decrease its royalty payment amount due and to provide incentives for the licensor to assume the license agreement.[343] Fifth, the licensee should include a right to improvements and enhancements provision in the license agreement to entitle it to licensors post-petition improvements.[344] Sixth, the licensee should transfer the embodiment of key information relating to the licensed intellectual property into an escrow account.[345]

In addition to the enhanced protections provided by Bankruptcy Code section 365(n), the non-debtor should implement and execute strategies to exclude the intellectual property and technology from the bankruptcy estate and provide disincentives for the licensor to reject the license agreement.[346] By purchasing the intellectual property and technology outright[347] or entering into a license to use the intellectual property and technology with a trust[348] or a bankruptcy remote entity[349] separate and apart from the financially-troubled or start-up company, the intellectual property and technology of the license agreement may not be included in the debtors bankruptcy estate, and thus, the non-debtor may be able to eliminate the risk altogether. Additionally, the non-debtor may take a security interest in the intellectual property and technology not only to secure the financially-troubled or start-up companys performance of the license, but also to make the rejection of any such license in a bankruptcy case less attractive.[350] Although such precautions will not enable a non-debtor licensing intellectual property and technology from a financially-troubled or start-up company to avoid all of the adverse consequences that may flow from a licensors bankruptcy case, they may lessen the impact of the bankruptcy case on the non-debtors business.

[1] Richard A. Mann, Michael OSullivan, Larry Robbins & Barry S. Roberts, Starting From Scratch: A Lawyer's Guide To Representing A Start-Up Company, 56 Ark. L. Rev. 773 (2004).

[2] Id.

[3] Id.

[4] Id.

[5] Richard M. Cieri & Michelle M. Morgan, Licensing Intellectual Property and Technology from the Financially-Troubled or Startup Company: Prebankruptcy Strategies to Minimize the Risk in a Licensees Intellectual Property and Technology Investment, 55 Bus. Law. 1649, n14 (2000) (Intellectual property and technology often are owned by a small business or an individual who is financially unstable for one reason or another (whether as a result of significant cash outlays relating to the development of the intellectual property and technology or, simply, poor management) or by a startup company lacking profits prior to the commercialization of its product. These entities typically are in need of financial investors, business partners, or entities willing to pay for the use (or the anticipated use) of the intellectual property and technology.)

[6] See section IV.A.1. infra.

[7] See section IV.A.2. infra.

[8] See section IV.A.3. infra.

[9] See section IV.A.4. infra.

[10] See section IV.A.5. infra.

[11] See section IV.A.6. infra.

[12] See section V.A.1. infra.

[13] See section V.A.2. infra.

[14] See section V.A.3. infra.

[15] See section V.B. infra.

[16] The Bankruptcy Code defines debtor as a person or municipality concerning which a case under title 11 has been commenced. 11 U.S.C. 101(13) (2005). The Federal Rules of Bankruptcy Procedure uses a slightly broader definition. See Fed. R. Bankruptcy P. 9001(5).

[17] See 11 U.S.C. 1123 (2005); section I.B. infra.

[18] Alan N. Resnick, Henry J. Sommer & Lawrence P. King, 7-1100 Collier on Bankruptcy P 1100.01 (15th ed. rev. 2006) [hereinafter 7-1100 Collier on Bankruptcy].

[19] Id.

[20] See Blacks Law Dictionary (8th ed. 2004), going-concern value (The value of a commercial enterprises assets or of the enterprise itself as an active business with future earning power, as opposed to the liquidation value of the business or of its assets. Going-concern value includes, for example, goodwill.).

[21] 7-1100 Collier on Bankruptcy, supra note 18. See Blacks Law Dictionary (8th ed. 2004), liquidation value (The value of a business or of an asset when it is sold in liquidation, as opposed to being sold in the ordinary course of business.).

[22] 7-1100 Collier on Bankruptcy, supra note 18.

[23] Id.

[24] See, e.g., 11 U.S.C. 361-364, 541, 547, 549, 1104, 1108, 1112(b), 1121, 1129 (2005). See also Table I.A.-1 infra.

[25] See 11 U.S.C. 1108 (2005) (Unless the court, on request of a party in interest and after notice and a hearing, orders otherwise, the trustee may operate the debtors business.).

[26] See 11 U.S.C. 1104 (2005). But see 7-1100 Collier on Bankruptcy, supra note 18 (unless it can be established that cause exists for the appointment of a trustee).

[27] 7-1100 Collier on Bankruptcy, supra note 18. See 11 U.S.C. 1121 (2005).

[28] 7-1100 Collier on Bankruptcy, supra note 18. See 11 U.S.C. 541 (2005).

[29] 7-1100 Collier on Bankruptcy, supra note 18. See 11 U.S.C. 362 (2005).

[30] 7-1100 Collier on Bankruptcy, supra note 18. See 11 U.S.C. 363 (2005).

[31] 7-1100 Collier on Bankruptcy, supra note 18. See 11 U.S.C. 364 (2005). The debtor in possession, however, is obligated to provide protection for entities with interests in property that the debtor in possession seeks to retain, use, sell, lease or borrow against. See 7-1100 Collier on Bankruptcy, supra note 18. See 11 U.S.C. 361 (2005).

[32] 7-1100 Collier on Bankruptcy, supra note 18. See 11 U.S.C. 365 (2005).

[33] 7-1100 Collier on Bankruptcy, supra note 18. See 11 U.S.C. 547, 549 (2005).

[34] 7-1100 Collier on Bankruptcy, supra note 18. See 11 U.S.C. 1121(b), (d) (2005); Alan N. Resnick, Henry J. Sommer & Lawrence P. King, 7-1121 Collier on Bankruptcy P 1121.01 (15th ed. rev. 2006) [hereinafter 7-1121 Collier on Bankruptcy].

[35] 7-1100 Collier on Bankruptcy, supra note 18. See 11 U.S.C. 1112(b) (2005).

[36] 7-1100 Collier on Bankruptcy, supra note 18. See 11 U.S.C. 1104(a) (2005).

[37] 7-1100 Collier on Bankruptcy, supra note 18. See 11 U.S.C. 362(d) (2005).

[38] 7-1100 Collier on Bankruptcy, supra note 18. See 11 U.S.C. 361 (2005).

[39] 7-1100 Collier on Bankruptcy, supra note 18. See 11 U.S.C. 1121(c) (2005); 7-1121 Collier on Bankruptcy, supra note 34, at P 1121.06.

[40] For example, the court may not confirm a plan if the holder of an impaired claim or interest has not accepted the plan and the plan does not provide that the holder will receive or retain under the plan at least what it would have received if the debtor were liquidated under chapter 7 of the Bankruptcy Code. 7-1100 Collier on Bankruptcy, supra note 18. See 11 U.S.C. 1129(a)(7) (2005); Alan N. Resnick, Henry J. Sommer & Lawrence P. King, 7-1129 Collier on Bankruptcy P 1129.03[7] (15th ed. rev. 2006) [hereinafter 7-1129 Collier on Bankruptcy]. In addition, the court may not confirm a plan unless the court determines that plan confirmation is not likely to be followed by liquidation or the need for further financial reorganization, unless liquidation or further reorganization is contemplated under the terms of the plan. 7-1100 Collier on Bankruptcy, supra note 18. See 11 U.S.C. 1129(a)(11) (2005); 7-1129 Collier on Bankruptcy, supra note 40, at P 1129.03[11].

[41] 7-1100 Collier on Bankruptcy, supra note 18.

[42] See section I.B.3. infra.

[43] 7-1100 Collier on Bankruptcy, supra note 18. See 11 U.S.C. 363, 365 (2005); section II.B.2. infra.

[44] 7-1100 Collier on Bankruptcy, supra note 18. See, e.g., 11 U.S.C. 363-365 (2005).

[45] See section I.B.1. infra.

[46] See section I.B.2. infra.

[47] See section I.B.3. infra.

[48] 7-1100 Collier on Bankruptcy, supra note 18, at P 1100.05. See 11 U.S.C. 362, 541 (2005).

[49] 11 U.S.C. 541 (2005).

[50] See Blacks Law Dictionary (8th ed. 2004), chose in action (1. A proprietary right in personam, such as a debt owed by another person, a share in a joint-stock company, or a claim for damages in tort. 2. The right to bring an action to recover a debt, money, or thing. 3. Personal property that one person owns but another person possesses, the owner being able to regain possession through a lawsuit.).

[51] 7-1100 Collier on Bankruptcy, supra note 18, at P 1100.05[1]. See 11 U.S.C. 541 (2005).

[52] See Blacks Law Dictionary (8th ed. 2004), automatic stay (A bar to all judicial and extrajudicial collection efforts against the debtor or the debtors property. The policy behind the automatic stay, which is effective upon the filing of the bankruptcy petition, is that all actions against the debtor should be halted pending the determination of creditors rights and the orderly administration of the debtors assets free from creditor interference.).

[53] See Blacks Law Dictionary (8th ed. 2004), stay (The postponement or halting of a proceeding, judgment, or the like.).

[54] 7-1100 Collier on Bankruptcy, supra note 18, at P 1100.05[2]. See 11 U.S.C. 362 (2005).

[55] But see 7-1100 Collier on Bankruptcy, supra note 18, at P 1100.05[2][a] (provides examples of certain actions that are exempted from the scope of the automatic stay, typically for particular policy reasons, such as criminal actions, that require such actions to be able to proceed).

[56] 7-1100 Collier on Bankruptcy, supra note 18, at P 1100.05[2]. See H.R. Rep. No. 95-595, 1st Sess. at 340 (1977).

[57] See H.R. Rep. No. 95-595, 1st Sess. at 340 (1977).

[58] See id.

[59] 7-1100 Collier on Bankruptcy, supra note 18, at P 1100.05[2][b]. See 11 U.S.C. 362(d) (2005); Alan N. Resnick, Henry J. Sommer & Lawrence P. King, 3-362 Collier on Bankruptcy PP 362.07-362.08 (15th ed. rev. 2006) [hereinafter 3-362 Collier on Bankruptcy].

[60] Alan N. Resnick, Henry J. Sommer & Lawrence P. King, 7-1101 Collier on Bankruptcy P 1101.01[2] (15th ed. rev. 2006) [hereinafter 7-1101 Collier on Bankruptcy]. There is no counterpart in chapter 11 to Bankruptcy Code section 701, which permits the court to order the appointment of an interim trustee after the commencement of a chapter 7 case. 7-1101 Collier on Bankruptcy, supra note 60, at P 1101.01[2][a] (If the court has concerns about the debtors remaining as debtor in possession pending a trustees qualifying to serve, the court may enjoin the debtor from taking particular actions or may issue such orders as may be necessary to protect parties in interest. If a case is converted to chapter 11 from chapters 7 or 13, such conversion results in the automatic termination of the trustee that had been serving in the chapter 7 or 13 case.).

[61] See 11 U.S.C. 1101(1), 322 (2005).

[62] The one exception is found in chapter 9. See 7-1101 Collier on Bankruptcy, supra note 60, at P 1101.01[1][a] (Section 901(a) provides that several provisions of chapter 11 are operative in chapter 9. Section 901(b) provides that terms used in those provisions of chapter 11 that are incorporated into chapter 9 shall have the meanings ascribed to those terms in chapter 11. This would include the defined term debtor in possession when it is used in those chapter 11 provisions incorporated into chapter 9. Because chapter 9 does not provide for the appointment of a trustee, the term debtor in possession in a chapter 9 case will always refer to the debtor.).

[63] See 11 U.S.C. 103(g) (2005).

[64] 7-1101 Collier on Bankruptcy, supra note 60.

[65] Id. See 11 U.S.C 1104 (2005).

[66] 7-1101 Collier on Bankruptcy, supra note 60.

[67] 7-1101 Collier on Bankruptcy, supra note 60, at P 1101.01[2][b]. See 11 U.S.C. 1107(a) (2005). The debtor in possession is generally vested with all of the rights and powers of a trustee as set forth in Bankruptcy Code section 1106, although the debtor in possession is not entitled to compensation as such. 7-1101 Collier on Bankruptcy, supra note 60, at P 1101.01[2][b]. See 11 U.S.C. 1106 (2005). The debtor in possession is also charged with performing all of the duties of a trustee set forth in Bankruptcy Code section 1106, except for the duties set forth in subsections 1106(a)(2), (3) and (4). 7-1101 Collier on Bankruptcy, supra note 60, at P 1101.01[2][b]. See 11 U.S.C. 1106 (2005).

[68] 7-1101 Collier on Bankruptcy, supra note 60, at P 1101.01[2][b].

[69] Id.

[70] 11 U.S.C. 1141(b) (2005); see Alabama Fuel Sales Co. v. Newport Resources, Inc. (In re Alabama Fuel Sales Co.), 45 B.R. 365 (N.D. Ala. 1985) (confirmation of plan terminates debtors status as debtor in possession); Air One, Inc. v. Wing On Bank, Ltd. (In re Air One, Inc.), 75 B.R. 998 (Bankr. E.D. Mo. 1987) (same). But see In re Grinstead, 75 B.R. 2 (Bankr. D. Minn. 1985) (debtor no longer debtor in possession after confirmation, thus losing absolute right under section 1112(a) to convert to chapter 7).

[71] 7-1100 Collier on Bankruptcy, supra note 18, at P 1100.09.

[72] Id.

[73] Id.

[74] 11 U.S.C. 1123 (2005).

[75] 11 U.S.C. 1123 (2005).

[76] 7-1100 Collier on Bankruptcy, supra note 18, at P 1100.09[2]. See 11 U.S.C. 1123 (2005).

[77] 7-1100 Collier on Bankruptcy, supra note 18, at P 1100.09[2].

[78] Id.

[79] Id.

[80] Id.

[81] Id.

[82] 11 U.S.C. 1123(a) (2005); id.

[83] 7-1100 Collier on Bankruptcy, supra note 18, at P 1100.09[2].

[84] Id.

[85] Id.

[86] Id.

[87] Id.

[88] 11 U.S.C. 1123(a) (2005); id.

[89] 11 U.S.C. 541(a)(1) (2005). See, e.g., United States v. Whiting Pools, Inc., 462 U.S. 198, 203 (1983); Alan N. Resnick, Henry J. Sommer & Lawrence P. King, 5-541 Collier on Bankruptcy P 541.01 (15th ed. rev. 2006) [hereinafter 5-541 Collier on Bankruptcy] (Congress intent to define property of the estate in the broadest possible sense is evident from the language of the statute, which initially defines the scope of estate property to be all legal or equitable interests of the debtor in property as of the commencement of the case, wherever located and by whomever held.); Cieri & Morgan, supra note 5, at n14 (Courts generally interpret section 541(a) of the Bankruptcy Code broadly to encompass any and all interests of a debtor, irrespective of the location or party in possession of the property.).

[90] See, e.g., Snyder v. Dewoskin (In re Mahendra), 131 F.3d 750, 755 (8th Cir. 1997), cert. denied, 523 U.S. 1107 (1998); C.T. Dev. Corp. v. Barnes (In re Oxford Dev., Ltd.), 67 F.3d 683, 685 (8th Cir. 1995); Davis v. Moon (In re Usery), 158 B.R. 470, 472 (Bankr. W.D. Mo. 1993); Cieri & Morgan, supra note 5 (2000), at n15 (2000) (To determine whether a debtors estate has an interest in property under the Bankruptcy Code, the courts generally consider the following three factors: (i) whether the property is property within the meaning of section 541 of the Bankruptcy Code, (ii) whether the debtor has an interest in such property under applicable state law, and (iii) whether the debtor had the property interest on the bankruptcy petition date.).

[91] See, e.g., Krebs Chrysler-Plymouth, Inc., v. Valley Motors, Inc., 141 F.3d 490, 498 (3d Cir. 1998) (characterizing a franchise as a license to use the subject trademarks and noting that such franchises represent interests in the trademarks and thus, are property of a debtors estate under section 541); Cieri & Morgan, supra note 5 (2000) (As a result, to the extent that a debtor has a prebankruptcy interest, legal or equitable, in an intellectual property and technology license, that license becomes property of the debtors bankruptcy estate under section 541 of the Bankruptcy Code.).

[92] 11 U.S.C. 365(a) (2005); Cieri & Morgan, supra note 5 (2000) (A trustee or debtor in possession may, in turn, assume, assume and assign, or reject this intellectual property and technology license as an executory contract under section 365(a) of the Bankruptcy Code.).

[93] The Copyright Act, 17 U.S.C. 101-1101 (2005) (Explains that the ownership of a copyright, or of any of the exclusive rights under a copyright, is distinct from ownership of any material object in which the work is embodied. 17 U.S.C. 202 (2005). Defines a transfer of copyright ownership as an assignment, mortgage, exclusive license, or any other conveyance, alienation, or hypothecation of a copyright or of any of the exclusive rights comprised in a copyright, whether or not it is limited in time or place of effect, but not including a nonexclusive license. 17 U.S.C. 101 (2005). Accordingly, a copyright owner may effect an absolute transfer of its rights in the copyright separate and apart from the sale of a product incorporating the copyrighted work.).

[94] See, e.g., Vaupel Textilmaschinen KG v. Meccanica Euro Italia S.P.A, 944 F.2d 870, 875 (Fed. Cir. 1991) (explaining that a patent owner has in effect, a bundle of rights which may be divided and assigned, or retained in whole or part).

[95] See, e.g., Waterman v. Mackenzie, 138 U.S. 252, 255-56 (1891) (A patentee may convey: (1) the whole patent, comprising the exclusive right to make, use, and vend the invention throughout the United States; (2) an undivided part or share of that exclusive right; or (3) the exclusive right under the patent within and throughout a specified part of the United States. A transfer of either of these three kinds of interests is an assignment and vests in the assignee a title in so much of the patent itself, with a right to sue infringers. Any assignment or transfer, short of one of these, is a mere license, giving the licensee no title in the patent, and no right to sue at law in his own name for an infringement.); Everex Sys., Inc. v. Cadtrak Corp. (In re CFLC, Inc.), 89 F.3d 673, 676 n.2 (defined assign as encompassing both the assignment of rights and the delegation of duties) (9th Cir. 1996); SAPC, Inc. v. Lotus Dev. Corp., 921 F.2d 360, 361 (1st Cir. 1990) (affirmed the trial courts holding that an Asset Purchase Agreement unambiguously transferred or extinguished all of the original owners rights relating to a program); MacLean Assocs., Inc. v. William M. Mercer-Meidinger-Hansen, Inc., 952 F.2d 769, 778-79 (3d Cir. 1991) (the owner of a copyright has the exclusive right to copy, distribute or display his work and can transfer ownership of the copyright by selling it or by exclusively licensing it); Cieri & Morgan, supra note 5 (2000) (Such a complete transfer divests the original owner of all rights in, including the right to sue for future infringement of the intellectual property and technology, and title to the intellectual property and technology.).

[96] See Bell Intercontinental Corp. v. United States, 381 F.2d 1004, 1011, 152 U.S.P.Q. 182, 184 (Ct. Cl. 1967) (Whether a transfer constitutes a sale or license is determined by the substance of the transaction and a transfer will suffice as a sale if it appears from the agreement and surrounding circumstances that the parties intended that the patentee surrender all his substantial rights to the invention.); Cieri & Morgan, supra note 5.

[97] Cieri & Morgan, supra note 5.

[98] See, e.g., Waterman, 138 U.S. at 256 (Whether a transfer of a particular right or interest under a patent is an assignment or a license does not depend upon the name by which it calls itself, but upon the legal effect of its provisions.); Eickmeyer v. United States, 231 U.S.P.Q. 820, 821 (Ct. Cl. 1986) (It is true that a basic distinction between the transfer of a license and the transfer of a patent is whether the transferee has received the right to sue for infringement. If such a right to sue for infringement is transferred, the transferee has received an assignment. If no such right to sue is transferred, the transferee has received a license.); Control Components, Inc. v. Atlantic Richfield Co., 439 F. Supp. 654, 656 (C.D. Cal. 1977) ([A]n agreement that purports to give only an exclusive license may in fact be an assignment if its legal effect is to transfer substantially all of the rights under the patent.).

[99] See Cieri & Morgan, supra note 5 (2000) (licenses commonly are described as mere covenants by the licensor not to sue for infringement.).

[100] See, e.g., Waterman, 138 U.S. at 255.

[101] Cieri & Morgan, supra note 5.

[102] Instead of a sale.

[103] Cieri & Morgan, supra note 5, at n34 (2000).

[104] See id.

[105] The Bankruptcy Code does not define the term executory contract. Courts, however, have employed the definition provided by the legislative history of Bankruptcy Code section 365 and developed by Professor Countryman. See Vern Countryman, Executory Contracts in Bankruptcy Part I, 57 Minn. L. Rev. 439, 440 (1973). See also In re Coal Stripping, Inc., 215 B.R. 500, 31 Bankr. Ct. Dec. (CRR) 1064 (Bankr. W.D. Pa. 1997); Matter of GP Exp. Airlines, Inc., 200 B.R. 222, 38 Collier Bankr. Cas. 2d (MB) 1725, 30 U.C.C. Rep. Serv. 2d (CBC) 583 (Bankr. D. Neb. 1996); Enterprise Energy Corp. v. United States (In re Columbia Gas Sys. Inc.), 50 F.3d 233, 239 (3d Cir. 1995) (quoting Sharon Steel Corp. v. National Fuel Gas Distrib. Corp., 872 F.2d 36, 39 (3d Cir. 1989)); In re MCorp Financial, Inc., 122 B.R. 49 (Bankr. S.D. Tex. 1990); Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers, Inc.), 756 F.2d 1043, 1045 (4th Cir. 1985), cert. denied, 475 U.S. 1057 (1986); Carlson v. Farmers Home Admin. (In re Newcomb), 744 F.2d 621, 624 (8th Cir. 1984); Fenix Cattle Co. v. Silver (In re Select-a-Seat Corp.), 625 F.2d 290, 292 (9th Cir. 1980); Butler v. Resident Care Innovation Corp., 241 B.R. 37, 42 (D.R.I. 1999); Cieri & Morgan, supra note 5.

[106] See Sipes v. General Dev. Corp. (In re General Dev. Corp.), 177 B.R. 1000, 1013 (S.D. Fla. 1995) (quoting In re Martin Brothers Toolmakers, Inc., 796 F.2d 1435, 1439 (11th Cir. 1986)), aff'd sub nom. Sipes v. Atlantic Gulf Communities Corp. (In re General Dev. Corp.), 84 F.3d 1364 (11th Cir. 1996). See also Cohen v. Drexel Burnham Lambert Group, Inc. (In re Drexel Burnham Lambert Group, Inc.), 138 B.R. 687, 706-08 (Bankr. S.D.N.Y. 1992); Cieri & Morgan, supra note 5 (2000) ([S]everal courts have expanded the concept of what is executory under section 365(a) of the Bankruptcy Code, recognizing that the power bestowed upon a debtor by this section is based on the trustees long-standing power to abandon obligations burdensome to the estate).

[107] Cieri & Morgan, supra note 5. See, e.g., General Dev., 177 B.R. at 1011-13. See also Jolly, 574 F.2d at 351; Procter & Gamble, Co. v. Paragon Trade Brands, Inc. (In re Paragon Trade Brands, Inc.), No. 98 60390, at 5-6 (Bankr. N.D. Ga. June 3, 1998); Drexel, 138 B.R. at 708-09; Jay L. Westbrook, A Functional Analysis of Executory Contracts, 74 Minn. L. Rev. 227 (1989).

[108] Cieri & Morgan, supra note 5 (2000) (the date that the debtor files its bankruptcy petition is the critical date for determining whether a contract is executory for purposes of the Bankruptcy Code). See, e.g., Columbia Gas, 50 F.3d at 240; Collingwood Grain, Inc. v. Coast Trading Co. (In re Coast Trading Co.), 744 F.2d 686, 692 (9th Cir. 1984); Newcomb, 744 F.2d at 624. But see In re Riodizio, 204 B.R. 417 (Bankr. S.D.N.Y. 1997) (holding that if the contract is set to expire by its terms post-petition, the critical date for determining whether the contract is executory for purposes of section 365 of the Bankruptcy Code is the date that the motion to assume or reject is filed).

[109] See, e.g., Aetna Cas. & Surety Co. v. Gamel, 45 B.R. 345, 348-49 (N.D.N.Y. 1984) (finding that, where an insurance policy terminated by its terms pending the debtors assumption or rejection decision, the debtor could not assume the policy under section 365); In re El Paso Ref., L.P., 220 B.R. 37, 40 n.6 (Bankr. W.D. Tex. 1998) (same); Hertzberg v. Loyal Am. Life Ins. Co. (In re B & K Hydraulic Co.), 106 B.R. 131, 134-36 (Bankr. E.D. Mich. 1989) (same); Lauderdale Motorcar Corp. v. Rolls Royce Motors, Inc. (In re Lauderdale Motorcar Corp.), 35 B.R. 544, 548 (Bankr. S.D. Fla. 1983) (same).

[110] Cieri & Morgan, supra note 5.

[111] See, e.g., Institut Pasteur v. Cambridge Biotech Corp., 104 F.3d 489, 490 n.2 (1st Cir. 1997) (recognizing, without discussion, that the cross-licenses of patents at issue were executory for purposes of section 365), cert. denied, 521 U.S. 1120 (1997); Perlman v. Catapult Entertainment, Inc. (In re Catapult Entertainment, Inc.), 165 F.3d 747, 749 (9th Cir. 1999) (assuming that non-exclusive licenses were executory contracts without discussion), cert. dismissed, U.S. , 120 S.Ct. 369 (1999); Everex Sys., Inc. v. Cadtrak Corp. (In re CFLC, Inc.), 89 F.3d 673, 677 (9th Cir. 1996) (holding that a patent license was an executory contract where the licensee had the continuing obligation of marking its products with the proper statutory patent notice and the licensor had the obligation to refrain from suing the licensee for patent infringement); In re Superior Toy & Mfg. Co., Inc., 78 F.3d 1169, 1175-76 (7th Cir. 1996) (disregarding the trustees argument that a license was not executory where the trustees predecessor had assumed the license under section 365 with court approval); Encino Business Management, Inc. v. Prize Frize, Inc. (In re Prize Frize, Inc.), 32 F.3d 426, 428 (9th Cir. 1994) (concluding that the license of technology, patents and proprietary rights in certain machinery was an executory contract for purposes of section 365 of the Bankruptcy Code because there were obligations on both sides which to some extent were unperformed); Otto Preminger Films, Ltd. v. Qintex Entertainment, Inc. (In re Qintex Entertainment, Inc.), 950 F.2d 1492, 1494-96 (9th Cir. 1991) (finding an exclusive film license to be an executory contract because the licensor had the continuing obligation not to license the film to third parties and the licensee had the continuing obligation to pay royalties); Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers, Inc.), 756 F.2d 1043, 1045-46 (4th Cir. 1985) (holding that licensing agreement was an executory contract where the licensor had continuing notice and forbearance obligations under the license and the licensee had the continuing obligation to pay royalties and submit quarterly accounting to the licensor), cert. denied, 475 U.S. 1057 (1986) (superseded by 11 U.S.C. 365(n) on other grounds); In re Access Beyond Techs., 237 B.R. 32, 43-44 (Bankr. D. Del. 1999) (finding that patent cross-license was executory due to various obligations remaining outstanding on both sides); In re Patient Educ. Media, Inc., 210 B.R. 237, 241 (Bankr. S.D.N.Y. 1997) (noting that courts have generally treated nonexclusive copyright and patent licenses as executory contracts); University of Connecticut Research & Dev. Corp. v. Germain (In re Biopolymers, Inc.), 136 B.R. 28, 29-30 (Bankr. D. Conn. 1992) (holding that an exclusive licensing agreement was an executory contract because obligations remained outstanding on both sides where the licensor had to forebear from granting licenses to others and to not unreasonably withhold its consent to the licensees sublicensing decisions); In re Three Star Telecast, Inc., 93 B.R. 310, 312 (Bankr. D.P.R. 1988) (characterizing a television program licensing agreement as executory for purposes of section 365); In re New York Shoes, Inc., 84 B.R. 947, 960 (Bankr. E.D. Pa. 1988) (same with respect to trademark contract); In re Best Film & Video Corp., 46 B.R. 861, 869 (Bankr. E.D.N.Y. 1985) (same with respect to movie distribution contract); Cieri & Morgan, supra note 5 (2000) (distinguishes In re Learning Publications, Inc.s and In re Stein and Day, Inc.s holding that licensing agreements are not universally considered executory contracts); Vern Countryman, Executory Contracts in Bankruptcy Part II, 58 Minn. L. Rev. 479, 501-502 (1974) (The usual patent license . . . ordinarily takes the form of an executory contract. Where there is no express undertaking by the licensor, the agreement with the licensee may still be executory because in every license, the licensor impliedly warrants the validity of its patent and this undertaking continues over the life of the license.).

[112] Cieri & Morgan, supra note 5. See, e.g., Countryman, supra note 111, at 501-502 (1974) (where there is no express undertaking by the licensor, the agreement with the licensee may still be executory because in every license, the licensor impliedly warrants the validity of its patent and this undertaking continues over the life of the license).

[113] Cieri & Morgan, supra note 5. See, e.g., Lubrizol, 756 F.2d at 1045-46 (the debtors obligation under the parties agreement to restrict its right to license its process at a certain royalty rate was sufficient to make the contract executory for purposes of section 365 of the Bankruptcy Code); Fenix Cattle Co. v. Silver (In re Select-A-Seat Corp.), 625 F.2d 290, 292 (9th Cir. 1980) (software license agreement where the non-debtor party was obligated to pay the debtor a royalty and the debtor was under a continuing obligation not to sell the software to a third party determined to be an executory contract); CFLC, 89 F.3d at 677 (finding that the non-debtor partys obligation under the parties agreement to refrain from suing the debtor for infringement was sufficient to make the contract executory for purposes of section 365 of the Bankruptcy Code); Access Beyond, 237 B.R. at 44 (finding that parties duties to refrain from suing each other under patent cross license made contract executory); Paragon Trade Brands, Inc., No. 98-60390, at 7-8 (finding that a patent owners promise not to enforce an injunction against the patent infringer/debtors customers was sufficient forbearance to render the Conversion Agreement executed between the parties executory in the debtors chapter 11 case); Biopolymers, 136 B.R. at 29-30 n.2 (The trustees contentions, that [the non-debtor partys] obligation to forbear from granting licenses to others and not to unreasonably withhold permission for sublicensing do not suffice to make the license agreement executory, are not sustainable.).

[114] Cieri & Morgan, supra note 5. See, e.g., In re Chipwich, Inc., 54 B.R. 427, 430 (Bankr. S.D.N.Y. 1985) (explaining that the contingency of a debtor/licensors obligation to defend the licensee in infringement suits and indemnify the licensee for certain losses relating to the licensed property did not prevent these obligations from being an unperformed obligation of the debtor/licensor sufficient to render the license executory); Lubrizol, 756 F.2d at 1046.

[115] Cieri & Morgan, supra note 5. See, e.g., Lubrizol, 756 F.2d at 1046; Chipwich, 54 B.R. at 430; In re Petur U.S.A. Instrument Co., Inc., 35 B.R. 561, 563 (Bankr. W.D. Wash. 1983).

[116] See Alan N. Resnick, Henry J. Sommer & Lawrence P. King, 3-365 Collier on Bankruptcy P 365.03 (15th ed. rev. 2006) [hereinafter 3-365 Collier on Bankruptcy] (The decision to assume or reject a contract or lease is subject to court approval. One court has held that the court may not grant generic approval, without a list of the particular contracts and their terms. It may be permissible, however, for the court to approve assumption or rejection of a list of contracts or leases, subject to the debtor in possessions later notice to the counterparty, to give the debtor in possession more time in which to negotiate with the counterparty before a final decision.).

[117] 11 U.S.C. 365(a) (2005); see 7-1100 Collier on Bankruptcy, supra note 18, at P 1100.07[3].

[118] See 11 U.S.C. 365(c) (2005). See, e.g., In re West Electronics Inc., 852 F.2d 79, 83 (3d Cir. 1988) (created a hypothetical test in construing Bankruptcy Code section 365); Perlman v. Catapult Entertainment, Inc. (In re Catapult Entertainment, Inc.), 165 F.3d 747, 750 (9th Cir. 1999) (adopted the West Electronics hypothetical test), cert. dismissed, U.S. , 120 S. Ct. 369 (1999); In re James Cable Partners, 27 F.3d 534, 537 (11th Cir. 1994) (same); Access Beyond Technologies, 237 B.R. 32, 48-49 (Bankr. D. Del. 1999) (same); Access Beyond, 237 B.R. at 45 (quoting Unarco Indus., Inc. v. Kelley Co., 465 F.2d 1303, 1306 (7th Cir. 1972), cert. denied, 410 U.S. 929 (1973)) (the long-standing federal rule of law with respect to the assignability of patent license agreements provides that these agreements are personal to the licensee and not assignable unless expressly made so in the agreement.). But see In re GP Express Airlines, 200 B.R. 222, 232 (Bankr. D. Neb. 1996) (criticized West Electronics); Summit Inv. and Dev. Corp. v. Leroux, 69 F.3d 608, 612-13 (1st Cir. 1995) (rejecting the West Electronics hypothetical test); In re James Cable Partners, L.P., 154 B.R. 813, 815 (D. Ga. 1993) (criticized West Electronics); Texaco, Inc. v. Louisiana Land & Exploration Co., 136 B.R. 658, 670 (D. La. 1992) (criticized West Electronics).

[119] See Blacks Law Dictionary (8th ed. 2004), cum onere (An item acquired cum onere is taken subject to existing burdens and charges.).

[120] See Tenet Healthcare Philadelphia, Inc. v. National Union of Hosp. Employees (In re Allegheny Health, Educ. and Res. Found.), 383 F.3d 169 (3d Cir. 2004); 3-365 Collier on Bankruptcy, supra note 116, at P 365.03[1] (But the nondebtor party must object if the trustee proposes to assume only a portion of the contract, or it may be bound.).

[121] See Stewart Title Guaranty Co. v. Old Republic Natl Title Ins. Co., 83 F.3d 735, 741 (5th Cir. 1996); City of Covington v. Covington Landing Ltd. Pship, 71 F.3d 1221 (6th Cir. 1995); Bildisco & Bildisco, 465 U.S. at 531 (a debtor must assume an executory contract cum onere); Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1311 (5th Cir. 1985); In re Lovitt, 757 F.2d 1035, 1040-41 (9th Cir. 1985); Cheadle v. Appleatchee Riders Assoc., 474 U.S. 849 (1985); In re Nitec Paper Corp., 11 C.B.C.2d 959, 43 B.R. 492 (S.D.N.Y. 1984); In re Village Rathskeller, Inc., 28 C.B.C.2d 293, 301, 147 B.R. 665, 671 (Bankr. S.D.N.Y. 1992); Cottman Transmissions, Inc. v. Holland Enters., Inc. (In re Holland Enters., Inc.), 25 B.R. 301, 303 (E.D.N.C. 1982); 3-365 Collier on Bankruptcy, supra note 116, at P 365.03[1] (executory contract may not be assumed in part and rejected in part); Cieri & Morgan, supra note 5 (2000) (must assume or reject contract in its entirety . . . In deciding whether to assume or reject an executory contract, a debtor must consider the contract as a whole because the Bankruptcy Code does not permit a debtor to rewrite the terms of an executory contract.).

[122] 7-1100 Collier on Bankruptcy, supra note 18, at P 1100.07[3].

[123] See Adventure Resources v. Holland, 137 F.3d 786 (4th Cir. 1998); Collingwood Grain Inc. v. Coast Trading Inc. (In re Coast Trading Co.), 744 F.2d 686, 692-93, 11 C.B.C.2d 790, 797 (9th Cir. 1984).

[124] Nostas Assocs. v. Costich (In re Klein Sleep Prods., Inc.), 78 F.3d 18, 30 (2d Cir. 1996).

[125] 7-1100 Collier on Bankruptcy, supra note 18, at P 1100.07[3].

[126] George M. Treister, et al., Fundamentals of Bankruptcy Law, 5.04(f), at 249 (5th ed. 2004); 3-365 Collier on Bankruptcy, supra note 116, at P 365.03[1]. It would stand to reason, therefore, that rejection of a partially performed contract is within the rejection power, because it relieves the estate of any remaining performance. See 3-365 Collier on Bankruptcy, supra note 116, at P 365.02. One court has ruled to the contrary, however, concluding that the debtor in possession may not reject the executory portions of a partially performed contract. See In re Mirant Corp., 318 B.R. 100 (N.D. Tex. 2004). The result seems questionable and in conflict with the widely-accepted Countryman definition of executory contract. See 3-365 Collier on Bankruptcy, supra note 116, at P 365.02.

[127] Normally, the breach is deemed to have occurred immediately prior to the date of the filing of the petition and the rejection claim is thus a pre-petition claim. Alan N. Resnick, Henry J. Sommer & Lawrence P. King, 6-721 Collier on Bankruptcy P 721.02[4][a] (15th ed. rev. 2006) [hereinafter 6-721 Collier on Bankruptcy]; see 11 U.S.C. 365(g)(1) (2005). In the event, however, that a chapter 11, 12 or 13 case is converted to a case under chapter 7, and the chapter 7 trustee rejects an executory contract or unexpired lease which had been assumed in the superseded case, the chapter 7 rejection constitutes a breach of the contract or lease immediately before the date of conversion. The damage claim would, therefore, enjoy chapter 11 administrative priority status, subordinate to chapter 7 administrative claims pursuant to Code section 726. If the contract or lease is assumed by the trustee in the course of the chapter 7 case, then subsequently rejected by the trustee during the chapter 7 case, the rejection constitutes a breach of the contract at the time of the rejection. 6-721 Collier on Bankruptcy, supra note 127; see 11 U.S.C. 365(g)(2)(B) (2005); Nostas Assocs. v. Costich (In re Klein Sleep Prods., Inc.), 78 F.3d 18, 28-29 (2d Cir. 1996) (claims for future rent arising from leases assumed by chapter 11 debtor but ultimately rejected by subsequently appointed chapter 11 trustee are not capped by Code section 502(b)(6)).

[128] 11 U.S.C. 365(g) (2005).

[129] See 7-1100 Collier on Bankruptcy, supra note 18, at P 1100.07[3].

[130] 11 U.S.C. 365 (2005).

[131] 3-365 Collier on Bankruptcy, supra note 116, at P. 365.03[3].

[132] But see id. (A conspicuous exception to the business judgment test is the standard for the rejection of collective bargaining agreements. Concern over the rights of employees in such cases produced a more restrictive standard, which has been codified in section 1113.).

[133] See Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 29 C.B.C.2d 1341 (2d Cir. 1993); Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 12 C.B.C.2d 1202 (5th Cir. 1985); In re Prime Motors, Inc., 124 B.R. 378 (Bankr. S.D. Fla. 1991); 3-365 Collier on Bankruptcy, supra note 116, at P. 365.03[2].

[134] Washington Bancorporation v. FDIC, 812 F. Supp. 1256, 1267 (D.C. Cir. 1993); Alan N. Resnick, Henry J. Sommer & Lawrence P. King, 7-1108 Collier on Bankruptcy P. 1108.07 (15th ed. rev. 2006) [hereinafter 7-1108 Collier on Bankruptcy].

[135] See, e.g., International Ins. Co. v. Johns, 874 F.2d 1447, 1458 n. 20 (11th Cir. 1989); 7-1108 Collier on Bankruptcy, supra note 134.

[136] 7-1108 Collier on Bankruptcy, supra note 134.

[137] Id. at P. 1108.07[3]; Cieri & Morgan, supra note 5 (2000) (For the most part, courts are reluctant to interfere with a debtors decision under the business judgment standard absent a showing of bad faith or abuse of discretion.).

[138] 3-365 Collier on Bankruptcy, supra note 116, at P 365.03 [2] (Although the business judgment is the proper standard for determining whether to permit assumption or rejection of an executory contract or unexpired lease, the court should focus on the business judgment of the trustee or debtor in possession, not on its own business judgment.); Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 1099, 29 C.B.C.2d 1341, 1347 (2d Cir. 1993), cert. dismissed, 511 U.S. 1026, 114 S. Ct. 1418, 128 L. Ed. 2d 88 (1994) (citing In re Minges, 602 F.2d 38, 43 (2d Cir. 1979)) ([T]he process of deciding a motion to assume is one of the bankruptcy court placing itself in the position of the trustee or debtor-in-possession and determining whether assuming the contract would be a good business decision or a bad one.); 7-1108 Collier on Bankruptcy, supra note 134, at P 1108.07[3].

[139] Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 1099, 29 C.B.C.2d 1341, 1347 (2d Cir. 1993), cert. dismissed, 511 U.S. 1026, 114 S. Ct. 1418, 128 L. Ed. 2d 88 (1994) (citing In re Minges, 602 F.2d 38, 43 (2d Cir. 1979)) ([T]he bankruptcy courts business judgment in deciding a motion to assume is just that--a judgment of the sort a businessman would make.).

[140] Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 1099, 29 C.B.C.2d 1341, 1347 (2d Cir. 1993), cert. dismissed, 511 U.S. 1026, 114 S. Ct. 1418, 128 L. Ed. 2d 88 (1994) (citing In re Minges, 602 F.2d 38, 43 (2d Cir. 1979)); see also Nostas Assocs. v. Costich (In re Klein Sleep Prods., Inc.), 78 F.3d 18, 25 (2d Cir. 1996); In re Helm, 55 C.B.C.2d 817, 335 B.R. 528 (Bankr. S.D.N.Y. 2006); Official Comm. for Unsecured Creditors v. Aust (In re Network Access Solutions, Inc.), 330 B.R. 67 (Bankr. D. Del. 2005); In re Vencor, Inc., 2003 Bankr. LEXIS 659 (Bankr. D. Del. Apr. 30, 2003); In re Optimum Merchants Servs., 163 B.R. 546, 551-52 (Bankr. D. Neb. 1994).

[141] See, e.g., Group of Institutional Invs., 318 U.S. at 550 (explaining that, under the business judgment test, the provisions of a lease must be attractive to the debtor and its creditors in order for the debtor to assume the lease); Lubrizol, 756 F.2d at 1047 (explaining that, under the business judgment test, a court only is reviewing the debtors decision to either assume or reject the executory contract to determine whether such a decision is advantageous to the debtor and its estate). See also In re Federated Dept Stores, Inc., 131 B.R. 808, 812 (S.D. Ohio 1991) (explaining that the business judgment test requires the bankruptcy court to examine the impact of the decision to reject on the debtors, not the general unsecured creditors); Wheeling-Pittsburgh Steel Corp. v. West Penn Power Co. (In re Wheeling-Pittsburgh Steel Corp.), 72 B.R. 845, 847 (Bankr. W.D. Pa. 1987) (Once the debtor establishes that rejection will benefit the estate, our inquiry ends.).

[142] In re Mirant Corp., 318 B.R. 100 (N.D. Tex. 2004) (public interest standard applies to FERC-regulated power purchase agreement); 3-365 Collier on Bankruptcy, supra note 116, at P 365.03[2].

[143] Shell Oil Co. v. Waldron, 785 F.2d 936 (11th Cir. 1986) (petition dismissed before considering damage issue); In re Food City, Inc., 94 B.R. 91, 9-94 (Bankr. W.D. Tex. 1988); In re W.L. Assocs., Inc., 16 C.B.C.2d 834, 841, 71 B.R. 962, 968 (Bankr. E.D. Pa. 1987) (recognizing that solvent debtor may have to disgorge any advantage); Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 1099, 29 C.B.C.2d 1341, 1347 (2d Cir. 1993); 3-365 Collier on Bankruptcy, supra note 116, at P 365.03[2] (such a consideration, however, should not lead the court to adjudicate disputed aspects of the contract or lease).

[144] 11 U.S.C. 365(d)(2) (2005).

[145] See Philadelphia Company v. Dipple, 312 U.S. 168, 44 AM. B.R. (N.S.) 687, 61 S. Ct. 538, 85 L. Ed. 651 (1941). See also Data- Link, 715 F.2d at 379; South Street Seaport Ltd. Partnership v. Burger Boys, Inc. (In re Burger Boys, Inc.), 94 F.3d 755, 761 (2d Cir. 1996) (citing Theatre Holding Corp. v. Mauro, 681 F.2d 102, 105-06 (2d Cir. 1982)); In re Dunes Casino Hotel, 63 B.R. 939, 949-50 (D.N.J. 1986); In re Mayer Pollock Steel Corp., 157 B.R. 952, 964 (Bankr. E.D. Pa. 1993). In determining what a reasonable time should be under Bankruptcy Code section 365(d)(2), certain factors are to be considered, including the nature of the interests at stake, the balance of hurt to the litigants, the good to be achieved, the safeguards afforded these litigants, and whether the action to be taken is so in derogation of Congress scheme that the court may be said to be arbitrary. In re Lionel Corp., 23 B.R. 224, 225 (Bankr. S.D.N.Y. 1982).

[146] In re Lionel Corp., 23 B.R. 224, 225 (Bankr. S.D.N.Y. 1982). See, e.g., Burger Boys, 94 F.3d at 761. See Cieri & Morgan, supra note 5 (2000) (The legislative history to section 365(d)(2) indicates that it was intended to prevent parties in contractual or lease relationships with the debtor from being left in doubt concerning their status vis-a-vis the estate. H.R. Rep. No. 95-595, at 348 (1977); S. Rep. No. 95-989, at 57 (1978)).

[147] See, e.g., Krafsur v. UOP (In re El Paso Refinery, L.P.), 196 B.R. 58, 72 (Bankr. W.D. Tex. 1996); Data-Link Sys., Inc. v. Whitcomb & Keller Mortgage Co. (In re Whitcomb & Keller Mortgage Co.), 715 F.2d 375, 378-79 (7th Cir. 1983); Seacost Prods., Inc. v. Spring Valley Farms, Inc., 34 B.R. 379 (M.D.N.C. 1983); Continental Energy Assocs. Ltd. Partnership v. Hazelton Fuel Management Co. (In re Continental Energy Assocs. Ltd. Partnership), 178 B.R. 405 (Bankr. M.D. Pa. 1995); McLean Indus., Inc. v. Medical Lab. Automation, Inc. (In re McLean Indus., Inc.), 96 B.R. 440, 447-50 (Bankr. S.D.N.Y. 1989); Skeen v. Denver Coca-Cola Bottling Co. (In re Feyline Presents, Inc.), 81 B.R. 623 (Bankr. D. Colo. 1988); In re Chick Smith Ford, 46 B.R. 515 (Bankr. M.D. Fla. 1985).

[148] Cieri & Morgan, supra note 5.

[149] See 11 U.S.C. 365(d)(2) (2005); Cieri & Morgan, supra note 5. See, e.g., Bildisco & Bildisco, 465 U.S. at 532 (holding that an executory contract is not enforceable against the bankruptcy estate until the contract is assumed by the debtor under section 365 of the Bankruptcy Code); Public Service Co. v. New Hampshire Elec. Coop., 884 F.2d 11, 14 (1st. Cir. 1989) (Ordinarily, the debtor need not commit itself to assumption or rejection of such a contract until a reorganization plan is confirmed. 11 U.S.C. 365(d)(2). In the meantime, the executory contract remains in effect and creditors are bound to honor it.); In re Gunter Hotel Assoc., Ltd., 96 Bankr. 696, 700 (Bankr. W.D. Tex. 1988).

[150] Cieri & Morgan, supra note 5.

[151] 11 U.S.C. 503(b) (2005). See Cieri & Morgan, supra note 5.

[152] But see Cieri & Morgan, supra note 5 (2000) (Courts are often times reluctant to force a debtor to make an early assumption or rejection decision.). See, e.g., Data-Link, 715 F.2d at 379 (affirming the bankruptcy courts decision preserving the debtors reasonable time to assume or reject an unexpired computer lease even though it was evident that the lease was necessary to the debtors reorganization); Procter & Gamble, Co. v. Paragon Trade Brands, Inc. (In re Paragon Trade Brands, Inc.), No. 98-60390, at 9-11 (Bankr. N.D. Ga. June 3, 1998) (denying the creditors motion to compel assumption or rejection of an executory contract because forcing the debtor to assume or reject the contract could prejudice the debtors estate by binding the estate to the terms of the contract or subjecting the estate to a large rejection damages claim, respectively, depending upon the resolution of the underlying patent infringement lawsuit); In re Wheeling-Pittsburgh Steel Corp., 54 B.R. 385, 388-89 (Bankr. W.D. Pa. 1985) (denying the creditors motion to compel assumption or rejection where the debtor was timely performing its obligations under the contract).

[153] 11 U.S.C. 365(d)(2) (2005). It is important to note that in the chapter 7 context, if the trustee does not assume or reject an executory contract within 60 days after the date that the case was commenced (as may be extended by the court for cause), the contract is deemed rejected. 11 U.S.C. 365(d)(1) (2005).

[154] See, e.g., Medical Malpractice Ins. Assn v. Hirsch (In re Lavigne), 114 F.3d 379, 386-87 (2d Cir. 1997); Eastover Bank for Savs. v. Sowashee Venture (In re Austin Dev. Co.), 19 F.3d 1077, 1082-83 (5th Cir. 1994); In re Bergt, 241 B.R. 17, 30-32 (Bankr. D. Alaska 1999); CASC Corp. v. Milner II (In re Locke), 180 B.R. 245, 259 (Bankr. C.D. Cal. 1995); In re Giles Assoc., Ltd., 92 B.R. 695 (Bankr. W.D. Tex. 1988). But see Commercial Fin., Ltd. v. Hawaii Dimensions, Inc. (In re Hawaii Dimensions, Inc.), 47 B.R. 425, 427-28 (Bankr. D. Haw. 1985) (holding that rejection of a lease operates to terminate the lease); Hassett v. Sprague Elec. Co. (In re O.P.M. Leasing Serv., Inc.), 30 B.R. 642 (Bankr. S.D.N.Y. 1983) (same).

[155] See 11 U.S.C. 365(g)(1) (2005). See also Aslan v. Sycamore Inv. Co. (In re Aslan), 909 F.2d 367, 371-72 (9th Cir. 1990) (explaining that the date of breach is the date immediately preceding the petition date and not some earlier or different date); In re O.P.M. Leasing Svcs., Inc., 79 B.R. 161, 167 (Bankr. S.D.N.Y. 1987) (explaining that a non-debtor partys damages must be discounted to the petition date).

[156] See 11 U.S.C. 502(g) (2005).

[157] See S. Rep. No. 100-505, at 4-5 (1988) (explaining that the bill is intended to respond to a particular problem arising out of recent court decisions under Section 365).

[158] Id. at 4 (1988). See also Gucci, 126 F.3d at 393-94 (explaining that section 365(n) was enacted, in part, to ameliorate the adverse impact of the rejection of a pre-petition license on a non-debtor licensees business); Encino Bus. Management, Inc. v. Prize Frize, Inc. (In re Prize Frize, Inc.), 32 F.3d 426, 428 (9th Cir. 1994) (same); In re EI Intl, 123 B.R. 64-66 (Bankr. D. Idaho 1991) (same).

[159] In enacting section 365(n), Congress effectively overruled Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers, Inc.), which had permitted a debtor in possession to reject a technology licensing agreement and terminate the licensees right to use the license. Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers, Inc.) 756 F.2d 1043, 12 C.B.C.2d 310 (4th Cir. 1985), cert. denied, 475 U.S. 1057, 106 S. Ct. 1285, 89 L. Ed. 2d 592 (1986) (for purposes of section 365, the licensing agreement was executory at the time of its rejection by the debtor-licensor, and licensees only remedy was to file a claim for money damages since it could not seek specific performance of the licensing agreement).

[160] 3-365 Collier on Bankruptcy, supra note 116, at P 365.14. There are three basic points to keep in mind with respect to section 365(n) of the Bankruptcy Code. Cieri & Morgan, supra note 5. First and foremost, section 365(n) applies only where (1) the debtor is the licensor under the license agreement and (2) the license is one for intellectual property as such term is defined in section 101(35A) of the Bankruptcy Code. See 11 U.S.C. 365(n)(1) (2005); 11 U.S.C. 101(35A) (2005); Prize Frize, 32 F.3d at 428.; Gucci, 126 F.3d at 394 (noting that the definition of intellectual property set forth in section 101(35A) of the Bankruptcy Code does not include trademarks); Cieri & Morgan, supra note 5. Second, section 365(n) applies to any intellectual property license executed pre-petition, even if the term of the license had not yet begun on the bankruptcy petition date. See 3-365 Collier on Bankruptcy, supra note 116, at P 365.14[1][a] (noting that, unlike its counterpart section 365(h), which governs the rights of a real property lessee upon rejection of an unexpired lease of real property by a debtor/lessor, section 365(n) does not require the term of a license to have commenced pre-petition in order for the license to fall within the protections of the section); Cieri & Morgan, supra note 5. See also S. Rep. No. 100-505, at 8 (1988) (It is important to note that the amendment, when referring to retention of rights under such contract, deliberately omits the phrase the term of which has commenced appearing in the somewhat parallel subsection 365(h) . . . .). Finally, the basic principles underlying section 365, such as evaluating a debtors assumption or rejection decision under the business judgment standard, apply to intellectual property licenses. See 3-365 Collier on Bankruptcy, supra note 116, at P 365.14[1][a]; Cieri & Morgan, supra note 5.

[161] 3-365 Collier on Bankruptcy, supra note 116, at P 365.14.

[162] See 11 U.S.C. 101(35A) (2005).

[163] See 11 U.S.C. 101(35A) (2005).

[164] See, e.g., Donald S. Chisum & Michael A. Jacobs, Understanding Intellectual Property Law 1E, at 1-3 (1992) [hereinafter Understanding Intellectual Property Law] (Intellectual property typically includes utility patents, trade secrets, copyrights, trademarks, design patents, plant patents, plant variety protection, semiconductor mask work protection, false advertising remedies, misappropriation, and public rights.).

[165] The legislative history to section 101(35A) indicates that because trademark, trade name, and service mark license agreements depend to a large extent on control of the quality of the products or service licensed, Congress found such license agreements to be beyond the scope of the Intellectual Property Act. See S. Rep. No. 100-505, at 5 (explaining that since these matters [i.e., trademark, trade name, and service mark license agreements] could not be addressed without more extensive study, it was determined to postpone congressional action in this area and to allow the development of equitable treatment of this situation by bankruptcy courts); Cieri & Morgan, supra note 5.

[166] Cieri & Morgan, supra note 5 (2000); Warren E. Agin, Bankruptcy and Secured Lending in Cyberspace 10, at 10-9 (2000) [hereinafter Agin].

[167] See Donald C. Chisum, 1-OV Chisum on Patents 1 (2007) (Patent law protects new, unobvious, and useful inventions, such as machines, devices, chemical compositions, and manufacturing processes. To obtain a patent grant, an inventor must file, in a timely fashion, an application with the United States Patent and Trademark Office (PTO). The application must include a specification describing and precisely claiming the invention. The PTO assigns each application to an examiner with technical training in the pertinent technology who conducts a search of the prior art and determines whether the applicants invention complies with the legal requirements of patentability: novelty, utility, nonobviousness, enabling disclosure, and clear claiming. If the examiner reaches a favorable decision, he or she allows the claims. In due course, the PTO issues a patent. The patent is a printed publication and includes (1) the complete specification as filed by the inventor, with any amendments made during examination, and (2) a cover sheet giving data on the patent, such as the patent number, the issue date, the application filing date, the inventor, and prior art publications and patents cited during the examination. Patents are important sources of technical information. A patent confers the right to exclude others from making, using, or selling the claimed invention in the United States for a term of 17 years from the issue date. A patent owner may file a civil suit for infringement against anyone who, without authority, makes, uses or sells the patented invention. Remedies for infringement include preliminary and permanent injunctions, damages, (enhanced damages when infringement is willful), attorney fees in exceptional cases, and prejudgment interest. Patents have the attributes of personal property and may be assigned or licensed.).

[168] Copyright is a form of protection grounded in the U.S. Constitution and granted by law to protect unpublished and published original works of authorship including literary, dramatic, musical, and artistic works, such as poetry, novels, movies, songs, computer software, and architecture. Copyright does not protect facts, ideas, systems, or methods of operation; although it may protect the way the author expresses these things. For the authors work to be protected, the author does not need to register his or her work. The authors work is under copyright protection the moment it is created and fixed in a tangible form that it is perceptible either directly or with the aid of a machine or device. Registration is recommended for a number of reasons. Many choose to register their works because they wish to have the facts of their copyright on the public record and have a certificate of registration. Registered works may be eligible for statutory damages and attorneys fees in successful litigation. Finally, if registration occurs within 5 years of publication, it is considered prima facie evidence in a court of law. Registration is required if the author wishes to bring a lawsuit for infringement of a U.S. work. See US Copyright Office Copyright in General (FAQ), available at http://www.copyright.gov/help/faq/faq-general.html#what (last visited April 04, 2007).

[169] Unlike patent and copyright law, trade secret law is a creature of state, and not federal, law. As a result, a partys rights with respect to trade secrets may vary depending upon the laws of the particular state governing the transaction. Cieri & Morgan, supra note 5 (2000) (Information constitutes a trade secret if it derives economic value . . . from not being generally known to, and not being readily ascertainable by proper means by, [sic] other persons and it is the subject of efforts that are reasonable under the circumstances to maintain secrecy. The type of information typically considered to be a trade secret includes formulae, data compilations, programs, devices, processes, and customer lists. Likewise, the Restatement defines a trade secret as any formula, pattern, device or compilation of information which is used in ones business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. The owner of a trade secret need take no special action to establish its ownership interest in the trade secret; however, this ownership interest is only protected for so long as the trade secret is withheld from the public domain. Information that is public knowledge or that is generally known in an industry cannot be a trade secret.).

[170] See 11 U.S.C. 365(n)(4) (2005); 11 U.S.C. 365(d)(2) (2005); Cieri & Morgan, supra note 5.

[171] To the extent provided in such contract or any agreement supplementary to such contract. 11 U.S.C. 365(n)(4)(A)(i) (2005).

[172] 11 U.S.C. 365(n)(4)(A)(i) (2005).

[173] Including any embodiment of such intellectual property to the extent protected by applicable non-bankruptcy Law. 11 U.S.C. 4(A)(ii) (2005).

[174] 11 U.S.C. 365(n)(4)(A)(ii) (2005).

[175] 11 U.S.C. 365(n)(4)(B) (2005).

[176] See 11 U.S.C 365(n)(1) (2005).

[177] See 11 U.S.C 365(n) (2005). On the non-assignability of a license by the licensee, see Harris v. Emus Records Corp., 734 F.2d 1329, 1333 (9th Cir. 1984) (Act case).

[178] 3-365 Collier on Bankruptcy, supra note 116, at P 365.14[1][a]. See 11 U.S.C. 365(n)(1)(B)(ii) (2005) (as such rights existed immediately before the case commenced); S. Rep. No. 100-505, at 8 (1988).

[179] 11 U.S.C. 365(n)(1)(A) (2005).

[180] 11 U.S.C. 502(g) (2005); Cieri & Morgan, supra note 5.

[181] But see Cieri & Morgan, supra note 5 (2000) (explains how liquidated damage provisions may assist in the calculation of damages).

[182] Cieri & Morgan, supra note 5.

[183] Id.

[184] Including a right to enforce any exclusivity provision of such contract, but excluding any other right under applicable non-bankruptcy law to specific performance of such contract. 11 U.S.C. 365(n)(1)(B)(i) (2005).

[185] The reference to supplementary agreements is intended to include agreements of the licensee with the debtor and third parties, whether or not rejected by the debtor or trustee. Id.

[186] Including any embodiment of such intellectual property to the extent protected by applicable non-bankruptcy law. Id.

[187] Id.

[188] 11 U.S.C. 365(n)(1)(B)(ii) (2005). This revision mirrors the relief provided to a lessee of real property under an unexpired lease with a lessor/debtor and to a purchaser of real property under an executory contract with a seller/debtor under sections 365(h) and 365(i), respectively, of the Bankruptcy Code. See 11 U.S.C. 365(h), (i) (2005). See also S. Rep. No. 100-505, at 5-6 (1988).

[189] 3-365 Collier on Bankruptcy, supra note 116, at P 365.1[1][b].

[190] See 11 U.S.C. 365(n)(2), (3) (2005) (noting that a trustee or debtor in possession need only allow the licensee to exercise its rights under the license and provide the licensee with the intellectual property and any embodiment thereof to which it is entitled under the license). See also S. Rep. No. 100-505, at 9 (1988) (If the trustee has chosen to reject the license, the licensee, although entitled to elect to retain the use of the existing intellectual property without interference, cannot otherwise compel affirmative post-petition performance under the license.); Cieri & Morgan, supra note 5 (2000) (Most notably, section 365(n)(1)(B) does not protect a licensees right to future performance by the debtor/licensor--i.e., other than the enforcement of an exclusivity clause, a licensee may not exercise any rights under applicable nonbankruptcy law to specific enforcement of the contract.). But see 3-365 Collier on Bankruptcy, supra note 116, at P 365.1[1][b] ([W]hen the licensee has elected to retain its rights, upon written request of the licensee, the trustee is required by section 365(n)(3) to furnish to the licensee any intellectual property held by the trustee, including any embodiment of the intellectual property, such as a prototype, and not to interfere with the rights of the licensee as provided in such contract or any supplementary agreement, including any right to obtain such intellectual property.).

[191] See Cieri & Morgan, supra note 5 (2000) (A payment need not be labeled a royalty payment to fall within a licensees obligation under section 365(n)(2). Some courts have interpreted the term royalties broadly to include any fee or payment due from the licensee under the license agreement, including the initial licensing fee.). See also, e.g., Prize Frize, 32 F.3d at 428-29 (holding that a licensees obligation to pay royalties under section 365(n)(2) of the Bankruptcy Code encompasses all payments by [a] licensee to [a] licensor for the use of intellectual property, including a license fee). See also Microsoft Corp. v. DAK Indus., Inc. (In re DAK Indus., Inc.), 66 F.3d 1091, 1096 n.3 (9th Cir. 1995) (Royalty payments owed to the debtor under 365(n) are interpreted broadly in order to insure that the estate receives full payment when a licensee takes advantage of the debtors intellectual property.) (citing Prize Frize, 32 F.3d at 428).

[192] 11 U.S.C. 365(n)(2)(C) (2005). The requirement that all royalty payments be made has been held to include license fees. Encino Business Management, Inc. v. Prize Frize, Inc. (In re Prize Frize, Inc.), 32 F.3d 426, 31 C.B.C.2d 1422 (9th Cir. 1994) (royalties construed broadly).

[193] 3-365 Collier on Bankruptcy, supra note 116, at P 365.1[1][c]. See, e.g, Schlumberger Resource Management Servs., Inc. v. CellNet Data Sys., Inc. (In re CellNet Data Sys., Inc.), 327 F.3d 242 (3d Cir. 2003) (buyer did not purchase license agreement but purchased licensed intellectual property; court held that estate was entitled to future royalties).

[194] 11 U.S.C. 365(n)(2)(C)(i) (2005).

[195] 11 U.S.C. 365(n)(2)(C)(ii) (2005).

[196] 3-365 Collier on Bankruptcy, supra note 116, at P 365.14[1][d].

[197] Id. See also In re EI Intl, 123 B.R. 64 (Bankr. D. Idaho 1991) (damages governed by Bankruptcy Code not choice of law provision in contract or liquidated damages clause); Cieri & Morgan, supra note 5 (2000) (As a result, any claim for damages that the licensee may hold against the licensor, whether pre-petition or post-petition, is relegated to a general unsecured claim against the debtor/licensors estate.).

[198] Cieri & Morgan, supra note 5. See S. Rep. No. 100-505, at 10-11 (1988).

[199] 11 U.S.C. 365(n)(2)(A) (2005).

[200] 11 U.S.C. 365(n)(3)(A) (2005).

[201] 11 U.S.C. 365(n)(3)(B) (2005).

[202] Marcelo Halpern, Bankruptcy Issues in Intellectual Property Licensing, 879 PLI/Pat 575, 591 (2006).

[203] Id.

[204] Id.

[205] 11 U.S.C. 365(n)(1)(A) (2005).

[206] Halpern, supra note 202, at 594; Cieri & Morgan, supra note 5.

[207] For example, failure to perform certain obligations that may be difficult to fulfill by a Licensor in bankruptcy. Halpern, supra note 202, at 594; Cieri & Morgan, supra note 5.

[208] Cieri & Morgan, supra note 5.

[209] Halpern, supra note 202, at 594; Cieri & Morgan, supra note 5.

[210] Cieri & Morgan, supra note 5. Because a debtor must assume or reject an executory contract in toto, some courts have determined that rejection of an executory contract under section 365 of the Bankruptcy Code forecloses the enforcement of a liquidated damages clause contained in the rejected contract. See, e.g., In

re EI Intl, 123 B.R. 64 (Bankr. D. Idaho 1991); In re Transamerican Natural Gas Corp., 79 B.R. 663 (Bankr. S.D. Tex. 1987); In re Davies, 27 B.R.

898 (Bankr. E.D.N.Y. 1983). See also Steinberg and Gerber, supra note 115, at 539, 545. But see In re Independent Am. Real Estate, Inc., 146 B.R. 546 (Bankr. N.D. Tex. 1992) (enforcing a liquidated damages provision after rejection of executory contract). Thus, although there is no harm in including a liquidated damages provision in the license, such provision may not be enforceable if the license ultimately is rejected by the debtor. In addition, to be enforceable, the liquidated damages provision must comply with and be enforceable under applicable non-bankruptcy law. Generally, a liquidated damages provision is enforceable if it provides for reasonable damages in light of the anticipated or actual loss caused by the breach and the difficulties of establishing the loss. See Restatement (Second) of Contracts 356 (1981).

[211] Cieri & Morgan, supra note 5.

[212] Id.

[213] See Arthur Linton Corbin, 11-58 Corbin on Contracts 58.1 (2006) [hereinafter 11-58 Corbin on Contracts].

[214] See Id.

[215] See Id.

[216] See Id. (The U.C.C. and the Restatement (Second) have reshaped these criteria somewhat. Under both the traditional and newer formulations, the third criterion is generally determinative, but under the newer formulation the question is whether the sum is a reasonable pre-estimate of the probable or actual loss.).

[217] For example, servicing and/or research and development obligations. Cieri & Morgan, supra note 5.

[218] Id.

[219] Halpern, supra note 202, at 594.

[220] Id.

[221] Id.

[222] See 11 U.S.C. 365(n) (2005).

[223] Halpern, supra note 202, at 592

[224] Cieri & Morgan, supra note 5.

[225] Id.

[226] Id.

[227] Id.

[228] Id. (The justification for such a reduction would be that the intellectual property is worth less to the licensee without the improvements. Thus, if the licensor files for bankruptcy and rejects the license (thereby, potentially eliminating the licensees rights to improvements), the licensees royalty obligations should it elect to retain its rights under the agreement would be arguably reduced.).

[229] Id.

[230] Cieri & Morgan, supra note 5.

[231] Id.

[232] 11 U.S.C. 365(n) (2005); Halpern, supra note 202, at 593; Cieri & Morgan, supra note 5. See, e.g., Szombathy v. Controlled Shredders, Inc., 1997 U.S. Dist. LEXIS (N.D. Ill. 1997) (holding improvements to patented goods created after the date of the petition were not part of the debtors estate).

[233] Cieri & Morgan, supra note 5.

[234] Id.

[235] 11 U.S.C. 365(n)(3)(A) (2005).

[236] See Blacks Law Dictionary (8th ed. 2004), escrow (A legal document or property delivered by a promisor to a third party to be held by the third party for a given amount of time or until the occurrence of a condition, at which time the third party is to hand over the document or property to the promisee).

[237] Cieri & Morgan, supra note 5. See also Halpern, supra note 202, at 593 (the licensee should (1) [d]raft release conditions to avoid exclusive reliance on financially based and bankruptcy triggers that could be deemed to be ipso facto clauses and rendered inoperable under the automatic stay; and (2) [m]ake sure that the underlying license includes present grant of source code license -- not a springing license after bankruptcy.). See Blacks Law Dictionary (8th ed. 2004), escrow account (A bank account, generally held in the name of the depositor and an escrow agent, that is returnable to the depositor or paid to a third person on the fulfillment of specified conditions. -- Also termed escrow deposit.).

[238] See Blacks Law Dictionary (8th ed. 2004), escrow agreement (The instructions given to the third-party depositary of an escrow.).

[239] Cieri & Morgan, supra note 5.

[240] See Scott A. Steinberg & Michael A. Gurber, Software Licensing: Protecting Intellectual Property in Bankruptcy, 6 J. Bankr. L. & P. 535, 546-47 (1996-97).

[241] The escrow agreement also should provide that the licensor is given a specified period of time within which to cure or dispute the existence of any breach or failure to perform. If the licensor cures or disputes the alleged breach or failure to perform, the escrow agent would then be obligated to retain possession of the intellectual property until the licensee and licensor agree, or a predetermined dispute resolution mechanism decides, whether a breach or failure to perform has occurred.

[242] If the licensee desires to retain its rights under the license agreement.

[243] Cieri & Morgan, supra note 5.

[244] See, e.g., id. ([O]nce the debtor/licensor rejects the license agreement, it no longer is obligated to perform any research or development services with respect to the intellectual property set forth in the license. Rather, the debtor/licensor may be able to undertake such research or development efforts postpetition on its own behalf and license the resulting product to a third party. Likewise, if the intellectual property is licensed to the licensee as part of a servicing, marketing, or production agreement, a court may find the debtors licensing obligations de minimus to the contract as a whole and characterize the contract as something other than an intellectual property license. In such a scenario, a licensee receives no protection from section 365(n) of the Bankruptcy Code.).

[245] See section III. supra.

[246] Cieri & Morgan, supra note 5.

[247] See section V.A. infra.

[248] See section V.B. infra.

[249] See Halpern, supra note 202; Cieri & Morgan, supra note 5.

[250] See Halpern, supra note 202; Cieri & Morgan, supra note 5.

[251] Including title.

[252] Cieri & Morgan, supra note 5.

[253] See Chesapeake Fiber Packaging Corp. v. Sebro Packaging Corp., 143 B.R. 360, 375 (Bankr. D. Md. 1992) (finding that because the parties agreement transferred title to the subject patent, the transfer was an outright grant of the patent (as opposed to a license to use the patent) and therefore, was not an executory contract for purposes of section 365 of the Bankruptcy Code), aff'd, 8 F.3d 817 (4th Cir. 1993); In re Access Beyond, 237 B.R. 32, 44-45 (Bankr. D. Del. 1999) (concluding that agreement at issue was a patent license but noting that agreement could not be an executory contract if it were a sale).

[254] Cieri & Morgan, supra note 5.

[255] Id.

[256] Id.

[257] Id.

[258] Id.

[259] Id.

[260] Cieri & Morgan, supra note 5.

[261] Id.

[262] See 11 U.S.C. 541(a) (2005).

[263] In this respect, it is imperative that the original owner completely transfer title to the intellectual property (and all rights associated therewith) to the trust on the effective date of the trust agreement and have no further obligations to the trust thereafter. See, e.g., In re Structurlite Plastics Corp., 86 B.R. 922, 926-28 (Bankr. S.D. Ohio 1988) (holding that where debtors only obligation under trust agreement was to fund the trust, trust agreement was not an executory contract for purposes of section 365 of the Bankruptcy Code). The limited obligation of the trustee to pay and the original owner to receive income generated by the trust res (i.e., the intellectual property) generally is not sufficient to render the trust agreement executory. See, e.g., In re Structurlite Plastics Corp., 86 B.R. 922, 926-27 (Bankr. S.D. Ohio 1988). Nevertheless, if the trust agreement requires the original owner to do or not to do any act other than transferring the trust res, the trust agreement may be characterized as an executory contract subject to rejection under section 365 of the Bankruptcy Code. See, e.g., In re Bellamah Community Dev., 107 B.R. 337, 342 (Bankr. D. N.M. 1989) (comparing the real property trust agreement to a land installment contract and concluding that, because both the seller and buyer of the real property had unperformed obligations, the trust agreement was an executory contract under the Countryman definition); In re Texaco, Inc., 73 B.R. 960, 964-65 (Bankr. S.D.N.Y. 1987) (same with respect to an indenture trust agreement).

[264] Cieri & Morgan, supra note 5. See 11 U.S.C. 101(9) (2005) (defines the term corporation to include a business trust).

[265] Cieri & Morgan, supra note 5.

[266] Id.

[267] Id.

[268] Id. (other than licensing the intellectual property).

[269] Id.

[270] Id.

[271] Cieri & Morgan, supra note 5.

[272] See Blacks Law Dictionary (8th ed. 2004), supermajority (A fixed proportion greater than half, such as two-thirds, esp. a percentage required for a measure to pass.).

[273] Cieri & Morgan, supra note 5.

[274] Id.

[275] Id.

[276] Id.

[277] Id.

[278] Id.

[279] See Alan N. Resnick, Henry J. Sommer & Lawrence P. King, 2-105 Collier on Bankruptcy P 105.09[1] (15th ed. rev. 2006) [hereinafter 2-105 Collier on Bankruptcy] (The bankruptcy court has the authority, through its general discretionary equitable powers, to substantively consolidate cases. In substantively consolidated cases, the assets and liabilities of different legal entities may be consolidated and dealt with as if the assets were held by and the liabilities were owed by a single legal entity.). See also, e.g., Fishell v. United States Trustee (In re Fishell), 111 F.3d 131, 1997 WL 188458, **2 (6th Cir. 1997) (unpublished disposition) (citations omitted); Eastgroup Properties v. Southern Motel Assoc., Ltd., 935 F.2d 245, 248 (11th Cir. 1991); Union Savings Bank v. Augie/Restivo Baking Co., Ltd. (In re Augie/Restivo Baking Co., Ltd.), 860 F.2d 515, 518 (2d Cir. 1988); In re Molnar Bros., 200 B.R. 555, 560 (Bankr. D.N.J. 1996) (substantive consolidation results in the merger of assets and liabilities of two or more estates, creating a common fund of assets and a single body of creditors). For standards the bankruptcy court may use to determine whether substantive consolidation is necessary, see Alan N. Resnick, Henry J. Sommer & Lawrence P. King, 2-105 Collier on Bankruptcy P 105.09[2] (15th ed. rev. 2006) (explains the traditional element tests and the modern balancing test).

[280] Cieri & Morgan, supra note 5.

[281] See Blacks Law Dictionary (8th ed. 2004), arms length transaction (1. A transaction between two unrelated and unaffiliated parties. 2. A transaction between two parties, however closely related they may be, conducted as if the parties were strangers, so that no conflict of interest arises.).

[282] See Blacks Law Dictionary (8th ed. 2004), security agreement (An agreement that creates or provides for an interest in specified real or personal property to guarantee the performance of an obligation. It must provide for a security interest, describe the collateral, and be signed by the debtor. The agreement may include other important covenants and warranties.).

[283] See Blacks Law Dictionary (8th ed. 2004), security interest (A property interest created by agreement or by operation of law to secure performance of an obligation (esp. repayment of a debt). Although the UCC limits the creation of a security interest to personal property, the Bankruptcy Code defines the term to mean a lien created by an agreement. 11 USCA 101(51).).

[284] Cieri & Morgan, supra note 5.

[285] See Blacks Law Dictionary (8th ed. 2004), unsecured claim (1. A claim by a creditor who does not have a lien or a right of setoff against the debtors property. 2. A claim by a creditor to the extent that its lien on or right of setoff against the debtors property is worth less than the amount of the debt.).

[286] See Blacks Law Dictionary (8th ed. 2004), secured claim (A claim held by a creditor who has a lien or a right of setoff against the debtors property.).

[287] Cieri & Morgan, supra note 5. See, e.g., Leasing Serv. Corp. v. First Tenn. Bank Natl Assn, 826 F.2d 434, 436-37 (6th Cir. 1987) (explaining that while rejection of a lease obligation does have the effect of a breach of the contract, it does not affect the creditors secured status if the parties executed a pre-petition security agreement in conjunction with their transaction).

[288] See 11 U.S.C. 362(d) (2005).

[289] Cieri & Morgan, supra note 5. Foreclosure by a secured party/licensee may be forestalled by a bankruptcy court permitting the sale of the licensee/secured partys collateral free and clear of all liens pursuant to section 363 of the Bankruptcy Code. See 11 U.S.C. 363(f). Such a sale would cause the secured party/licensee to have to look to the proceeds of the sale of its collateral to satisfy its secured claim. See 11 U.S.C. 363 (2005); U.C.C. 9-504(1) (2005). Nonetheless, the secured party will be able to bid in the amount of its claim at the sale of such collateral. See U.C.C. 9-504(3) (2005).

[290] Cieri & Morgan, supra note 5.

[291] See 11 U.S.C. 361 (2005).

[292] Cieri & Morgan, supra note 5.

[293] Id.

[294] Id. (explaining that many of the security agreements that have involved intellectual property as collateral have relied upon buzz words that are often incorrectly used and do not accurately describe the intellectual property in which a security interest should be taken).

[295] Id.

[296] Id.

[297] The grant of a security interest in intellectual property in and of itself does not necessarily transfer the right to sue for infringement or misappropriation. See generally, Harold R. Weinberg and William J. Woodward, Jr., Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 KY. L.J. 61 (1991).

[298] For example, a security interest should always be taken in the specialized machinery or other tangible property that is necessary to operate the business, which would allow the secured party/licensee to continue in operation in the event of rejection and to utilize the property in which it has been granted a security interest upon the exercise of its remedies as a secured party. Taking a security interest in such equipment will also place additional pressure on the debtor/licensor not to reject its license agreement because the debtor/licensor would lose access to such property to conduct its business.

[299] Rights under foreign laws can be extremely valuable, but it may be difficult to perfect and protect such rights.

[300] Cieri & Morgan, supra note 5.

[301] Id.

[302] Id.

[303] Id.

[304] Id.

[305] Id.

[306] Cieri & Morgan, supra note 5.

[307] Id.

[308] Id.

[309] Id.

[310] Id. (For example, the licensor will usually want to license the intellectual property to others with the understanding that such licenses will continue even in the event of the secured party/licensees exercise of its remedies resulting from a licensor/bankrupts breach. In contrast, the secured party/licensee will want to focus upon avoiding the termination of important licenses and permits without notice to the debtor/licensor, which terminations could have the impact of eviscerating the secured party/licensees security interests. Thus, the debtor/licensor should covenant to give the secured party/licensee notice of breach of any such agreements and an opportunity to cure such breach.).

[311] Id.

[312] Cieri & Morgan, supra note 5.

[313] Id.

[314] Id.

[315] Id.

[316] Id.

[317] Id.

[318] Cieri & Morgan, supra note 5.

[319] Id.

[320] See 11 U.S.C. 365(e) (2005).

[321] Cieri & Morgan, supra note 5.

[322] Id.

[323] Id.

[324] Such a non-disturbance agreement basically should provide that the secured party/licensee agrees not to sue for infringement or misappropriation any person that has received license rights to any of the security pursuant to a license agreement that is not inconsistent with the license agreement existing between the secured party/licensee and the debtor/licensor. Id. (non-disturbance clause or agreement analogous to a mortgagees agreement not to disturb a leasehold estate upon a mortgagees foreclosure on a parcel of real estate).

[325] A non-disturbance agreement should continue only so long as the debtor/licensor would have no right to terminate the license with the third party and such license has not been rejected by the debtor/licensor and terminated by the respective licensee under section 365 of the Bankruptcy Code.

[326] Cieri & Morgan, supra note 5.

[327] Id.

[328] See 11 U.S.C. 361, 363 (2005).

[329] See Blacks Law Dictionary (8th ed. 2004), perfected security interest (A security interest that complies with the statutory requirements for achieving priority over a trustee in bankruptcy and unperfected interests. A perfected interest may also have priority over another interest that was perfected later in time.).

[330] Cieri & Morgan, supra note 5.

[331] 11 U.S.C. 544 (2005). Section 544(a) of the Bankruptcy Code grants a debtor in possession/trustee the rights and powers of a judgment lien creditor and bona fide purchaser of real property and allows the debtor or the bankruptcy trustee to extinguish any interest in the debtors property that is voidable by such creditor.

[332] Cieri & Morgan, supra note 5 (such as the applicable states version of the Uniform Commercial Code).

[333] Id. (provides the Patent Act, the Copyright Act, and the Lanham Act as examples of Federal law).

[334] Id.

[335] But see id. (discusses the difficulty of estimating damages and compares the difficulty to estimating damages resulting from a rejection of a license of developing technology or an option to acquire future technology).

[336] Id.

[337] See section IV.A.3. supra.

[338] See 11 U.S.C. 365(n)(2005).

[339] See section IV.A. supra.

[340] See section IV.A.1. supra.

[341] See section IV.A.2. supra.

[342] See section IV.A.3. supra.

[343] See section IV.A.4. supra.

[344] See section IV.A.5. supra.

[345] See section IV.A.6. supra.

[346] See section V. supra.

[347] See section V.A.1. supra.

[348] See section V.A.2. supra.

[349] See section V.A.3. supra.

[350] See section V.B. supra.