Intellectual Property Licenses in Bankruptcy Act

The Intellectual Property Licenses in Bankruptcy Act (IPLBA) is a 1988 amendment to Section 365 of the U.S. Bankruptcy Code. Enacted in response to the Fourth Circuit's decision in *Lubrizol*, which allowed a bankrupt licensor to terminate an IP license, the IPLBA provides critical protection for licensees. Under 11 U.S.C. § 365(n), if a licensor in bankruptcy rejects an executory license agreement, the licensee can either treat the contract as terminated or elect to retain its rights to the intellectual property (including trade secrets, patents, and copyrights). If retention is chosen, the licensee must continue to make all royalty payments. Notably, the statutory definition of "intellectual property" under the Act does not include trademarks. In enterprise risk management, the IPLBA serves as a vital legal control to mitigate counterparty and supply-chain risks, ensuring business continuity for firms reliant on licensed technology.

Practical application of the IPLBA involves a proactive, multi-stage approach. First, during pre-contract due diligence with a U.S.-based licensor, a company must assess the licensor's financial stability and insist on including clauses in the license agreement that explicitly reference the licensee's rights under 11 U.S.C. § 365(n). Second, establish a counterparty risk monitoring system to track the licensor's financial health. If bankruptcy is filed, the legal and procurement teams must immediately execute a pre-planned response. Third, upon receiving a rejection notice from the bankruptcy trustee, the licensee must formally and timely elect to retain its rights by providing written notice. Concurrently, it must continue making all royalty payments without fail. For example, a Taiwanese electronics manufacturer licensing essential semiconductor patents from a U.S. firm can use this process to prevent a complete production shutdown, thereby ensuring business continuity and regulatory compliance for cross-border contracts.

Taiwanese enterprises face three key challenges with the IPLBA. First, **Jurisdictional Misconception**: Many firms mistakenly assume its protections are global. The IPLBA is a U.S. law and only applies to licensors under U.S. bankruptcy jurisdiction, offering no direct protection if the licensor is European or Japanese. The solution is to conduct cross-border legal due diligence and negotiate protective clauses or technology escrow agreements. Second, the **Trademark Exclusion**: The Act's definition of IP excludes trademarks, creating significant risk for businesses in franchising or co-branding. Mitigation involves structuring trademark licenses separately and negotiating for buyout or perpetual use rights upon bankruptcy. Third, **Procedural Complexity and Cost**: Navigating U.S. bankruptcy court is complex and expensive, a major hurdle for SMEs. The priority action is to pre-qualify U.S. bankruptcy counsel and allocate a contingency budget for legal action as part of proactive risk management.

Winners Consulting specializes in Intellectual Property Licenses in Bankruptcy Act for Taiwan enterprises, delivering compliant management systems within 90 days. Free consultation: https://winners.com.tw/contact