Fourth Circuit Affirms Application of Section 365(n) to Ensure Patent Licensees Sufficiently Protected in Granting Relief to Foreign Representative

December 11, 2013

The Court of Appeals for the Fourth Circuit, in Jaffe v. Samsung Elecs. Co., Ltd., recently held that a U.S. bankruptcy court is not required under principles of comity to blindly apply foreign law to assets located in the U.S. of a foreign debtor whose principal insolvency proceeding is outside the U.S. Instead, bankruptcy courts must balance the interests of the affected U.S. parties with the those of the foreign debtor. In this case, the balancing required the application of U.S. law to the foreign debtor’s U.S. assets, not German law as applied in the foreign proceeding. Absent the application of U.S. law, German law would have governed some 4,000 U.S. patent licenses rendering them unenforceable. Application of section 365(n) of the U.S. Bankruptcy Code, on the other hand, limits the debtor’s ability to unilaterally reject licenses of the debtor's intellectual property by giving licensees the option to retain their rights under the licenses. The Court in Jaffe determined that, in granting discretionary relief to a foreign representative under section 1521(a)(5) of the Bankruptcy Code, a Bankruptcy Court is required to balance the interests of affected U.S. entities against the interests of the foreign debtor in order to consider whether such U.S. entities are “sufficiently protected” under section 1522(a) of the Bankruptcy Code. The Fourth Circuit also held in the Jaffe case that, in balancing such interests, the Bankruptcy Court properly required, as sufficient protection of the objecting patent licensees, the application of section 365(n) of the U.S. Bankruptcy Code prior to entrusting the U.S. patents to the foreign representative.

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