Contractsand Intellectual Property Drafting

Contractsand Intellectual Property (IP) Drafting

Inthe contemporary business environments, it is common to encountersituations where firms rely on intellectual property rights to ensurebusiness operations although they do not have total ownership of theIP rights. Pour (2012) asserts that most firms regard intellectualproperty rights as significant business success factors, butunfortunately these firms do not have the full ownership to theserights, which makes their independence and operations complex. Someitems of a firm’s IP rights are obtained in license from otherentities or people privy to a license agreement. This means that afirm acquires contractual rights as per the in-license agreementrather than becoming the sole ownership of the IP. Day to daycomplexities in a firm’s mode of operations can develop intoinstances where the differences between in-licensed IP rights andsolely owned-IP rights become muddled (Nolan IV, 2011). From abusiness perspective, a licensor may be compelled to file forbankruptcy because of some unforeseeable circumstances. This mayresult in such a firm discarding executory contracts. Thus, it isimperative to present a discussion on the drafting of a contractclause on IP clause regarding the ownership of IP upon bankruptcy.

Bankruptcyand IP Rights Licenses

IPdenotes the structural business practices, copyrights, trade secrets,designs, ideas, documentation, inventions, reports, and otherresources or information. Thus, IP is any idea, information, orproduct that the law shields from unsanctioned usage by other peopleor entities which generate an imperfect control in the intellectualproperty. There are legal instances where an IP license is regardedas an executory contract. One such instance is where the licensee anda bankrupt licensor remain obligated to continue performing inaccordance with a signed contractual agreement (Nolan IV, 2011). Assuch, nonperformance on the part of a bankrupt licensor translates toa material breach. It is, however, important to point out thatCongress sought to ensure that through the US Bankruptcy Code’section 365(n), a licensee does not lose IP rights upon the licensorfiling for bankruptcy protection (Vereen, 2014).

Section365(n) provides that is a license is deemed executory and the coreissue is concerned with granting IP rights the licensee is legallyempowered to either:

  1. Consider such a contractual agreement ended or

  2. Maintain its hold on such IP under the signed contract as well as supplementary agreements for the stipulated length of the contract and all other rights to extensions therein (Picht, 2013).

However,bankruptcy courts tend to have varied discretion towards finaldetermination concerning whether a licensee is protected undersection 365(n) (Picht, 2013). The licensee is therefore required toassist the bankruptcy court to ensured make a favorable determinationby utilizing unambiguous and clear language throughout the in-license(Ghaffari, 2013). This is in an effort to provide an explicitdescription of an entity’s intent and furthermore, to offer clarityunderstanding the manner with which the license should be regarded inthe case of licensor bankruptcy.

Thelimitations associated with the US Bankruptcy Code have far-reachingimplications for a licensee. For instance, the Code does not relateto non-US IP rights and trademarks. Similarly, section 365(n) provedthat a licensee cannot have the capacity to license IP developed by alicensor after a bankruptcy petition (Ghaffari, 2013). Thislimitation can lead to situations when the licensee firm’scapabilities to continue as a going concern are severely affected. Assuch, a firm’s operational objectives can be significantly hamperedespecially when its expectant of sustained access to the licensor’sforecasted technology upgrades, technical service assistance, andmodifications. Another limitation accruing from section 365(n)entails the licensee’s mandatory obligation to ensure all royaltiespayments are paid out to the licensor throughout the contract’stenure (Picht, 2013). This implies that licensee payments continuefor all forecasted technical services such as upgraded technology(Tran, 2015). In the case of a bankrupt licensor, the licensee willcontinue paying up for mega royalties accruing from old previouslylicensed IP. In this regards, firms need to comprehend theirobligations, especially when winding up to ensure that they passtheir rights effectively.

Contractand IP Draft Clause in case of Licensor Bankruptcy

Toenable a firm to protect its in-license IP rights in case of licensorbankruptcy, an unambiguous and clear contract should plainly providethat (Weise &amp Williams, 2012):

  1. The license is categorically intended by all concerned parties to be an express grant of rights to IP as provided for in the US Bankruptcy Code

  2. The license does not explicitly deny or extend limits to a firm’s licensee rights to IP as provided for in section 365 (n) of the US Bankruptcy Code (Weise &amp Williams, 2012)

  3. All parties privy to the license intend for protection guaranteed by section 365 (n) of the US Bankruptcy Code to conform to the license provisions

  4. The in-license agreements expressly provide that in case the licensor obligations as per the contract are ended as a result of bankruptcy, then the licensee is mandated to collect a copy of every applicable intellectual property as well as embodiments therein (Weise &amp Williams, 2012). This means that firms should review their agreements and introduce new ones to ensure that they align to existing laws on IP.


Contemporarytransformations in economic operating environments require businessesto conform to emerging operational methods. As this paper hasprovided, firms should ceaselessly work towards reviewing current IPlicensing agreements. If the current situations necessitate forappropriate changes to the current license agreement, all effortsshould be made to strengthen the past as well as future licensingprotocols and agreements. This is to ensure that a strong contractualclause protects a business entity’s IP rights in the event alicensor files for bankruptcy protection. Furthermore, intellectualand contract drafting especially regarding business matters entailnumerous complexities such as civil lawsuits and lost revenue hence,it is important for firms to review their IP rights regularly.Managers should possess skills and information of contracts andintellectual drafting so as to circumnavigate any loophole easily andsave their firms money. Firms must protect their IP to maintainbusiness success, as well as, manage to control products and ideas.Most complex and costly legal issues arise regularly because ofcontract and IP clauses.


Ghaffari,K. (2013). End to an Era of Neglect: The Need for EffectiveProtection of Trademark Licenses, SouthernCalifornia Law Review,87,1053.

NolanIV, D. A. (2011). Fundamental Problem: The Vulnerability ofIntellectual Property Licenses in Chapter 15 and the Meaning of Sec.1506, A. EmoryBankruptcy Developments Journal, 28,177.

Picht,P. (2013). Collateralizing IP Licenses: Present Deficiencies andProposals for Reform. AmericanIntellectual Property Law Association Quarterly Journal, 41,423.

Pour,J. Y. (2012). Treatment of Trademarks in US Bankruptcy Law. The-12 Korean. University Review, 11,37.

Tran,J. L. (2015). Rethinking Intellectual Property Transactions. SULRev., 43,149.

Vereen,E. (2014). Trademark Protection in Bankruptcy Proceedings: A CloserLook at Lubrizol and its Progeny. PittsburghJournal of Technology Law and Policy, 15,57.

Weise,S. O., &amp Williams, N. G. (2012). Recent Developments in UCCArticle 9: Taking and Perfecting Security Interests in CollateralSubject to Specialized Rules: Deposit Accounts, Commercial TortClaims, Intellectual Property. DePaulBus. &amp Comm. LJ, 10,515-539.