Decided: December 3, 2013
The Fourth Circuit held that the bankruptcy court reasonably exercised its discretion in balancing the interests of licensees with the interests of the debtor and found that application of Section 365(n) was necessary to sufficiently protect licensees. Therefore, the bankruptcy court’s ruling was affirmed.
In January 2009, Qimonda AG filed an insolvency proceeding in Germany. Dr. Michael Jaffé (“Jaffé “) was appointed to serve as insolvency administrator to liquidate the estate. The principal assets of the estate were approximately 10,000 patents, including 4,000 U.S. patents. The U.S. patents were subject to cross-license agreements with competitors.
Soon after the insolvency proceedings were commenced in Germany, Jaffé successfully commenced a Chapter 15 proceeding for recognition of the German proceeding as a “foreign main proceeding” under 11 U.S.C. § 1517. In addition, the bankruptcy court, pursuant to Section 1521(a)(5), entrusted him with all of Qimonda’s assets located within the United States, primarily the patents.
Contemporaneously with the Chapter 15 proceeding, Jaffé sent letters to Qimonda’s licensees under cross-license agreements declaring that the licenses were no longer enforceable under Section 103 of the German Insolvency Code. The licensees, however, responded that they elected to retain their rights under the license pursuant to Section 365(n). In response, Jaffé sought a determination that Section 365(n) was not applicable. Initially, Jaffé prevailed in the bankruptcy court. However, on appeal, the district court reversed and remanded to the bankruptcy court for consideration of the Section 1522(a) balancing test and Section 1506 public policy considerations. After a four day evidentiary hearing on remand, the bankruptcy court issued an order holding that Section 365(n) applied with respect to the U.S. patents. The bankruptcy court found that the balancing of the debtor and creditor interests required by Section 1522 weighed in favor of application of Section 365(n). In addition, the bankruptcy court also concluded that deferring to German law under Section 1506, to the extent it allowed cancellation of U.S. patent licenses, would be contrary to public policy and therefore 365(n) should apply. This direct appeal to the Fourth Circuit followed.
On appeal, the Fourth Circuit addressed the significant question under Chapter 15 of the U.S. Bankruptcy Code of how to mediate between the United States’ interests in recognizing and cooperating with foreign insolvency proceeding and its interests in protecting creditors of the foreign debtor with respect to U.S. assets, as provided in Sections 1521 and 1522. Noting that the bankruptcy court properly recognized that in considering a request for discretionary relief under Section 1521(a), the court must also apply the balancing test set forth in Section 1522(a), the court held that the bankruptcy court reasonably exercised its discretion in (1) balancing the interests of licensees with the interests of the debtor and (2) finding that application of Section 365(n) was necessary to sufficiently protect licensees. Therefore, the bankruptcy court’s ruling was affirmed.
-W. Ryan Nichols