Abstract
In today’s knowledge-driven economy, the significance of intellectual property licenses cannot be overstated. Nevertheless, a loophole within the Bankruptcy Code allows a non-debtor’s license agreement to be erased, stripping them of their right to utilize the intellectual property without any avenue for recourse. Selling intellectual property “free and clear” of encumbrances before the debtor rejects the license agreement could deprive the non-debtor licensee of the opportunity to continue using the intellectual property. This loophole not only undermines the policy goals of both intellectual property and bankruptcy, but also subverts the clear intentions of Congress and the Supreme Court to protect non-debtor licensees from the ripple effects of their licensor’s chapter 11 bankruptcy. Furthermore, extinguishing an intellectual property license through the loophole could inadvertently drive more businesses into bankruptcy, contrary to the stated rationales of the Intellectual Property Bankruptcy Protection Act and the recent expansion of similar protections to trademark licenses in Mission Prod. Holdings v. Tempnology. As a result, changes to the Bankruptcy Code and how judicial discretion is applied to intellectual property licenses are necessary to protect non-debtor licensees from the involuntary erasure of their rights.
This Comment describes (1) how the loophole can be exploited; (2) the implications for a non-debtor licensee of intellectual property; (3) why this outcome is unacceptable under the policy aims of intellectual property and bankruptcy law; and (4) a simple way to close the loophole permanently.
Recommended Citation
Grant Marshall,
The Nightmare Loophole: Circumventing Section 365(n) and Erasing a Non-Debtor Licensee’s Intellectual Property Rights,
41
Emory Bankr. Dev. J.
515
(2025).
Available at:
https://scholarlycommons.law.emory.edu/ebdj/vol41/iss3/8