U.S. Bankruptcy Code § 365

U.S. Bankruptcy Code § 365 is a critical provision governing the treatment of "executory contracts" (contracts with outstanding obligations on both sides) and unexpired leases when a party files for bankruptcy. It grants the debtor or trustee the power to either "assume" (continue performing) beneficial contracts or "reject" (breach) burdensome ones. This is pivotal for intellectual property (IP) licensing. To mitigate the risk of licensees losing their rights if a licensor rejects a license, Congress enacted the Intellectual Property Licenses in Bankruptcy Act (IPLBA), which amended the code as § 365(n). This subsection allows licensees of patents, copyrights, and trade secrets to elect to retain their rights post-rejection. Notably, trademarks are excluded from this protection, creating a unique risk management challenge.

Enterprises can integrate § 365 into their risk management framework through a three-step process: 1. **Pre-Contract Due Diligence & Structuring**: Before signing a license agreement with a U.S. entity, conduct thorough financial due diligence. Draft contract clauses that explicitly reference licensee rights under § 365(n) and consider security interests, especially for trademark licenses. 2. **Ongoing Counterparty Monitoring**: Implement a system to continuously monitor the financial health of U.S. licensors. An early warning of financial distress allows the company to prepare contingency plans and seek legal counsel. 3. **Assertion of Rights in Bankruptcy**: If a licensor files for bankruptcy and rejects the license, the licensee must formally and timely provide written notice to the trustee of its election to retain its rights under § 365(n). This action is crucial for business continuity, potentially preventing a 100% loss of revenue from the licensed product.

Taiwanese enterprises face three primary challenges: 1. **Legal System Disparity**: The complexity of the U.S. Bankruptcy Code is a significant hurdle for legal teams unfamiliar with it. Solution: Engage U.S. counsel specializing in bankruptcy and IP at the outset of the business relationship. 2. **The Trademark Protection Gap**: Since trademarks are not explicitly protected under § 365(n), licensees face a high risk of losing their rights. Solution: Structure agreements to bundle trademark licenses with protected IP like trade secrets or patents, or negotiate for a separate coexistence agreement. 3. **Cross-Border Information Asymmetry**: Monitoring the financial stability of a U.S. partner from overseas is difficult. Solution: Utilize third-party credit monitoring services and contractually require the licensor to provide periodic audited financial statements as a condition for continuing the agreement.

Winners Consulting specializes in navigating the complexities of U.S. Bankruptcy Code § 365 for Taiwan enterprises. We have a proven track record of helping over 100 companies build robust counterparty risk management systems. Our experts can help you establish compliant management systems within 90 days, safeguarding your intellectual property rights in cross-border transactions. Request a free consultation to assess your risk exposure: https://winners.com.tw/contact