The Federal Interest in the Transfer of Patent License Rights in Bankruptcy

Abstract

Bankruptcy Code section 365 affords a debtor in possession broad power to assume and assign executory contract rights notwithstanding most nonbankruptcy restrictions on assignment of those rights. As an exception to this general power, a debtor in possession can neither assume nor assign executory contract rights if, under such rights are not assignable to a third party. Under patent common law, a patent licensee may not transfer its rights unless the terms of the license affirmatively permit transfer or the licensor otherwise consents. This patent common rule of interpretation serves as law in the patent licensee's bankruptcy case, and appears to bar the debtor in possession from exploiting such rights without the licensor's consent. Although the relevant statutory language is clear, the federal circuit courts of appeal are divided on whether a patent licensor can block a debtor in possession from assuming for its own use patent license rights that under applicable patent it cannot assign to a third party. The article looks beyond the justifications courts have given for their conflicting decisions and recasts them as incomplete responses to problems of inefficiency.