When a company files bankruptcy, its intellectual property becomes part of the bankruptcy estate along with everything else it owns, and the Bankruptcy Code then decides who controls it, whether existing licenses survive, and how it can be sold. The treatment of intellectual property in bankruptcy pulls from several parts of the Code and from federal patent, copyright, and trademark law, and the pieces do not always fit together cleanly. For patents, copyrights, and trade secrets, a licensee generally keeps the right to keep using the technology even if the licensor rejects the contract. For trademarks, the Supreme Court reached the same result by a different route. For the debtor itself, whether it can hold onto a license it depends on can turn on which federal circuit it files in.
What Counts as Intellectual Property in Bankruptcy
Filing a bankruptcy petition creates an estate that captures virtually every property interest the debtor holds, including intangibles like patents, copyrights, and proprietary know-how.1Office of the Law Revision Counsel. 11 USC 541 – Property of the Estate The Code then defines “intellectual property” narrowly for purposes of the special protections it grants. Six categories qualify: trade secrets, patented inventions and processes, patent applications, plant varieties, copyrighted works, and semiconductor mask works.2Office of the Law Revision Counsel. 11 USC 101 – Definitions
Trademarks, service marks, and trade names are not on that list. They are still property of the estate and still have to be disclosed, but the licensee protections written into Section 365(n) by their terms cover only the six statutory categories. The gap left by that omission is what forced the Supreme Court to address trademarks separately, as discussed below.
Every debtor has to schedule its IP assets. Failing to disclose them accurately can lead to denial or revocation of discharge if the omission looks knowing.3United States Courts. Chapter 7 Bankruptcy Basics
Who Controls the IP Depends on the Chapter
In a Chapter 7 liquidation, a court-appointed trustee takes control of estate assets, including IP. The trustee’s job is to maximize the return for creditors, which usually means selling the IP or abandoning it if the cost of maintaining it exceeds its value. The debtor has no say in whether a patent gets sold or a trade secret gets licensed off.
In a Chapter 11 reorganization, the debtor typically stays in control as a debtor in possession and keeps decision-making authority over its IP. That is the path companies choose when their intellectual property generates ongoing revenue and is worth more inside a functioning business than at auction. A reorganization plan can restructure debt around the IP’s income stream, keeping ownership intact while paying creditors over time. Companies whose value sits mostly in patent portfolios or proprietary technology overwhelmingly prefer Chapter 11 when they can support it financially.
What Happens to Existing IP Licenses
License agreements are treated as executory contracts under Section 365, because both sides usually still owe meaningful performance: the licensor has ongoing duties like maintaining patent prosecution or providing updates, and the licensee owes royalties and quality compliance.4Office of the Law Revision Counsel. 11 USC 365 – Executory Contracts and Unexpired Leases
The debtor or trustee can either assume the license and keep performing, or reject it and walk away. Courts generally defer to the debtor’s business judgment. Assuming a license requires curing outstanding defaults, such as unpaid royalties, and giving adequate assurance of future performance. Rejection is treated as a pre-petition breach, and the counterparty’s damages claim sits with the other unsecured creditors.
Deadlines Differ by Chapter
In Chapter 7, the trustee must decide within 60 days of the order for relief. Silence is deemed rejection. The court can extend the deadline, but only if asked before the 60 days run out.4Office of the Law Revision Counsel. 11 USC 365 – Executory Contracts and Unexpired Leases
In Chapter 11, the debtor can generally wait until plan confirmation, which can take months or years. But either side can ask the court to set a shorter deadline, and courts often do when the uncertainty is harming the non-debtor. If you hold a license from a Chapter 11 debtor, you may sit in limbo until the court forces the choice or the plan is confirmed.
When the Debtor Is the Licensee: The Anti-Assignment Problem
When the debtor holds a license rather than owns the underlying IP, Section 365 collides with federal IP law. Patent and copyright law generally treat licenses as personal to the licensee, meaning they cannot be transferred without the licensor’s consent. Section 365 restricts assumption or assignment of any contract where applicable law excuses the non-debtor from accepting performance from anyone other than the original debtor.4Office of the Law Revision Counsel. 11 USC 365 – Executory Contracts and Unexpired Leases Read strictly, that provision can prevent a debtor-licensee from assuming its own license even when no third party is involved.
Federal appeals courts are split. The Third, Fourth, Ninth, and Eleventh Circuits apply the “hypothetical test”: if the law would prohibit assignment to a hypothetical third party, the debtor cannot even assume the license for its own continued use. The First Circuit and several lower courts apply the “actual test”: as long as no actual assignment is happening, the debtor can assume the contract and keep using the IP. The consequence is real. Under the hypothetical test, a debtor whose business depends on a licensed patent can lose the right to keep using it simply by filing, unless the licensor consents. The circuit in which the case lands can make or break a reorganization.
When the Debtor Is the Licensor: Licensee Protections
When the debtor owns the IP and licenses it out, rejection would otherwise leave the licensee with nothing but a damages claim. Section 365(n) fixes that for the six statutory categories.
When a licensor rejects an IP license, the licensee gets a choice. It can treat the rejection as a full termination, walk away, and file a damages claim as an unsecured creditor. Or it can elect to retain its rights to the intellectual property for the remaining contract term, including any extensions the licensee was entitled to exercise.5Office of the Law Revision Counsel. 11 USC 365 – Executory Contracts and Unexpired Leases
Retention comes with strings. The licensee must keep paying royalties for the full contract term and gives up any right to offset those payments against other debts the licensor might owe. On written request, the trustee must give the licensee access to the intellectual property or any physical embodiment of it and cannot interfere with the licensee’s contractual rights.5Office of the Law Revision Counsel. 11 USC 365 – Executory Contracts and Unexpired Leases Exclusivity survives too: a licensee that retains its rights can still enforce any exclusivity provision in the original contract, so rejection does not open the door for the trustee to license the same technology to competitors.
Trademarks and Mission Product Holdings
Because trademarks are not in the statutory definition, Section 365(n) does not directly protect trademark licensees. For years, some courts read that silence to mean rejection could destroy a trademark license entirely, which would have been catastrophic for franchisees and distributors whose businesses depend on using the brand.
The Supreme Court closed that gap in 2019 in Mission Product Holdings, Inc. v. Tempnology, LLC. The Court held that rejecting a trademark license does not revoke the licensee’s rights. Rejection is a breach of contract, not a rescission. A licensor who breaches outside bankruptcy cannot retroactively strip a licensee of rights already granted, and bankruptcy does not expand that power.6Supreme Court of the United States. Mission Product Holdings, Inc. v. Tempnology, LLC
The reasoning was broad: the estate cannot possess more than the debtor had outside bankruptcy. The practical effect is that rejection leaves the non-debtor’s existing rights intact, though the non-debtor can no longer force the debtor to perform ongoing obligations like quality control or marketing support.6Supreme Court of the United States. Mission Product Holdings, Inc. v. Tempnology, LLC For trademarks that matters, because trademark validity depends on the owner’s quality control. A licensee who keeps using the mark after rejection may still face practical problems if the licensor is no longer policing quality.
Keeping Trade Secrets Secret During the Case
Trade secrets create a problem the other IP categories do not. A patent’s claims are public by design, but a trade secret loses its legal protection the moment it becomes publicly available. Bankruptcy filings are generally open, and detailed valuations, discovery documents, and asset schedules can expose proprietary formulas, customer lists, or manufacturing processes to competitors.
Section 107(b) authorizes courts to issue protective orders shielding trade secrets and confidential commercial information from public disclosure.7Office of the Law Revision Counsel. 11 USC 107 – Public Access to Papers Federal Rule of Bankruptcy Procedure 9018 reinforces that authority, letting the court act on its own or on a party’s motion, with or without prior notice. If the order is entered without notice, any affected party can move to vacate or modify it after the fact.8Legal Information Institute. Rule 9018 – Secret, Confidential, Scandalous, or Defamatory Matter
The protection is not automatic. Someone has to ask for it. The motion has to identify the specific documents or categories at issue and explain why disclosure would cause harm. Vague or overbroad requests get rejected. Filing under seal, using redacted public versions, and similar procedures let the valuation and sale process go forward without destroying the asset being valued.
Selling IP Through Section 363
When the goal is to convert IP into cash, the sale usually runs through Section 363. The trustee or debtor in possession can sell estate property outside the ordinary course of business after notice and a court hearing.9Office of the Law Revision Counsel. 11 USC 363 – Use, Sale, or Lease of Property For significant IP portfolios the process is typically a court-supervised auction, often with a stalking-horse bidder who sets the floor price and baseline terms in exchange for protections like a break-up fee if outbid.
Buyers strongly prefer to acquire IP “free and clear” of liens, claims, and encumbrances. Section 363 allows that if any one of five conditions is met: applicable non-bankruptcy law permits the sale free and clear; the lienholder consents; the price exceeds the total value of all liens on the property; the interest is in genuine dispute; or the lienholder could be forced to accept a money satisfaction in a legal or equitable proceeding.9Office of the Law Revision Counsel. 11 USC 363 – Use, Sale, or Lease of Property Only one condition needs to be satisfied, which is why these sales are usually feasible.
“Free and clear” has limits. Courts have wrestled with whether a Section 363 buyer can be held responsible for the debtor’s pre-bankruptcy conduct, such as ongoing patent infringement. Recent case law tends to allow sales free of successor liability claims that arise from ownership of the sold assets and relate to pre-petition conduct, but the area is not fully settled. Buyers of portfolios that include contested patents or pending infringement claims should not rely on the sale order alone.
Perfecting Security Interests in IP Before Bankruptcy
A lender’s ability to enforce a security interest in IP through a bankruptcy depends on where and how the interest was perfected before the filing. The rules differ by asset type, and a security interest that is not properly perfected under the correct system is vulnerable to avoidance by the trustee, which strips the creditor of its secured status.
- Patents. Courts have held that a security interest in a patent is perfected through a state UCC filing rather than by recording with the U.S. Patent and Trademark Office. The Patent Act’s recording system addresses ownership transfers, not security interests. A UCC filing protects the creditor against a bankruptcy trustee or other lien creditors, but it will not protect against a bona fide purchaser who records an assignment with the USPTO, so dual filing is the safest practice.
- Copyrights. Registered works follow a different rule. The Copyright Office’s position, supported by the Peregrine Entertainment decision, is that federal copyright law preempts state UCC filings for perfecting security interests in registered works, so the interest has to be recorded with the U.S. Copyright Office. Some courts have required a state UCC filing for unregistered works instead.10U.S. Copyright Office. Recordation of Security Interests in Intellectual Property11U.S. Copyright Office. Compendium of US Copyright Office Practices, Chapter 2300 – Recordation
- Trademarks. The Lanham Act has no comprehensive recording system that would preempt state UCC filings for security interests. Most practitioners file both a UCC-1 financing statement and a notice with the USPTO to cover both bases, since the law here is less settled than for patents or copyrights.
Given the split in requirements across the three regimes, lenders taking IP collateral usually file in every potentially applicable system rather than guess which one the bankruptcy court will apply.
Valuing IP in the Estate
Determining what IP is worth is one of the hardest parts of any bankruptcy involving significant intangibles. Unlike inventory, a patent portfolio or trade secret has no obvious market price. Analysts generally draw on three approaches: cost-based methods that estimate what it would take to recreate the IP from scratch, market-based methods that look at comparable license transactions or royalty rates, and income-based methods that project future cash flows attributable to the IP.
The right standard depends on context. A Chapter 11 reorganization that assumes the debtor keeps operating typically applies fair market value, reflecting what a willing buyer and seller would agree to. A Chapter 7 liquidation may call for orderly liquidation value or forced sale value, which can be dramatically lower. The gap between those standards is where fights break out, especially when secured creditors argue their collateral is worth more than a fire sale would produce. Professional appraisals are common, and courts often require them before approving major sales or confirming a plan that assigns value to IP assets.