IP in Bankruptcy, Reorganization and Securitization
An excerpt from Chapter 17 of Fundamentals of Intellectual Property Valuation
By Weston Anson
Throughout this Primer we often refer to the importance of context and time in
establishing real value for intellectual property. In no other situation is time as critical as
it is in a bankruptcy or reorganization—and no other context is as fluid, fraught with
potential change and has such a depressive effect on the value of intellectual property.
The term “valuation in a bankruptcy environment” can really mean one of many things.
It can be a valuation in a reorganization of a company, an orderly disposal of assets,
liquidation of assets, securitization of those IP assets for continuing funds, and a partial
sell-off of the assets. Each of these scenarios can lead to the development of different
values. The reader would do well to refer back to the Introductory Pages of this
Section, that review the “CONSOR Context Continuum”, and the accompanying graphs
of value under the four various bankruptcy scenarios.
Over the last decade we have worked on valuations for a number of companies that
found themselves going through reorganization. In Chart 17.1 below, we look at
companies whose going-concern value and liquidation values were established. In
most of these cases we were involved in valuing the assets for both scenarios. The five
different companies come from five distinctively different businesses ranging from hightech fiber optic assets through photography and chemical technology to fast food and
comic books, with a stop on the way to take a look at TWA Airlines. The Chart is clear
in its conclusions. Liquidation value on average runs less than 15% of going-concern
value. A word of caution: These particular examples are extreme but nonetheless they
serve to illustrate the point that the difference between the value of a company’s IP in a
going-concern environment is so substantially different from a disposal or liquidation
environment, as to be almost unbelievable.
Chart 17.1
Going Concern Value vs. Disposal/Liquidation
Case
Going Concern
Value
Disposal or
Liquidation
Proportion
of Value
Polaroid
400MM+
60MM
15.0%
Boston Market
210MM
31MM
14.7%
TWA
800MM
50MM
6.3%
1.0B
121MM
23.2%
5.0+MM
<250K
5.0%
Marvel
Amherst Fiber Optics
AVERAGE
12.8%
© Copyright 2010 CONSOR Intellectual Asset Management
1
An excerpt from Fundamentals of Intellectual Property Valuation by Weston Anson
The accelerating pace of bankruptcies, both Chapter 7 and Chapter 11, is alarming to
us all from a business point of view. However, from an intellectual property point of
view, it raises bigger and brighter red flags. In bankruptcy, who owns the licenses and
the intellectual property controlled by the company going bankrupt? Can those licenses
be sold? Can the intellectual property be licensed into other areas and/or sold? All of
these issues are still being debated in the courts, and answers vary depending on the
district and the case.
This Primer looks at how to value and monetize intellectual property, information
technology, and other intangible assets in a bankruptcy environment. It is not intended
to deal with the legal issues of ownership, salability, provenance, etc. Instead, it deals
with the practicalities of valuing and selling intellectual property in the economic
environment created by bankruptcy or reorganization.
Questions That Need to Be Answered
The reality of the current economic environment means that the legal issues
surrounding the sale of IP assets out of bankruptcy will arise more frequently. In other
words, there will be more bankruptcies involving intangibles. When starting the process
of valuing and selling a company’s intellectual property and intangible assets, there are
two sets of questions that must be asked. The first has to do with the value and
ownership of the intellectual property:

Does the intellectual property maintain its value when it is in bankruptcy?

Who owns and controls that value?

Do the subsequent licenses have value?

Who controls the destiny of those licenses?
The second set of questions has to deal with the practicality of the valuation and
disposal process:

What sort of liquidation discount is experienced when a patent, a trademark, a
copyright, or a software license is sold in an orderly disposal?

How are these assets valued in a liquidation scenario?

Is there a formula to establish the descending value of these assets in
liquidation?

How can these assets be marketed and disposed of most cost effectively and
time effectively?
The two most interesting questions that need to be addressed in a bankruptcy situation
are the following: How does one treat trademark assets, since trademarks are
specifically excluded from the definition of IP under bankruptcy law; and, secondly, what
happens to trademarks and technology licenses in a bankruptcy or reorganization? As
to the latter, the code prohibits assignment of intellectual property licenses without the
consent of the non-debtor party, regardless of whether the license agreement has a
bankruptcy clause. Naturally, a debtor with critical IP license agreements that was
© Copyright 2010 CONSOR Intellectual Asset Management
2
An excerpt from Fundamentals of Intellectual Property Valuation by Weston Anson
prevented from assuming those agreements would have a much more difficult time
reorganizing and emerging from bankruptcy. In addition, if that same debtor was going
to use the assignment of valuable license agreements as a basis to reorganize,
prohibiting that assignment would defeat the ability to reorganize.
There are no hard and fast rules, however, some important thoughts are as follows:
The license can be allowed to “pass through” the bankruptcy proceedings without
assumption or rejection; but this depends on the ruling of the bankruptcy court, and
cannot always be depended upon. Second, when writing the license agreement, the
licensor can add a bankruptcy clause that specifically states that if the licensee files for
bankruptcy, the licensee or trustee has the absolute right to assume the license and to
continue to use the IP. Third, one can preempt problems by making the license an
exclusive license. The reason is that under a non-exclusive license, the licensee has a
right but not an obligation; whereas under an exclusive license, the licensor can be
considered to have transferred implied title in a non-executory sale. Executory
contracts are subject to bankruptcy approval, but non-executory sales would not be
subject to assumption or rejection under the bankruptcy code.
As to the second issue regarding trademarks and the treatment of trademark licenses
under bankruptcy, the law is even muddier, since trademarks were specifically excluded
from the last overhaul of the bankruptcy code (after much lobbying from very big
trademark interests such as Disney and the movie studios). However, one piece of
advice we give our clients if there is any hint of bankruptcy or reorganization on the
horizon is to sign a hybrid license. By this, we mean a license written for both
trademarks and technology of some sort, ranging from software to technical advice to
trade secrets, processes, etc. In doing this one has transformed what would normally
be a trademark license not subject to bankruptcy protection into a license containing
technology that would be specifically under the realm of the bankruptcy code—
However, this brings its own dangers and one must be certain that protections are
written into the contract, the most important one being to ensure that it is an exclusive
contract.
This discussion of key questions is complex and based heavily on law. Because this is
not intended as a legal Primer, the issues and details of bankruptcy law are not
addressed here. However, it is important to know that two sets of laws collide at the
intersection of a company’s bankruptcy: The bankruptcy code and laws, and the
intellectual property code and PTO regulations. Oftentimes these two sets of rules and
regulations are at odds. Therefore, trademarks in bankruptcy are most often dealt with
on a case-by-case basis. A final piece of advice: Get two good lawyers, one that
knows bankruptcy, and one that knows IP licensing.
Comparative Examples
When Warnaco sought protection in the Courts, it affected multiple pieces of intellectual
property, including the Warner’s brand, the Calvin Klein licenses held by Warnaco, and
the Speedo brand. In addition, Warnaco had software and operating systems that had
value and could have been sold if the company were to be liquidated. In a different
case, when Montgomery Ward elected to shutter its doors, it had a great deal of
intellectual property and intangible assets to be sold off. We valued and sold the
© Copyright 2010 CONSOR Intellectual Asset Management
3
An excerpt from Fundamentals of Intellectual Property Valuation by Weston Anson
trademark, brand names, shrink-wrap software, operating systems, and software
licenses owned and controlled by Montgomery Ward. Each bankruptcy is different, and
each company has different types of intellectual property. Chart 17.2 below compares
six companies and their trademarks and IP values in bankruptcy.
Chart 17.2
IP AND INTANGIBLE ASSETS IN BANKRUPTCY
SUMMARY CASE STUDIES
TYPES OF INTANGIBLES
Relative
Value
Ranking1
A plus
COMPANY
(B)
(C)
(D)
(E)
TM’s and Brands
IT and
Databases
Patents &
Technology
Internet
Other
Warners,
Speedo,CK
licenses
Complex
operating
systems
Manufacturing
technology
Domain Names
and Website
N/A
2. Borden
Chemical
Corporate brand
and sub-brands
Manufacturing
systems
Multiple and
proprietary
Modest
Chemical
processes
3. Montgomery
Ward
Montgomery
Ward, Ship N
Shore, plus 100+
TM’s and subbrands
Operating
platforms;
mailing lists
None
Online store
Mail order
system
4. Exodus
Corporate identity
Massive systems
Multiple BMP’s2
Complex assets
Hosting
processes
Corporate TM
International
databases
Proprietary
technology and
BMP
Online
sweepstakes
service
Other BMPs
Corporate name
Security IT and
software
Multiple patents
Modest
UL certifications
1. Warnaco
B+C
C+B
(A)
D, A, E
B
A+D
B, C, D, E
C+D
5. beenz.com
B
E+C
6. Mosler
A, D, B
1
The rankings for each company reflect relative value within that company, in a bankruptcy or liquidation scenario (e.g.,
Montgomery Ward will realize most value from “B” assets, IT and databases).
2
BMP = Business Method Patents. A BMP provides protection for intellectual concepts and systems sufficiently unique to earn
patent protection. The one-click ordering system of Amazon.com is a BMP.
© Copyright 2010 CONSOR Intellectual Asset Management
4
An excerpt from Fundamentals of Intellectual Property Valuation by Weston Anson
Identifying the Portfolio of Intellectual Property
When the harsh realities of bankruptcy or liquidation descend on an enterprise, where
can the lenders or ultimate stakeholders look to maximize cash or other value beyond
the obvious bricks and mortar, inventory, FFE&I, and real estate assets? Increasingly,
the answer is to the intellectual capital. However, within the context of a bankruptcy or
reorganization, those assets and their valuation and sale often are treated as an
afterthought. Although obtaining accurate market-based values in these situations is
important, the value and disposition of assets for creditors often are made on a less
than well-informed basis.
Accurate valuation of intellectual capital and other intangible assets is crucial not only in
bankruptcy situations, but in the context of mergers and acquisitions, off balance sheet
financing, tax planning, and internal-asset allocation. To address the need for accurate
valuations of intangibles and intellectual property in bankruptcy or liquidation and
disposition situations, it is necessary to address two core issues. The first is to identify
the underlying cause (e.g., Chapter 11 or merger) that precipitated the need to value
and sell the assets. The second is to identify the basic premise of the valuation (e.g.,
going-concern or liquidation value). The core objective becomes establishing the thencurrent market value of the intangible assets, given the conditions and valuation goals.
The intellectual capital of the enterprise should be viewed as a portfolio of intangible
assets. These include the obvious patents, trademarks, copyrights, brand names,
logos, and other elements frequently lumped into the category of goodwill and seldom
valued individually. In addition, proprietary methodologies, best practices, applicationspecific software, operating systems, enterprise information infrastructures, as well as
the tools to operate and support the information needs of a 21st century business,
comprise the intangible-asset bundles that contribute directly to return on equity and fee
cash flow. Their value, in terms of cash equivalence, is complex in composition and is
heavily dependent on the context in which they are evaluated.
The Valuation Process
The steps for valuing intangibles in a bankruptcy or reorganization follow much the
same pattern as when intellectual property is valued in a merger and acquisition
environment. The first is to identify all the intangibles involved. (See Chapter 2 & 3).
The second is to separate those intangibles from the tangible assets so that a separate
valuation can be established. The next step is to identify incremental value within the
family of intangibles, looking for additional financial security and/or financial leverage.
The goal is to maximize the value for the creditors and the bankruptcy estate by
identifying all intangibles and their potential uses that have market value. This gives the
court, creditors or corporation a solid basis for a total asset valuation and allocation.
At this point, we all understand that the context in which an intangible asset is valued is
important. We have reviewed the Context Continuum value charts. There is another
graphic way of illustrating the high degree of uncertainty in intellectual property
valuation, based on context: In the second edition of the Smith and Parr book,
Valuation of Intellectual Property and Intangible Assets, the authors engage in
discussion on asset characteristics. In Chapter 12 they include a Chart entitled
© Copyright 2010 CONSOR Intellectual Asset Management
5
An excerpt from Fundamentals of Intellectual Property Valuation by Weston Anson
Business Asset Characteristics as shown below. The most striking aspect of this is that
as an asset type goes from rough to right on their Chart it becomes less liquid and more
volatile in value. Put another way, cash assets do not have a variation in value, whether
they are in bankruptcy or not. As we move to the right, we see that tangible assets such
as buildings also have a relatively small variation in value. Finally, on the right hand of
the Chart, intangible assets have the greatest variation in value. This Chart illustrates
as graphically as any that we have seen the effect of uncertainty on groups of intangible
assets—and, there is no more uncertain situation then that of bankruptcy.
Whether calculating a value of the assets based on replacement value, auction value,
liquidation value, or traditional market value, account must be given to the environment
for disposal. Because of bankruptcy or reorganization, the valuation is context specific,
meaning that some discount from normal market value will be needed. It must be
remembered, too, that intellectual property and intangible assets are wasting assets—
as time goes by, their value declines relatively quickly. Finally, in a liquidation scenario,
the “willing buyer/willing seller” premise of value is modified to account for the
distressed environment in which the assets will be sold.
Therefore, one should take an approach to valuation during bankruptcy that from
typical, going-concern market value, a liquidation discount will be applied. That
discount can be as little as 30% and as much as 90%, and, in some cases, possibly
even more. As each month passes, the value of the IP or intangible asset decreased by
2% to 5% (databases, mailing lists, and technical know-how will degrade more quickly
than trademarks and brand assets).
Therefore, the final thought in bankruptcy valuation is: Going-concern value less
liquidation discount, less a further discount for competitive bankrupt asset offerings, is a
realistic and attainable market value.
The Marketing and Sales Process
The central issue of selling or liquidating intangible assets in bankruptcy is to find the
most effective way to maximize value. Whether in the context of an acquisition or
merger, an IPO, a private sale, a foreclosure, reorganization or bankruptcy; how do
these intangible assets, the intellectual capital of the company, become converted to
real cash. To answer this question, it is necessary to look at the elements and the
process of monetization and then to the mechanics of the process in its implementation.
Experience says that it is far more practical to manage and hold one out-sourced firm
accountable and measurable than it is to attempt to undertake the effort internally.
While the company in bankruptcy was functioning, its core competencies were not
focused on the business of liquidating its IP. The skills and resources to create,
implement, and manage the liquidation of the IP are, by definition, outside the requisite
skill set for growing an enterprise. Independence of the outsource provider and the
arm’s length nature of the relationship add credibility to the valuation and
implementation efforts, desired.
Viewed with a jaundiced eye, the assets need to be analyzed as if they were
merchandise. That is, they must be prepared for sale, described with collateral material,
© Copyright 2010 CONSOR Intellectual Asset Management
6
An excerpt from Fundamentals of Intellectual Property Valuation by Weston Anson
and packaged as if these were inventory, fixtures or other tangible assets being sold in
the ordinary course of bankruptcy, which, in fact, they are. Further, because the assets
are intangible, they need to be collected in their electronic or graphic form and secured
off site by the outsource provider, because the old operating environment in which they
were deployed is unstable and going away. The remaining people in the organization
will be disappearing, and a knowledge transfer needs to be accomplished to a safe
haven of stability and continuity.
As part of the process, the assets need to be physically secured, including source code
libraries and technical and user documentation, in addition to the contracts, licenses,
certifications, patents, trademarks, and other filings and registrations. Although many of
these originals will remain resident with counsel for the company, an inventory of all
relevant materials related to salable assets needs to be collected and organized.
CASE STUDIES
To illustrate the marketing sales process we have included two case studies. In the
first, Polaroid Corporation, we were asked to put together a contingency plan to dispose
of the assets. Under one contingency, we were asked to look at liquidation and on the
other hand at an orderly disposal. At the same time, we were asked to also establish
going-concern value for a legacy company. We will focus here on the first two valuation
premises. The three Charts below, 17.3, 17.4 and 17.5 summarize the project very
simply. Chart 17.3 lays out what we were asked to do, 17.4 lists the assets of value,
while 17.5 summarizes the values.
Chart 17.3
Polaroid: The Project
To assist Polaroid in maximizing the value of its intellectual
property and other intangible assets via:

Valuation of the assets

Identification of target markets, economic
conditions,

Suggest monetization alternatives

Recommendation of an asset disposition or
securitization plan
© Copyright 2010 CONSOR Intellectual Asset Management
7
An excerpt from Fundamentals of Intellectual Property Valuation by Weston Anson
Chart 17.4
Polaroid Corporation: Bankruptcy/Reorganization
Key Assets
Technology
Marketing
 800+ Patents
 52 Clusters
 500+ Patent Applications
 30,000+ Chemicals
 Patent Licenses
 Core Polaroid Brand
 Sub-brands
 Trademark Licenses
 Photo Archive
Chart 17.5
POLAROID NET ASSET VALUES
Liquidation
TOTAL TECHNOLOGY
ASSET VALUE
$15.2M –
$19.5M
TOTAL BRAND ASSET VALUE
$30.8M –
$45.2M
NET VALUE (after all hard
$46.0M –
$ 65.0M
Orderly Disposal
$36.5M - $43.0M
$67.0M - $78.0M
$103.5M - $112.1M
costs)
The Polaroid case had a happy ending in that an investor was found for a legacy
company, and the intangible assets were used as securitization for a $50M to $60M
asset based loan. In the second case, Amherst Fiber Optics, the situation was quite
different. Amherst was a subsidiary of TVC which was a company in Chapter 11
reorganization.
In order to come up with an adequate plan of reorganization and emerge from
bankruptcy, the parent company discovered that there was a great deal of unlocked
value in the Amherst Fiber Optics assets----- but, this was value of a very unique sort.
In this case, Amherst stood to recover a $20+M tax refund from the federal government
© Copyright 2010 CONSOR Intellectual Asset Management
8
An excerpt from Fundamentals of Intellectual Property Valuation by Weston Anson
for its investments in R&D. However, there was a very important key constraint; and
that was that the assets had to be sold on or before December 31, 2002 in order to earn
the tax credit. In this environment we were given less than 90 days to identify,
assemble, market, sell and close the transaction. Therefore, assets that might have
brought a few million dollars in a liquidation scenario were reduced to an absolute fire
sale context.
Chart 17.6 outlines the assets for sale and Chart 17.7 shows the result of the project.
While we had only a few weeks to sell and close the assets, and, as a consequence
received less than $700K in cash for the assets, the process was a great success
because all assets were sold, transferred and money exchanged prior to December 31,
2002. As a result the client received a tax refund in excess of $20M, enabling TVC to
proceed with its reorganization plan.
Chart 17.6
Amherst Fiber Optics: Liquidation/Asset Sale
Company
TVC
Context:
Liquidation of subsidiary
Cause:
Massive potential tax benefit
Components:
8 independent patent bundles
Fiber Optics after-market,
Repair/maintenance
Valuation Approach:
Components of value
Liquidation value
© Copyright 2010 CONSOR Intellectual Asset Management
9
An excerpt from Fundamentals of Intellectual Property Valuation by Weston Anson
Chart 17.7
Monetization of Amherst Fiber Optics
Trademark and Technology Assets
 Identify all IP in each bundle
 Inventory patent applications and registrations
 Collate related trade secrets, designs, assemblers, etc.
 Benchmark valuation
- Liquidation context
- End-use dependent
 Market the assets/close transactions
 Results:
- $400 – 700,000 cash sale
- $20+ million tax refund
Conclusions
The legal issues regarding intellectual property in bankruptcy are complex.
Nonetheless, in the midst of the radical change wrought by liquidation, bankruptcy or
sale, intellectual property and intangible assets should be looked to first and not last.
The company or its trustees should begin the process of monetization in parallel with
tangible asset reviews of merchandise, inventories, real estate, FFE&I. Just as there
are recognized leaders in the provision of valuation and disposal services for the
tangible assets, there are experts who deal solely in intangibles. Professionals in this
area generally work for retainers and are also compensated with “success fees” that
often escalate in direct proportion to the aggregate dollars realized.
This brief overview of intangible assets and intellectual property in reorganization and
bankruptcy, stresses accurate values and orderly disposition. This Chapter is only a
summary of a subject that is complex and increasingly important. However, there are
five specific observations that should be restated:
1. The increasing importance to a corporation of intangible assets.
2. The increasing recognition by bankruptcy, tax and other courts of both the
importance and value of intellectual capital.
3. A similar recognition by creditors of the importance and value of these assets.
4. The awareness that intangible assets and intellectual property can be valued
accurately.
5. The realization of IP disposal or liquidation values in the tens of millions of dollars.
Finally, there are the legal issues regarding IP ownership and rights in bankruptcy.
Whether it is primary ownership of the trademark, patent, copyright, etc., a fully paid-up
© Copyright 2010 CONSOR Intellectual Asset Management
10
An excerpt from Fundamentals of Intellectual Property Valuation by Weston Anson
license, or a series of product-specific licenses, ownership and disposal is and will be
an issue in bankruptcy. This is not an analysis of the legal issues. Rather, it puts forth
the business issues. However, all professionals involved with intellectual property in a
bankruptcy environment must be cautioned that substantial uncertainty remains as to
ownership and disposal powers over shrink-wrap licenses, trademark licenses, patent
and technology agreements, etc. These issues likely will be worked out on a case-bycase basis as the number and range of bankruptcies gets more complex.
© Copyright 2010 CONSOR Intellectual Asset Management
11