What happens to your IP license if the other side goes bankrupt?

Licenses run for years, and over years partners fail. A label, distributor, software vendor or brand owner files for bankruptcy, and the other side needs to know whether its license still works. Our page on IP licensing and assignments mentions insolvency clauses briefly. This page explains the federal bankruptcy rules that override many of those clauses, using section 365 of the Bankruptcy Code and the Supreme Court's decision in Mission Product Holdings v. Tempnology.

How a license is handled in bankruptcy, step by step

1. The case is filed. A license on which both sides still owe performance is an "executory contract," which the Supreme Court describes as a contract that neither party has finished performing.
2. The trustee or debtor decides. Subject to court approval, the trustee may assume or reject any executory contract of the debtor (11 U.S.C. 365(a)).
3. Assumption means the deal continues. Before assuming, the debtor must cure defaults or give adequate assurance it will, and give adequate assurance of future performance (365(b)).
4. Rejection is a breach. Rejection "constitutes a breach of such contract" (365(g)).
5. The licensee of IP chooses. If the debtor is the licensor of "intellectual property" as the Code defines it, the licensee may treat the license as terminated or keep its rights (365(n)).
6. Keeping rights has a price. A licensee that keeps its rights must make all royalty payments and gives up setoff and certain administrative claims (365(n)(2)).

If your licensor goes bankrupt, what does section 365(n) give you?

When a trustee rejects an executory contract under which the debtor is a licensor of a right to intellectual property, the licensee may elect to retain its rights, including the right to enforce any exclusivity provision, "under such contract and under any agreement supplementary to such contract," to the intellectual property, "including any embodiment of such intellectual property," as those rights existed immediately before the case began. It keeps them for the duration of the contract and any extension available to the licensee as of right (365(n)(1)(B)).

In return, the licensee must keep paying all royalties due for that period and is deemed to waive any right of setoff under the contract and any administrative expense claim arising from the contract's performance (365(n)(2)). On the licensee's written request, the trustee must provide any intellectual property it holds, to the extent the contract provides, and must not interfere with the licensee's rights, including the right to obtain the IP from another source (365(n)(3)). Even before rejection, on written request the trustee must perform the contract or provide the IP, and not interfere (365(n)(4)).

Why are trademark licenses treated differently?

Because the Bankruptcy Code's definition of "intellectual property" lists trade secrets, patents and patent applications, plant varieties, works of authorship protected under the Copyright Act and mask works, and does not list trademarks (11 U.S.C. 101(35A)). So section 365(n) does not apply to a trademark license.

The Supreme Court filled part of that gap in Mission Product Holdings, Inc. v. Tempnology, LLC, 587 U.S. 370 (2019). Tempnology had licensed its trademarks to Mission for clothing and accessories, then rejected the agreement in Chapter 11. The Court held that rejection "has the same effect as a breach of that contract outside bankruptcy," and "cannot rescind rights that the contract previously granted." Outside bankruptcy, a licensor's breach does not revoke continuing rights given to the other side, so rejection does not either.

Justice Sotomayor's concurrence adds two cautions. The Court did not decide that every trademark licensee may keep using the mark after rejection; the question remains whether the rights would survive a breach under nonbankruptcy law, and special contract terms or state law could matter. And trademark licensees' position differs from section 365(n) licensees in some ways, for example the 365(n) duty to keep paying all royalties without deductions does not apply to them. Our page on trademark license quality control explains why a licensor's control obligations make trademark licenses distinctive in the first place.

How do you draft a license that survives a partner's bankruptcy?

No clause can switch section 365 off, but drafting decides how well the statute works for you. Start with a signed written license that names each work, patent or mark covered; for copyright exclusives a signed writing is required anyway, as our page on whether a license must be in writing explains. Allocate royalties among the types of IP so that a court can see what the licensee pays for the 365(n) property and what it pays for any trademark. Give the licensee renewal options it can exercise alone, because 365(n) protects extensions available "as of right." List the materials the licensee is entitled to receive (masters, source files, artwork, specifications) and make any delivery or deposit arrangement an agreement supplementary to the license.

For trademark pieces, follow Justice Sotomayor's point: state what rights survive a breach by the licensor, such as a sell-off period and the right to keep using the mark on approved goods for the remaining term, so that "applicable nonbankruptcy law" has clear contract terms to apply. Merchandise programs, which usually combine a trademark license with artwork, are a common case; our page on trademark classes for merchandise licensing covers the filing side. Creators who license to brands face the same questions from the other direction, as our post on IP licensing for creators and brands discusses.

What changes the answer

• Which IP the license covers. A deal mixing software copyright and a brand gets 365(n) protection for the copyright side only. Draft so each piece can be identified.
• Whether the contract is executory. Section 365 applies to contracts with performance still due on both sides; a fully paid, completed assignment is a different question.
• Extensions "as of right." 365(n) protects the term plus extensions the licensee can claim as of right, so an option the licensee can exercise alone is stronger than one needing the licensor's agreement.
• Supplementary agreements. 365(n) protects rights under the license "and under any agreement supplementary to such contract," so related deliverables or deposit arrangements should be tied expressly to the license.
• Author's copyrights. The Copyright Act bars involuntary transfers of an individual author's copyright, "except as provided under title 11" (17 U.S.C. 201(e)), so an author's own bankruptcy can affect ownership.
• Exclusivity. A licensee that keeps its rights under 365(n) may enforce exclusivity provisions, which matters for an exclusive licensee; see our page on whether a licensee can sue an infringer.

A worked example

Common mistakes

• Relying on a "terminates on bankruptcy" clause. Section 365(e)(1) makes such clauses generally unenforceable once the case starts.
• Missing the election. A licensee that wants to keep its rights should make the 365(n) election clearly and keep paying.
• One royalty for everything. Separate pricing for copyright, patent and trademark pieces makes 365(n) easier to apply.
• No written request for materials. The trustee's duty to provide IP and not interfere is triggered by a written request.
• Assuming a trademark license is safe or doomed. After Mission Product, it is neither automatically; the contract terms decide much.
• Forgetting the paperwork trail. A recorded license is easier to prove; see our page on recording a copyright assignment or license.

What to do this week

1. List your licenses with partners who may be in financial trouble, in both directions.
2. For each, identify the type of IP licensed: copyright, patent, trade secret, trademark, or a mix.
3. Check whether royalties are allocated separately to each type.
4. Note renewal options and whether you can exercise them alone.
5. Make sure related agreements (deliverables, deposits, support) are expressly supplementary to the license.
6. If a partner has filed, calendar the case's deadlines and send any written requests under 365(n) promptly.

Frequently asked questions

Does section 365(n) cover music and film licenses?

Yes, to the extent they license works of authorship protected under the Copyright Act, which the Code includes in its definition of intellectual property (101(35A)).

Do I have to keep paying royalties to a bankrupt licensor?

If you elect to keep your rights under 365(n), yes: all royalty payments due for the term and any extension, without setoff (365(n)(2)).

Can a bankrupt licensee sell my license to someone else?

Not if applicable law excuses you from accepting performance from someone other than the debtor and you do not consent (365(c)(1)). Whether that applies to a given license is decided by the bankruptcy court.

What did Mission Product v. Tempnology decide?

That a debtor's rejection of a trademark license has the same effect as a breach outside bankruptcy and cannot rescind rights the contract already granted (587 U.S. 370 (2019)).

Should a catalog buyer worry about the seller's bankruptcy?

A buyer who takes an assignment, rather than a license, should record it and close cleanly; our page on selling a music catalog covers the sale side.

Do these rules apply to licenses for training data or new technology?

The same section 365 rules apply to any license of covered IP, including newer kinds of deals, discussed on our page on licensing your work for AI training.

Zala IP Law drafts licenses with insolvency in mind and advises licensors and licensees when a partner is in trouble, and Shreepal J. Zala practices federal intellectual property law nationally. If a licensing partner has filed or may file, request a consultation or call 404-313-1701.