Under Section 365(n) of the US Bankruptcy Code, if your technology licensor files for bankruptcy, you generally have the right to retain your intellectual property license. To keep using the software or patent, you must continue making all required royalty payments and waive any right to set-off damages against the bankrupt licensor.
In the modern, highly connected economy, businesses rely heavily on licensed software, patented manufacturing processes, and recognizable trademarks to operate efficiently. But what exactly happens if the company that owns the underlying technology suddenly goes bankrupt? Understanding how US bankruptcy laws affect intellectual property licenses is absolutely critical for safeguarding your daily business operations. This comprehensive federal guide outlines your specific legal rights when a licensor files for Chapter 7 liquidation or Chapter 11 reorganization bankruptcy. 📍
When a licensor enters the bankruptcy process, they are granted the extraordinary federal power to reject existing, burdensome contracts to shed financial weight. In the past, this terrifying reality left innocent licensees utterly devastated and without access to essential tools. However, Congress specifically implemented Section 365(n) of the Bankruptcy Code to heavily protect technology users. Just as dealing with the IRS requires strict adherence to federal tax rules, navigating a licensor’s bankruptcy requires swift and incredibly precise legal action to minimize your corporate liability.
Step-by-Step Process in the USA Bankruptcy Courts
Corporate bankruptcy is an entirely federal process handled exclusively by Federal District Bankruptcy Courts. Whether the bankrupt company is located in Silicon Valley in California, Chicago, Illinois, or Austin, Texas, the federal bankruptcy procedures remain identical across the country. Most licensees in the USA choose to take these specific, highly strategic steps when a vital licensor goes under to protect their assets. 📂
Step 1: Receiving the Notice of Bankruptcy
If a company you actively license technology from officially files for bankruptcy, you will receive a formal, written notice from the Federal Bankruptcy Court. This document is just as important as a compliance notice from the DMV or EEOC, and you must review it immediately. It will outline critical deadlines, known as bar dates, for filing a proof of claim as an unsecured creditor.
Step 2: Evaluating the Licensor’s Choice
During the proceedings, the bankrupt licensor (often acting as the debtor-in-possession) can choose to either legally assume or reject your specific intellectual property license agreement. If they assume the contract, business continues exactly as usual, and they must cure any past defaults. If they unfortunately reject the contract, they are essentially walking away from all of their future obligations, such as providing you with software updates or technical support.
Step 3: Making the Section 365(n) Election
If the licensor decides to reject the contract, you must formally invoke your protective rights under Section 365(n) in the federal bankruptcy court. 📝 By officially making this election, you loudly notify the bankruptcy judge, the plaintiff, and any defendant in related adversary proceedings that you will retain your right to use the intellectual property for the absolute remainder of the original contract term.
Step 4: Continuing Royalty Payments
Retaining your rights under Section 365(n) comes with a very strict, non-negotiable condition. You must continue paying all required royalties due under the original licensing agreement. Furthermore, you must totally waive any right to deduct damages (known as a settlement set-off) from those payments, even if the licensor’s bankruptcy severely disrupted your business or increased your legal liability.
How Much Does it Cost in the USA?
Defending your intellectual property rights during another company’s chaotic bankruptcy is unfortunately not cheap. 💼 You will certainly need to hire a specialized bankruptcy attorney to file the correct motions and ensure you do not miss strict federal deadlines. As of March 2026, you can generally expect the following standard costs:
- Bankruptcy Attorney Fees: Experienced legal professionals usually bill hourly at rates between $350 and $900 per hour, depending heavily on the state and the complexity of the tech license.
- Federal Court Filing Fees: Filing a formal notice of appearance or specific protective motions typically involves nominal federal fees ranging from $25 to $200, depending on the exact district court.
- Continued Royalties: You must continue to pay exactly 100% of the royalties stated in your original license agreement, without any unilateral discounts.
How Long Does the Process Take?
A complex corporate Chapter 11 bankruptcy can painfully drag on for anywhere from six months to several years. ⏱ However, the deadline for a bankrupt licensor to decide whether to assume or reject your crucial license is usually imposed within the first 60 to 120 days of the case filing. Once they actually reject the contract on the record, you typically have an extremely brief window, often around 30 days, to file your formal Section 365(n) election with the presiding court.
Understanding Section 365(n) Protections
It is crucial to understand that not all licenses are treated equally under the US Bankruptcy Code. Here is a clear breakdown of exactly how different intellectual property types are currently handled. 🔍
| IP Type | Protected by 365(n)? | Key Legal Considerations |
|---|---|---|
| Patents | Yes, Fully Protected | You can safely continue manufacturing, selling, or using the patented invention. |
| Copyrights | Yes, Fully Protected | Protects your access to existing software code, but not future updates created post-bankruptcy. |
| Trademarks | Yes, Generally Protected | Following a massive 2019 US Supreme Court ruling, trademark licenses cannot be easily revoked via rejection. |
Frequently Asked Questions (FAQ)
Can I sue the bankrupt licensor for breach of contract?
When a company formally files for bankruptcy, an automatic stay immediately prevents you from filing new lawsuits against them. You cannot simply drag them into state court to seek a standard settlement. Instead, you must carefully file a proof of claim in the federal bankruptcy court.
Will I still get software updates if the licensor goes bankrupt?
Generally, no. Section 365(n) only allows you to keep using the intellectual property exactly as it existed on the precise day of the bankruptcy filing. The bankrupt company is no longer legally required to provide ongoing maintenance, technical support, or future software updates.
What happens if the licensee goes bankrupt instead?
If the user (the licensee) goes bankrupt, they cannot simply sell or transfer the IP license to another random company to pay off their massive debts. Federal intellectual property law generally prohibits the assignment of non-exclusive patent or copyright licenses without the licensor’s explicit consent.
Is there a statute of limitations for filing my bankruptcy claim?
Yes, bankruptcy courts set a very strict bar date, which acts much like a rigorous statute of limitations. If you do not formally file your claim for financial damages or missing services by this exact calendar date, your entire claim will be permanently dismissed without review.
Does a corporate bankruptcy impact personal family assets?
Corporate bankruptcies focus entirely on business assets and liabilities. However, if an individual licensor files for Chapter 7 or Chapter 13 bankruptcy, their ongoing IP royalties might be evaluated as personal income, which could directly affect the calculation of personal obligations like alimony/spousal support or child custody funding arrangements.
What happens if I stop paying royalties after rejection?
If you choose to retain your rights under Section 365(n) but subsequently fail to make the required royalty payments, you will be in direct breach of the license. The bankruptcy estate can then legally terminate your access to the intellectual property and sue you for the missing funds.
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