Konarka and the Treatment of IP Rights in Bankruptcy

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As the number of green technology bankruptcies continues to rise, an important consideration for these companies, their business partners, and their creditors is the treatment of IP rights in bankruptcy.

For example, with companies engaged in new research and development, often through collaborations with other companies, how does the bankruptcy process effect the estate’s IP rights? And how might the bankruptcy effect the rights of its licensees and development partners?

The topic recently came to mind, with reports regarding the bankruptcy of Konarka Technologies, Inc. (“Konarka”).

I. The Konarka Bankruptcy

Konarka, which declared bankruptcy in June, was a pioneer in the area of thin-film organic photovoltaic materials, which might be used in any number of ways, including for clothes or bags, textiles for curtains, and even building materials.

Konarka’s technology web page explains its technology as follows:

[a]t the heart of Konarka’s technology is a photo-reactive polymer material invented by Konarka co-founder and Nobel Prize winner, Dr. Alan Heeger. This proprietary material can be printed or coated inexpensively onto flexible substrates using roll-to-roll manufacturing, similar to the way newspaper is printed on large rolls of paper.

With respect to its bankruptcy, Konarka’s press release noted the company’s assets include a lot of IP in addition to its manufacturing facility:

Among the Company’s assets are over hundreds of owned and licensed patents and patent applications in the field of solar energy and a state-of-the-art manufacturing plant in New Bedford, Massachusetts.

Press releases and articles suggest that Konarka made a serious and continued effort to develop and commercialize its innovative materials.

For example, Konarka had taken exclusive licenses on IP concerning photovoltaic applications and photoactive polymers from (respectively) DuPont Displays (in 2007) and Université Laval (in 2008).

Further, Konarka’s polymer-based, organic photovoltaic (OPV) technology had been incorporated into a number of products, including solar energy bags (with Neuber’s Energy), curtain walls (with Arch Aluminum & Glass), as well as roofs, skylights, and facades (with ThyssenKrupp Steel Europe).

II. Protection for IP Licensees

Normally, bankruptcy raises red flags for any company that’s in business with the company seeking bankruptcy protection.

Generally speaking, a bankruptcy trustee has the right to accept (and thereby assume) or terminate (and thereby reject) the company’s executory contracts. An executory contract is a contract that has on-going performance obligations, such as a business lease, a service contract, equipment leases, development contracts, and intellectual property licenses.

So while the other party has to keep performing, the bankruptcy trustee has the option of terminating an agreement that might be very important to your company’s well-being. (And if the trustee does terminate, the other party is left with an unsecured bankruptcy claim for breach of contract, which is likely a poor alternative for a material lease, equipment rental, license, or some other right.)

Fortunately, there is some measure of relief for IP licensees. In a 1985 decision called Lubrizol Enterprises v. Richmond Metal Finishers, the Fourth Circuit Court of Appeals confirmed that non-exclusive licenses are executory contracts, which a bankruptcy trustee may reject.

The Fourth Circuit also held that the former licensee didn’t have any right to seek specific performance under the license.

In response to the Lubrizol decision, Congress adopted Section 365(n) of the Bankruptcy Act, which provides that a licensee may elect:

(A) to treat such contract as terminated by such rejection if such rejection by the trustee amounts to such a breach as would entitle the licensee to treat such contract as terminated by virtue of its own terms, applicable nonbankruptcy law, or an agreement made by the licensee with another entity; or

(B) to retain its rights (including a right to enforce any exclusivity provision of such contract, but excluding any other right under applicable nonbankruptcy law to specific performance of such contract) under such contract and under any agreement supplementary to such contract, to such intellectual property (including any embodiment of such intellectual property to the extent protected by applicable nonbankruptcy law), as such rights existed immediately before the case commenced, for—

i. the duration of such contract; and

ii. any period for which such contract may be extended by the licensee as of right under applicable nonbankruptcy law.

Section 365(n) is quite remarkable, in that it is a significant exception from the bankruptcy trustee’s typical authority and is an important protection for IP licensees.

There are some important caveats to consider, however, before relying on the protections of Section 365(n). First, the Bankruptcy Act’s definition of “intellectual property” does not include trademarks (it does include trade secrets, patents, patent applications, plant variety, copyrights, and mask works).

Second, Section 365(n) presumably does not prevent the termination of related rights or obligations, such as enforcement agreements, technology transfers, and service agreements.

Third, Section 365(n) does not automatically apply to licenses by foreign licensors (even if it’s a license of U.S. patents).

Fourth, and lastly, Section 365(n) does not say IP licenses aren’t terminable. It instead says that, if the bankruptcy entity seeks to terminate the license, a licensee may elect to retain its rights. And since this implicates an affirmative action, it’s important that a licensee monitor its licensor’s bankruptcy, to determine whether it becomes necessary to make an appearance to protect its rights.

With respect to Konarka, we’ll continue to monitor the bankruptcy proceeding and report back here, as the bankruptcy plan is published and we learn whether and how Konarka plans to dispose of its substantial patent portfolio (and whether licensees step in to preserve any rights).

Article by Adrian Mollo, a Partner in the Washington office of McKenna Long & Aldridge. Mr. Mollo’s practice focuses on patent licensing, strategic patent planning, intellectual property due diligence, related corporate counseling, and intellectual property litigation.

Article appearing courtesy Green Patent Blog.

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