Cooperation and Tolerance in Chapter 15

Chapter 15’s modified universalism structure requires cooperation between courts in different countries as well as tolerance for outcome differences under different bankruptcy laws. While in general it’s fair to say U.S. courts have been cooperative and tolerant, for some reason the issue of intellectual property licenses in bankruptcy brings out the worst in us.

In the appeal of Jaffe v. Samsung (the appeal of a case called In re Qimonda in the courts below), the Fourth Circuit recently held that a U.S. bankruptcy court can require a German court overseeing the liquidation of a German company to apply U.S. law when dealing with licenses of U.S. patents.

Congress is considering amending Chapter 15 to mandate a similar  result through the proposed Innovation Act, which would add the following language to Section 1522:

(e) Section 365(n) shall apply to cases under this chapter. If the foreign representative rejects or repudiates a contract under which the debtor is a licensor of intellectual property, the licensee under such contract shall be entitled to make the election and exercise the rights described in section 365(n).

I understand the concern of licensees – there are hold-up problems when a licensee has sunk substantial sums of money in order to use the license, and that these problems could stifle innovation in the tech industry. Congress added Section 365(n) to address these problems in the domestic arena, and undoubtedly these problems exist in the international arena as well. But can a bankruptcy court or Congress really require that a foreign court apply U.S. bankruptcy law when liquidating a foreign company?

Putting this again in the factual context of Jaffe, the only way I can see to justify this result is if rejection of the U.S. license agreements = administering the debtor’s
U.S. patents. The German liquidator would need a Chapter 15 order turning over the U.S. patents for administration in Germany. At that point, the U.S. court could refuse to turn over the U.S. patents without assurances that the U.S. licensees would not be unduly harmed.

That’s how the court seems to understand the issue, but does rejecting patent licenses = administering the patents? That is, would the German liquidator be able to reject the license agreements without a turnover order from a U.S. court? I can see how turnover would be necessary to sell the U.S. patents. I'm just not convinced it's necessary to reject contracts related to the patents.

The proposed the language in the Innovation Act seems more problematic, as it would appear to apply to all of a foreign debtor’s patents, not just its U.S. ones. I don't see how this is proper or, more practically, enforceable.

Comments

[John Pottow]

Drew, good post. But a possibly even greater problem is whether we should take the step of starting to chip away at chapter 15's uniformity in connection with the Model Law. I am concerned this law if enacted would start a worrisome trend.

[Andrew Dawson]

Nice point, John. I know there are some substantive differences between Chapter 15 and the Model Law as originally enacted in 2005, such as the safe harbor provisions for derivatives (in Section 1519, for instance).

But as far as I know, the Innovation Act, if enacted, would be the first "defection" from the Model Law by way of amendment. Worrisome indeed.