Rejection

Rejection is a legal power granted to a debtor or trustee under Section 365 of the U.S. Bankruptcy Code. It allows the debtor to either assume (continue) or reject (terminate) executory contracts—agreements where performance is still due from both parties, such as intellectual property licenses. If a contract is rejected, it is treated as a breach occurring immediately before the bankruptcy filing. The non-debtor party's claim for damages is typically treated as an unsecured claim, severely limiting their recovery. This concept is distinct from a standard contractual termination, as it is a unilateral right in bankruptcy designed to relieve the debtor from burdensome obligations. For licensees, this poses a critical counterparty risk, as a licensor's bankruptcy could lead to the abrupt loss of essential IP rights, a risk not explicitly covered for trademarks under the Intellectual Property Licenses in Bankruptcy Act (IPLBA).

Enterprises manage the risk of rejection through a multi-layered approach. Step 1: Enhanced Due Diligence. Before entering critical licensing agreements, companies must assess the licensor's financial stability, analyzing financial statements and credit ratings, not just their technical capabilities. This counterparty financial risk assessment should be a formal part of the vendor selection process. Step 2: Strategic Contract Negotiation. Incorporate protective clauses, such as source code escrow agreements for software licenses, which release the code to the licensee upon the licensor's bankruptcy. While enforceability may vary, such clauses provide leverage. Step 3: Proactive Monitoring and Contingency Planning. Continuously monitor the financial health of key licensors. Develop a contingency plan, including identifying alternative suppliers or technologies, to mitigate the impact of a sudden license termination. The goal is to ensure business continuity and minimize disruption if a licensor files for bankruptcy and rejects the contract.

Taiwanese enterprises, particularly those expanding globally, face several challenges in managing rejection risk. 1. Lack of U.S. Legal Expertise: Many are unfamiliar with the nuances of the U.S. Bankruptcy Code, leading them to overlook this risk during contract negotiations with U.S. partners. Mitigation involves targeted legal training for in-house counsel and engaging U.S. legal experts for critical contracts. 2. Difficulty in Due Diligence: Assessing the financial health of private U.S. startups or partners can be difficult due to limited public information. Overcoming this requires demanding financial disclosures as a contractual prerequisite and utilizing third-party business credit reporting services. 3. High Cost of Mitigation: Maintaining backup suppliers or developing in-house alternatives for licensed technology is resource-intensive. A prioritized approach is key: focus robust contingency plans on mission-critical licenses while using less costly measures, like business interruption insurance, for others.

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