Spansion v. Apple
The Intersection of the Bankruptcy Code
and Intellectual Property
AIPLA Spring Meeting
May 2, 2013
Michael R. Lastowski
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11 U.S.C. § 365 – Executory Contracts
Definition – a contract as to which each party has obligations that
are sufficiently material so that a failure to perform those obligations would
relieve the other party from performance.
Examples – supply contracts, license agreements, leases, etc.
Property of the estate – under 11 U.S.C. § 541, these contracts
are property of the debtor/property of the estate.
Executory contracts, from a business perspective, may be beneficial or
burdensome (i.e., the debtor’s benefits under an executory contract may
be above or below “market”).
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Assumption of Beneficial Executory Contracts
11 U.S.C. § 365(a) permits assumption or
rejection of executory contracts.
Under 11 U.S.C. § 365(b), a contract may not
be assumed unless the debtor:
Cures existing defaults ;
Provides adequate assurance
of future performance.
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Rejection of Burdensome Executory Contracts
The debtor is deemed to be in material breach of its obligations as of the
date it filed for bankruptcy (the “Petition Date”).
The non-debtor party has a claim for rejection damages (i.e., damages for
breach of contract).
The claim is a general unsecured claim (often pennies on the dollar).
The contract is not “terminated.” The debtor may still be bound by
provisions of the executory contract (e.g., a covenant not to compete).
The non-debtor party is relieved from future performance.
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Treatment of Intellectual Property
Under the Bankruptcy Code
11 U.S.C. § 101(35A) provides:
The term “intellectual property” means:
(A) trade secret;
(B) invention, process, design or plan under title 35;
(C) patent application;
(D) plant variety;
(E) work of authorship protected under title 17; or
(F) mask work protected under chapter 9 of title 17
to the extent protected by applicable non-bankruptcy law.
Note the omission of trademarks.
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Rejection of Intellectual Property
Licenses Under the Bankruptcy Code
If the debtor, as licensor, rejects an intellectual property
license, the non-debtor licensee has the ability to elect to:
Treat the license as terminated (note the difference
between “rejection” and “termination”); or
Elect to continue to “retain its rights” under the
executory contract and any “agreement supplementary to
such contract” for the duration of the contract and any
extension period.
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If the licensee elects to retain its rights,
•
The licensee may enforce any exclusivity provision in the agreement
with the debtor.
•
The licensee is required to pay royalties under the agreement, without
the benefit of setting off any damages arising from the debtor’s
performance of its obligations.
•
The licensee forfeits its right to seek rejection damages.
•
The debtor is required to deliver to the licensee any intellectual
property relating to the license.
•
The debtor is barred from interfering with the rights of the licensee
under the license.
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The Spansion/Apple Litigation
•
The case has its genesis in Spansion’s commencement of
litigation against Samsung for patent infringement.
•
Spansion filed a patent infringement action in District
Court.
•
Spansion also initiated an action before the International
Trade Commission (“ITC”), seeking an order barring the
import of certain consumer goods incorporating Samsung
flash memory chips.
•
In the ITC action, Spansion named as respondent’s
purchasers of Samsung chips, including Apple.
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The Letter Agreement
•
Spansion and Apple entered into a Letter Agreement
under which Spansion agreed to dismiss the ITC action
against Apple and not to “re-file the ITC action or another
action related to one or more of the same patents against
Apple.”
•
In exchange, Apple agreed that “Spansion will remain
primary-supplier on current platforms where Spansion is
qualified for the life-time of the product and will also be
considered for future platforms . . .”
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The Rejection/Termination
of the Letter Agreement
•
Spansion filed a motion to reject the Letter Agreement.
•
The bankruptcy court granted the motion and entered an
order which, among other things, stated that the Letter
Agreement was “terminated.”
•
Apple thereafter filed a “notice of election” under § 365(n).
•
Spansion moved to strike the election in light of the
language in the order providing for “termination.”
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The Bankruptcy Court Ruling
• The order granting the motion to reject was
amended to exclude any reference to
“termination.”
• The notice of election was stricken in light of
the absence of any evidence that Spansion
and Apple had a continued business
relationship.
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The District Court Ruling
•
The bankruptcy court’s decision to amend its prior order to
exclude any reference to termination was affirmed.
•
The bankruptcy court’s striking of the notice of election
was reversed – the absence of a continuing business
relationship between Spansion and Apple does not
prevent the covenant not to sue from being enforced as a
license.
•
The United States Court of Appeals for the Third Circuit
affirmed the District Court.
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