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Tech Bankruptcy
October 30, 2008
  Biksi gets Bilked by the Federal Circuit
In a key patent decision released today, the Court of Appeals for the Federal Circuit, sitting en banc, has stated that the proper test for patentability of a process patent is the "machine or transformation" test previously set forth by the U.S. Supreme Court in Gottschalk v. Benson, 409 U.S. 63 (1972). According to the Electronic Frontier Foundation, the case, In re Bilski, No. 2007-1130 involved a patent on a "method of managing the risk of bad weather through commodities trading." A classic so-called business method patent.

The Federal Circuit held that the primary claim under the patent was not patentable under the machine or transformation test, effectively putting a stake in the heart of so-called business method patents. The Court took the time to explain how the machine or transformation test does allow patents for transformations of electronic information, thus allowing patentability of electronic processes. The Court referenced as an example of a patentable process a system that takes electronic representations of body parts and displays them on a computer screen - leaving open software patentability. And, the Court explicitly stated that business methods were not per-se unpatentable. But, the decision will certainly call into question the ability of companies to patent business methods and software.

For more information see:


October 29, 2008
  Dischargeability of Copyright Infringement Claims
The Court of Appeals for the Ninth Circuit recently issued a decision discussing the ability of a debtor to discharge a copyright infringement claim, In re Barboza, 2008 WL 4307451 (9th Cir. 2008).

Claims for copyright infringement are brought under 17 U.S.C. sec. 502, et. seq., and the damages can be quite serious. Willful copyright infringement comes with a statutory damages price tag of up to $150,000 per incident, plus attorneys fees. In many contexts, the statutory damages claim can be astronomical.

In the bankruptcy context, creditors with copyright infringement claims will claim that because the infringement was willful, the damages are not discharged. Section 523(a)(6) of the bankruptcy code provides that the Chapter 7 and Chapter 11 discharges do not discharge claims for willful and malicious injury by the debtor to another entity or its property.

In Barboza, the debtors ran a video distribution business and purchased a large quantity of videotapes from Million Dollar Video Corp., including ten Spanish language films. The plaintiff held an exclusive right to copy and distribute those ten films, and so informed the debtors. The debtors, however, made 500 copies of the ten films, and started selling them. The plaintiff sued the debtor, the jury ruled in its favor, and awarded statutory damages of $75,000 a film. The total judgment for the ten films, including legal fees - $893,077. Million Dollar video indeed. The debtors then filed for bankruptcy. The plaintiff objected to dischargeability of the debt and won on summary judgment based on the prior jury finding of willful infringement.

The Ninth Circuit held that the willfulness standards were different for copyright infringement and for non-dischargeability purposes. The standard for willful copyright infringement was whether the infringing act was intentional or reckless.

The non-dischargeability standard had two separate prongs. The injury had to be both willful and malicious. For an injury to be willful, there must be a deliberate or intentional injury - not just a deliberate or intentional act that led to an injury. Kawaahau v Geiger, 523 U.S. 57 (1998). So, right there, the standard under the Bankruptcy Code is stricter than the standard under the Copyright Act. For an injury to be malicious, a four part test had to be met. The act must involve (1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause or excuse.

Thus, a claim for willful copyright infringement is not automatically non-dischargeable. The Court of Appeals remanded the case for further findings. The take away from this case is the same as for the earlier California bankruptcy court decision on the subject, In re Chan. Claims for willful violations of copyright infringement will not automatically be dischargeable or non-dischargeable in bankruptcy, but the facts surrounding settlement or trial of the claims may determine whether or not a non-dischargeability action can be won on summary judgment. Counsel involved in a copyright dispute should pay heed to Barboza, and think about the ability to enforce a settlement or judgment in a subsequent bankruptcy case.

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October 28, 2008
  Gonzo for IP at Gonzanga
The Gonzanga Law Review recently published a A Symposium on The Treatment of Intellectual Property in Insolvency Proceedings.

Articles include:

Prof. Xuan-Thao Nguyen, Selling It First, Stealing It Later: The Trouble with Trademarks in Corporate Transactions in Bankruptcy (she always does come up with the best titles)

Prof. Nadine Farid, The Fate of Intellectual Property Assets in Cross-Border Insolvency Proceedings

Prof. Sharon K. Sandeen, Identifying and Keeping the Genie in the Bottle: The Practical and Legal Realities of Trade Secrets in Bankruptcy Proceedings

David R. Kuney, Restructuring Dilemmas for the High Technology Licensees: Will "Plain Meaning" Bring Order to the Chaotic Bankruptcy Law for Assumption and Assignment of Technology Licenses?

I'm sure all four articles are required reading for those interested in the field, although I've only had a chance to read Professor Farid's article on comparative IP and insolvency law so far. The articles are all available on Westlaw. Thanks to Professors Linda Rusch and Stephen L. Sepinuck for organizing the symposium.

October 19, 2008
  Don't gamble with your domain names
My friend, Phil Corwin of Butera & Andrews sent me a copy of the just issued opinion in Commonwealth of Kentucky v. 141 Internet Domain Names, which allowed the Commonwealth of Kentucky to seize 141 different domain names they claimed were "gambling devices" in use in Kentucky. This decision of the Franklin Circuit Court held that domain names are property and in rem jurisdiction could be held over a domain name so long as the connections between the domain name and the forum are sufficient to justify the exercise of jurisdiction. This holding is, clearly, far more expansive from that of Office Depot, Inc. v. Zuccarini, 2007 WL 2688460 (N.D. Cal. 2007), which held that the proper loci for in rem jurisdiction over a domain name were the locations of the registry and the registrar.

The context for 141 Internet Domain Names is fairly interesting. Kentucky law allows law enforcement to immediately, and without process, seize gambling devices used in illegal gambling. Leaving aside the somewhat interesting question of how a domain name qualifies as a gambling device, law enforcement officials in Kentucky identified 141 domain names used to host websites offering gambling, and which Kentucky residents could access. They asked the Franklin County Court for an ex-parte seizure order, which the court granted. The court ordered the various related domain name registrars to turn over to the Commonwealth of Kentucky the registrations for the names, but allowed the other information related to the domain names to remain unchanged. This meant the domain names continued to work. The matter was then set for further hearing.

Lawyers appeared representing the interests of nine of the names. In addition, a number of associations representing domain name registrars, on-line gamblers, and on-line gambling sites, appeared and provided the court with briefs. And they raised a number of issues including the question of whether domain names are property subject to seizure and whether the court in Franklin County could exercise in rem jurisdiction over the names.

With respect to the property issue, the court followed Kremen v. Cohen, 337 F.3d 1024 (9th Cir. 2003) in holding that domain names are in fact a form of property.

The court also held that it could exercise in rem jurisdiction over the domain names. First, it stated that in rem jurisdiction could be exercised wherever the domain names were located. It then rejected the schema used in the Anticybersquatting Consumer Protection Act, that domain names have a dual situs, located where the registry and the registrars are located.

Instead, the court crafted a presence test based on an interweaving of in rem jurisdiction principles and rules addressing specific in personam jurisdiction over defendants based on the presence of a website. Basically, the court held that because the websites allowed Kentucky residents to gamble, and the relevant websites were accessed through the domain names, the domain names were located in Kentucky. The analysis did not make any sense to me, but there it is.

So, I'm not sure where all this is going to go. The court did give the domain name owners the option to avoid the forfeiture order by blocking access to Kentucky residents and I suspect that would be the smart thing for them to do. Better than losing the domain name. On the other hand, I think I smell an appeal.

I also wonder what Kentucky would do with the names. Resell them? That seems a little hypocritical. Under the state statute governing seizure of gaming devices, they are supposed to destroy them. How do you do that? I have no idea. I suppose you could accomplish the same thing by just sitting on the registrations. Of course, the domain name registrars might be able to refuse to renew the names. Wouldn't that be fun.
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.

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October 01, 2008
  Luddite Trustees?
Get a load of the e-mail I received today from the bankruptcy court for the Southern District of Texas:
Change in Policy Regarding Submission of Paper Documents

The Judges of the United States Bankruptcy Court for the Southern District of Texas have agreed that chapter 7 trustees should not routinely refuse to accept electronic documents or to require that paper copies of documents be provided in addition to electronic copies. Section 341 meetings of creditors should not routinely be delayed or continued on the basis that chapter 7 trustees have been provided with only electronic copies of documents.

This policy change is intended to affect requests for schedules and statements and for routine documents required by a chapter 7 trustee. The Court recognizes that there may be occasions when original, paper copies of documents must be examined. This policy is not intended to inhibit a chapter 7 trustee from examining original documents when appropriate circumstances so warrant. This policy also does not impair the chapter 7 trustees' exclusive ownership and control of property of the estate, including all estate-owned documents.

To implement this policy, the United States Bankruptcy Court for the Southern District of Texas has amended its participation in the Uniform Administrative Procedures for Electronic Filing in Texas Bankruptcy Court by deleting the special provision contained in section III(E)(5)(b)(1) in the Uniform Administrative Procedures.

This policy change is effective for all cases filed on or after October 15, 2008.
I guess some of the local trustees down in Texas still like to do things the old fashioned way. As for me, I'm a chapter 7 trustee and we process all the schedules and most other documents electronically. When I do my meetings, I lug along a couple of laptops and a 17" screen as well. I can pop the bankruptcy schedules up on the large screen and flip through the pages while I talk to the debtors. The best part is they have no idea what I'm looking at. Is it the smoking gun document? When I ask them if they own real estate - am I looking at the title report? They have no way of knowing since they can't see the screen.

My guess is the trustees who want paper will continue to want paper and will find ways of getting the paper from the debtors' counsel who, if they are smart, will start faxing stuff from their computers.
A blog discussing the impact of technology on bankruptcy law and practice.

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Warren E. Agin is a partner in Swiggart & Agin, LLC, a boutique law firm in Boston, Massachusetts focusing on the needs of technology companies. Mr. Agin heads its bankruptcy department. The author of the book Bankruptcy and Secured Lending in Cyberspace (3rd Ed. West 2005), Mr. Agin also chaired the ABA's E-commerce and Insolvency Subcommittee from 1999 to 2005, co-chaired the Boston Bar Association's Internet and Computer Law Committee (2003-2005), and served on the American Bar Association's Standing Committee on Technology and Information Services (2008-2011). Mr. Agin currently co-chairs the Editorial Board of Business Law Today. A contributing editor to Norton Bankruptcy Law and Practice, 3d, and co-author of its chapter on intellectual property for the past fifteen years, he is author of numerous legal articles and addresses on topics of technology, internet and bankruptcy law.

Biksi gets Bilked by the Federal Circuit
Dischargeability of Copyright Infringement Claims
Gonzo for IP at Gonzanga
Don't gamble with your domain names
Patent transfers are nothing to sniff at
Luddite Trustees?
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