The perceptive reader may have noticed that the economy is in distress (economic term meaning “deep doo doo”). This raises the unpleasant specter of bankruptcies among one’s IP licensees. What happens to an IP license when the licensee becomes bankrupt? More specifically, can the licensee – now technically known as a “debtor-in-possession” – assume the license? The answer to this fascinating question depends on location.
Some courts follow the “hypothetical test,” under which a debtor could assume a license only if it hypothetically could have assigned that license to a third party. If the debtor lacked the right to assign the license to a third party, it could not assume the license. The fact that the debtor had no intention of assigning the license to a third party is irrelevant (we are not making this up).
Other courts follow the “actual test,” under which a debtor-in-possession may assume an otherwise non-assignable license only if it has no actual intent to assign it to a third party (we are not making this up either).
THE LESSON TO BE LEARNED: Assume that the bankrupt licensee will be able to assume the license. If this is unacceptable, include provisions that will effect termination of the license before the licensee files for bankruptcy, such as termination if the licensee becomes unable to pay its bills as they come due.