October 14, 2008
Patent transfers are nothing to sniff at
I just came across an interesting patent transfer case from the Northern District of California, In re Lockwood, 2008 WL 943025 (Bankr. N.D. Cal. 2008). It addresses some odd ball issues that can arise when selling patents in an individual's chapter 7 case.
When Lockwood filed his individual chapter 7 case in 2005, he owned a patent for an "improved nasal dilator system." He had licensed the patent to JMS Labs Limited, which was supposed to pay royalties. The patent license was for the existing patent, and also any other improvements Lockwood might sniff up.
Initially, the chapter 7 trustee turned up her nose at this potential asset, and let the license be automatically rejected 60 days into the case. (Section 365(d)(1) will do that in a chapter 7 case.) But, the smell of money eventually got the better of her, and she agreed to sell the patent and assign the patent license to JMS Labs Limited. The sale and assignment were appropriately noticed, and when no objecting parties came nosing around, the Court approved the sale.
That's when Lockwood and JMS started to stink up the place. JMS filed a complaint against Lockwood seeking to enforce the licensor's obligation under the license to license future inventions. In other words, Lockwood was still inventing new ideas and JMS wanted access to them. In response, JMS filed a motion for reconsideration, asking the court to overturn the prior sale order on two grounds. First, he argued that the patent license had been automatically rejected and the Court could not therefore enter a sale order that, in effect, raised it up from the dead. In other words, Lockwood argued, there was no remaining license agreement for JMS to enforce. Second, Lockwood argued that the once JMS held the patent and both the licensee and licensor interests in the license, the license was eliminated by merger.
The Court thought these arguments passed the smell test and considered them in turn. The Court held that rejection is not an elimination of the contract, but merely a breach. Thus, the Court retained authority to assume and assign the licensor's interest, particularly to the only party entitled to enforce the breach - the licensee.
However, the Court felt the merger argument might have merit. The sale order did, actually, have a clause preventing merger. But, the sale motion itself had not clearly disclosed this provision or ask the Court to enter it. The Court felt that part of the order should not have been entered and ordered submission of a revised order. The Court did not decide whether or not the doctrine of merger would, in fact, apply.
One issue I find of interest, which the Court did not address, was the licensee's ability under the patent license to seek performance not from the new licensor (itself), but the old licensor (Lockwood). Once the patent was transfered to JMS and the licensor's rights under the license assumed by the estate and assigned to JMS, how in the world would Lockwood have had any further obligation under the license? JMS had taken an assignment of the licensor's interest because they wanted to eliminate any argument that they had to pay continuing royalty obligations. Maybe, they should have just purchased the payment stream, and left the rest of the license behind.
I don't know. Maybe the answer is right in the middle of my face.
When Lockwood filed his individual chapter 7 case in 2005, he owned a patent for an "improved nasal dilator system." He had licensed the patent to JMS Labs Limited, which was supposed to pay royalties. The patent license was for the existing patent, and also any other improvements Lockwood might sniff up.
Initially, the chapter 7 trustee turned up her nose at this potential asset, and let the license be automatically rejected 60 days into the case. (Section 365(d)(1) will do that in a chapter 7 case.) But, the smell of money eventually got the better of her, and she agreed to sell the patent and assign the patent license to JMS Labs Limited. The sale and assignment were appropriately noticed, and when no objecting parties came nosing around, the Court approved the sale.
That's when Lockwood and JMS started to stink up the place. JMS filed a complaint against Lockwood seeking to enforce the licensor's obligation under the license to license future inventions. In other words, Lockwood was still inventing new ideas and JMS wanted access to them. In response, JMS filed a motion for reconsideration, asking the court to overturn the prior sale order on two grounds. First, he argued that the patent license had been automatically rejected and the Court could not therefore enter a sale order that, in effect, raised it up from the dead. In other words, Lockwood argued, there was no remaining license agreement for JMS to enforce. Second, Lockwood argued that the once JMS held the patent and both the licensee and licensor interests in the license, the license was eliminated by merger.
The Court thought these arguments passed the smell test and considered them in turn. The Court held that rejection is not an elimination of the contract, but merely a breach. Thus, the Court retained authority to assume and assign the licensor's interest, particularly to the only party entitled to enforce the breach - the licensee.
However, the Court felt the merger argument might have merit. The sale order did, actually, have a clause preventing merger. But, the sale motion itself had not clearly disclosed this provision or ask the Court to enter it. The Court felt that part of the order should not have been entered and ordered submission of a revised order. The Court did not decide whether or not the doctrine of merger would, in fact, apply.
One issue I find of interest, which the Court did not address, was the licensee's ability under the patent license to seek performance not from the new licensor (itself), but the old licensor (Lockwood). Once the patent was transfered to JMS and the licensor's rights under the license assumed by the estate and assigned to JMS, how in the world would Lockwood have had any further obligation under the license? JMS had taken an assignment of the licensor's interest because they wanted to eliminate any argument that they had to pay continuing royalty obligations. Maybe, they should have just purchased the payment stream, and left the rest of the license behind.
I don't know. Maybe the answer is right in the middle of my face.
Labels: patent license, patents
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