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The IP pitfalls and opportunities of bankruptcy

In a session on bankruptcy, due diligence, and dual filings and assignments at the AIPLA Annual Meeting, panelists spoke of the challenges that IP lawyers face when dealing in bankruptcy and transactional matters.

Though IP lawyers often don’t see bankruptcy as a big part of their practice, Jennifer McCallum of the McCallum Law Firm points out that it is a lucrative and increasingly important field. One reason is that Chapter 11 bankruptcy, sometimes referred to as a reorganization bankruptcy, automatically stays all litigation against the filer. This, McCallum noted, can yield significant tactical advantages in IP cases.

“In Chapter 11, what we’re seeing is that a tech company gets sued for infringement, and it’s a way to stop the case, because it absolutely stops litigation the minute the tech company files,” she said. “They can then put in a claim for liquidating all their intellectual property, or just become a licensing house.” McCallum said: “It’s basically a litigation play.”

The Chapter 11 stay on litigation can pose other challenges for lawyers. For example, because companies have largely run out of money and can’t be sued, there’s a real possibility that their own prosecution counsel will not be paid.

“So if you’re prosecution counsel, stop work,” McCallum warned. “But don’t pay for things because you may not get paid back.”

Companies dealing with business partners undergoing bankruptcy also need to be aware of some of the legal pitfalls. For example, if your company is a creditor to another that is going through bankruptcy, your company may be able to file liens on the debtor’s assets, including its patents and trademarks. However, McCallum notes that lawyers often make mistakes when filing the lien. Most state courts have held that a security interest may be perfected when a lien is filed with the Secretary of State where the debtor is organized. However, because the law is not completely settled, there have been some other decisions which took the position that the lien must be filed with the USPTO to perfect the security interest.

Thus, McCallum says, to be on the safe side, creditors looking to perfect a security interest in a trademark or a patent should file its lien with both the state office and the USPTO.

Bankruptcy can also pose opportunities for rights holders. Companies going through a bankruptcy must file a Schedule B form, which lists all of the company’s assets. Thus, as McCallum explains, if your company wishes to buy the assets, including the IP assets, of a bankrupt competitor, pulling their Schedule B form will list all the assets that you can bid for.

However, buying IP from a bankrupt seller also poses its own challenges. Because the bankrupt company was likely having trouble paying its patent and trademark attorneys, buyers need to be especially careful in their due diligence to make sure that things like maintenance fees or deadlines for applications are all up to date. Failure to identify these issues can cause problems down the road, and courts or the USPTO aren’t likely to excuse these issues on the grounds that it was the previous owner that committed these mistakes.

Despite the challenges that bankruptcy poses, McCallum says that they can be great opportunities for lawyers. This is true even if it’s a client who is going bankrupt – in which case, she advises, the lawyer should contact the bankruptcy trustee and ask to become employed by the bankruptcy trustee. The lawyer has to make a case to be hired (for example, there are a lot of pending applications that cannot be allowed to lapse) and also make an estimate of the costs.

“When there’s no litigation and the economy is kind of down, bankruptcy is up,” she notes. “It’s great to have a practice that’s always busy.”

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