The United States Supreme Court recently declined to grant certiorari to Qimonda, a foreign manufacturer of semiconductors subject to insolvency proceedings in Germany. The request sought to determine the applicability of German insolvency law to licensees of U.S. patents.
Qimonda AG, which entered insolvency in 2009, holds as its primary asset an IP portfolio containing nearly 10,000 patents, of which 4,000 were held in the United States. In doing so, the Supreme Court let stand the Fourth Circuit Court of Appeals’ decision in Jaffe v. Samsung Electronics Co., 737 F.3d 14 (4th Cir. 2013), cert. denied, No. 13-1324 (Oct. 6, 2014), to affirm a prior Bankruptcy Court decision declining to apply German insolvency law to holders of U.S. patent licenses. Therefore, licensees of Qimonda’s U.S. patents were allowed to retain their respective rights under such licenses pursuant to 11 U.S.C. § 365(n).
Chapter 15 of the U.S. Bankruptcy Code is a mechanism by which a representative of a foreign insolvency proceeding may petition a U.S. Bankruptcy Court to recognize a foreign insolvency proceeding. In the case of Qimonda, the administrator of the German insolvency proceeding requested the U.S. Bankruptcy Court for the Eastern District of Virginia to recognize the insolvency proceeding in Germany and to allow him to reject the intellectual property licensing agreements under German insolvency law. While the U.S. Bankruptcy Court did recognize the Qimonda insolvency proceeding, the court did not allow the administrator to reject and terminate the license agreements of U.S. patents under German insolvency law. Instead, the U.S. Bankruptcy Court upheld the licensees rights under § 365(n) of the U.S. Bankruptcy Code to elect to retain the benefits of their respective U.S. patent licenses.
The Fourth Circuit affirmed the ruling of the U.S. Bankruptcy Court when it employed a balancing test and determined the harm to licensees of the U.S. patents outweighed the benefits to the estate of Qimonda should the court rule that the administrator be allowed to reject the U.S. patent license agreements under German law. On a separate basis, the court also held that deferring to German insolvency law to the extent it allowed for the unilateral termination of U.S. patent licenses would be manifestly contrary to U.S. public policy.
The U.S. Bankruptcy Court’s ruling, however, did not extend to licensees of non-U.S. patents.
While the Qimonda case on the interplay between Chapter 15 and § 365(n) is only binding in those jurisdictions within the Fourth Circuit, it is a case of first impression in the United States, and will likely be highly influential if and when the matter subsequently arises in other circuits. However, for now, licensees of U.S. patents can feel more comfortable knowing their rights to such licenses will likely be protected from more draconian laws of foreign insolvency proceedings.
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