Presenting a live 90-minute webinar with interactive Q&A Advanced Issues in Bankruptcy Asset Sales: Potential Opportunities and Pitfalls for Buyers Navigating the Complexities of IP Assets, Successor Liability, Joint and Consortium Bidding, and More WEDNEDAY, MARCH 27, 2013 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: George W. Shuster, Partner, Wilmer Hale , Boston Benjamin W. Loveland, Attorney, Wilmer Hale , Boston The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Advanced Issues in Bankruptcy Asset Sales: Potential Opportunities and Pitfalls for Buyers March 27, 2013 George W. Shuster, Jr. Benjamin W. Loveland WilmerHale WilmerHale george.shuster@wilmerhale.com benjamin.loveland@wilmerhale.com 617-526-6572 (t) 617-526-6641 (t) 212-937-7232 (t) George Shuster is a partner in WilmerHale’s bankruptcy and financial restructuring practice group and debt finance group. Benjamin Loveland is a senior associate in WilmerHale’s bankruptcy and financial restructuring practice group.
Overview: Six Advanced Issues in Section 363 Sales In this presentation, we are going to tackle some of the more complex issues we have seen in recent Section 363 bankruptcy sales: 1. What does “free and clear” mean in the intellectual property context? 2. When is a sale “cross - border,” and what does that mean? 3. How much reliance can “good faith” buyers place on Section 363(m)? 4. Is some level of successor liability inevitable? Can it be mitigated? 5. What power can “negative notice” truly provide? 6. Section 363(n): collusion, consortia, confusion. 6
Section 363 Sales and IP Assets: “Free and Clear?” Section 363(f) permits bankruptcy estate property to be sold “free and clear of any interest in such property .” But “interest in property” is not clearly defined. Can a Section 363 sale of a debtor’s intellectual property, such as patents, be “free and clear” of: 1) licenses by the debtor to third parties? 2) commitments by the debtor to standard setting organizations (SSOs)? Can a Section 363 sale of a debtor’s business be “free and clear” of: 1) damages for pre-sale infringement by the debtor on a third- party’s patents? 2) claims for post-sale infringement by the buyer? 7
Section 363 Sales and IP Assets: License Rights Outside of bankruptcy, a purchaser of patents generally takes subject to a licensee’s rights in those patents. In bankruptcy, a debtor generally has a right to reject (at least non-exclusive) licenses, subject to certain rights of the licensee under Section 365(n). Whether a sale “free and clear” can extinguish a licensee’s rights in the IP assets sold, whether under the license or under Section 365(n), remains uncertain. In re Dynamic Tooling Systems, Inc. , 349 B.R. 847 (Bankr. D. Kan. 2006): The court, employing Section 363(e), refused to permit a “free and clear” sale of patents to extinguish licensees’ rights. Precision Indus., Inc. v. Qualitech Steel SBQ, LLC , 327 F.3d 537 (7th Cir. 2003): The Seventh Circuit held that real property could be sold “free and clear” of the rights of commercial lessees under Section 365(h) to continue to occupy the leased property after rejection. This same rationale could apply to permit a sale “free and clear” of a licensee’s Section 365(n) rights. Note that the timing of rejection and election of Section 365(n) rights, relative to the timing of the sale, may be crucial. 8
Section 363 Sales and IP Assets: License Rights In practice, disputes over whether a purchaser will acquire IP assets “subject to” the rights of third parties sometimes focus on the nature of those rights ( i.e. , whether they constitute a license) rather than on a debtor’s ability to extinguish license rights under Section 363(f). In re Digital Domain Media Group, Inc. (Bankr. D. Del.) Debtor sought to sell patents “free and clear.” Disney objected to the sale “free and clear” of an asserted license right in the patents based on an option to receive a license from the prior owner of the patents. Judge Shannon held that the sale was not subject to Disney’s rights in the patents, because the option had not ripened into a license at the time of the transfer of the patents to the debtor. The sale closed, subject to Disney’s potential rights following any successful appeal. The decision is pending appeal at the district court. See also In re Spansion, Inc. , 2011 WL 3268084 (Bankr. D. Del. July 28, 2011): “No special language is required to create a patent license.” 9
Section 363 Sales and IP Assets: SSO Commitments Patent owners sometimes make commitments to standard-setting organizations or “SSOs”— industry groups that set standards providing for a common product design — to license any patents that are essential to the standard on (fair,) reasonable, and nondiscriminatory (F/RAND) terms. No case expressly addresses whether a debtor can sell patents “free and clear” of SSO commitments, because no debtor has made a vigorous attempt to do so . In re Nortel Networks Inc. (Bankr. D. Del.) Nortel sought to sell patent assets “free and clear” with some potentially vague language regarding SSO commitments. Other members of various SSOs to which Nortel had made F/RAND commitments objected to a sale “free and clear” of those commitments, arguing: – The right to license the patents on a non- F/RAND basis was not part of Nortel’s estate. – Non-bankruptcy law, including the Federal Trade Commission Act and the Sherman Act, prohibits attempts to avoid SSO commitments. See In the Matter of Negotiated Data Solutions LLC , No. 0510094 (F.T.C. Sept. 22, 2008). – Nortel was unable to satisfy Section 363(f)’s requirements for a sale “free and clear.” Buyer and SSO members ultimately agreed, without litigation, that the buyer would take the patents “subject to” Nortel’s pre -existing SSO commitments. 10
Section 363 Sales and IP Assets: Infringement Claims Most courts permit debtors to sell assets “free and clear” of existing tort claims, including claims for pre-sale infringement. A buyer is not, however, immune from claims for continuing infringement after the sale. Pre-sale infringement damages remain claims against the debtor’s estate, and post -sale infringement damages may be asserted against the buyer. The nature of certain patent litigation claims may give rise to complexities in the patent sale context. Coupled Prods., LLC v. Nobel Automotive Mexico LLC , 2011 WL 4499344 (W.D. La. Sept. 27, 2011): The court refused to dismiss claims for patent invalidity against a buyer, even though those claims were based on prior conduct by the debtor. The court also held that claims for misuse and inequitable conduct were really affirmative defenses. Folger Adam Sec., Inc. v. DeMatteis/MacGregor, JV , 209 F.3d 252 (3d Cir. 2000): Although the phrase “interest” in Section 363(f) is interpreted broadly and can include claims, it does not include defenses. Thus, whether a particular patent cause of action is characterized as a “claim” or an “affirmative defense” may affect a buyer’s ability to acquire patents “free and clear” of that cause of action. 11
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