Intellectual property is frequently among the most valuable assets a business owns. Trademarks, copyrights, patents, and trade secrets can carry long-term revenue potential and serve as collateral for loans or deals. When a business enters bankruptcy, these assets can become key pieces of the financial puzzle, affecting both creditors and the future of the business. Attorneys like those at Eric Lindh Foster Law, LLC can attest to the importance of addressing these issues early in the bankruptcy process.
Types Of Intellectual Property Involved In Bankruptcy
The most common forms of intellectual property involved in bankruptcy cases include trademarks, copyrights, patents, and sometimes trade secrets. Each type presents different issues during a bankruptcy proceeding. For example, trademarks are tied to brand reputation and often require ongoing use and maintenance. Patents may have licensing value but also come with potential litigation risk if infringement issues arise. Copyrights, while often easier to transfer or sell, can still be subject to disputes over ownership or licensing obligations.
Some IP assets may be easier to quantify than others. A software company may have copyright-protected code and patented methods, while a manufacturing firm may depend more heavily on trade secrets. Identifying and valuing this property early can affect how the bankruptcy case proceeds, especially in a Chapter 11 reorganization.
Treatment Of IP In Chapter 7 Versus Chapter 11
How intellectual property is handled often depends on the type of bankruptcy being filed. In Chapter 7 liquidation, the trustee may sell off IP assets to pay creditors. The challenge lies in finding interested buyers and determining what rights can legally be transferred. For instance, licenses may be non-transferable, or may expire upon bankruptcy depending on the language in the agreement.
In Chapter 11 reorganization, intellectual property may be preserved and leveraged to help the business recover. The business may seek to retain IP rights while modifying its obligations to licensees or creditors. In this case, the IP assets can be a key part of the debtor’s long-term plan for repayment and continued operation. In both scenarios, proper valuation and clear documentation are important, especially when IP is part of any proposed asset sale or restructuring plan.
Executory Contracts And IP Licenses
Industries that depend on intellectual property often use licensing agreements, many of which are considered executory contracts in bankruptcy proceedings. This means they are contracts where both parties still have ongoing obligations. The debtor may decide whether to assume or reject these contracts with court approval.
Rejection of an IP license can create significant issues for licensees who depend on that agreement. However, Section 365(n) of the U.S. Bankruptcy Code provides certain protections for licensees of intellectual property. If a debtor rejects a license, the non-debtor party may choose to retain its rights under the license, as long as it continues to meet its obligations.
A bankruptcy lawyer will often need to examine licensing agreements closely to assess what rights are transferable, what terms may terminate upon insolvency, and how these contracts should be addressed in the reorganization plan.
IP Valuation And Creditor Considerations
Valuing intellectual property in bankruptcy is often one of the more debated steps in the process. Unlike physical assets, IP doesn’t always have a clear market value. It may be worth more to the debtor’s business than to a third party. This affects how creditors are paid and what recovery they might expect from the estate.
Secured creditors with liens on IP may try to foreclose or force a sale. Unsecured creditors may argue that the IP has ongoing value and should be preserved within the business. When IP is central to operations, the debtor may seek to use it as part of a reorganization strategy, subject to creditor approval and court oversight.
IP rights that are not properly protected—such as unregistered trademarks or unmaintained patents—can further complicate the picture. Clear documentation, registration, and maintenance records help establish ownership and value during bankruptcy proceedings.
Future Use Of IP After Bankruptcy
Once a bankruptcy case is finalized, the use and ownership of intellectual property will reflect the terms set out in the approved plan. If the business was reorganized under Chapter 11, it may continue using its IP assets as part of its fresh start. If the assets were sold, the new owner may choose to license them or use them independently.
In some cases, a trustee or buyer may choose to monetize the IP in new ways that were not explored during the debtor’s operations. This could include bundling IP with other assets, licensing it more broadly, or selling rights to investors. The outcome depends on market interest and how the court-approved plan treated those rights.
Bankruptcy proceedings that involve valuable intellectual property require practical legal strategies and attention to detail. Our friends at Eric Lindh Foster Law, LLC discuss these matters regularly and work with clients to evaluate how intellectual property can be protected, transferred, or leveraged during the bankruptcy process.