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Patent Portfolios in Bankruptcy Cases
Protecting and Maximizing Their Value
By Geoffrey Groshong and Samantha Pak, Ph.D.
When an owner of intellectual property files a bankruptcy petition, an estate is created that includes all patents and patent applications of the debtor. Prior to bankruptcy, the owner (or debtor) may have ceased maintaining patents and prosecuting patent applications, and may have completely ignored deadlines of patents and patent applications, thus abandoning valuable assets. Counsel employed by a Chapter 11 debtor-in-possession (DIP), by a Chapter 11 trustee, or by a Chapter 7 trustee in a case involving a patent portfolio can take certain steps outlined below to protect the portfolio and maximize its value. A bankruptcy case that includes patents and patent applications requires skilled patent and bankruptcy counsel.Specific technical knowledge in the subject matter of the patents can be very useful for patent counsel, and having a doctorate in the relevant technical area is ideal.

Identifying and Protecting Assets

Counsel must obtain, organize, and review the debtor's records. The debtor's inventors, other intellectual property (IP) staff, and management team may provide important information from which the debtor can identify relevant technology information, the status of patent applications and patents, any existing IP agreements, and the history of the company. Typically for companies with IP, in-house patent counsel or an IP patent portfolio manager is involved prebankruptcy in managing patent portfolios while outside counsel handles patent prosecution. Patent prosecution basically refers to patent attorneys or agents, admitted to practice before the U.S. Patent and Trademark Office (the USPTO), communicating and corresponding with the examiners of the USPTO regarding nonsubstantive and substantive issues in order to advance granting of a patent or patents for the relevant subject matter or invention covered in a patent application or applications. Foreign patent prosecution refers to foreign patent attorneys corresponding with their respective patent offices before which a patent application or applications are to be granted. Communicating with the IP patent portfolio manager and all patent counsel, both domestic and foreign, who were involved in prosecution can produce essential information.

The USPTO Web site, particularly the Private PAIR and database for assignment records, has current status information for pending patent applications, patents, and assignment records.Assignment records are open to public inspection. Prosecution file history, including records such as office actions issued and replies filed in response to office actions for patent applications and patents, is posted only for two to three prior years. But prosecution file history for older patent applications and patents can be ordered if not otherwise available online. The World Intellectual Property Office (WIPO) Web site also contains data for international or Patent Cooperation Treaty (PCT) applications, foreign counterparts to U.S. applications, which are easily searchable in WIPO's database. Foreign patent office databases, such as those for the European Patent Office, the Canadian Intellectual Property Office, and the Japanese Patent Office, also contain data for national stage applications based on the PCT applications.

Properly maintained patent file folders are quite useful in determining status and prosecution file history for U.S. as well as foreign applications. Since the online USPTO database contains a complete file history only for the more recent years, properly maintained folders can be used to check status and ascertain issues for foreign prosecution. Patent file folders for domestic applications may include records such as past correspondence between the USPTO and patent counsel, including office actions and replies to office actions.Patent file folders for foreign applications are particularly important for records such as correspondence between and from a foreign patent office and foreign counsel.

Counsel should find and review patent license agreements to identify obligations in licensed patent applications and/or patents as licensor or licensee. As described below, specific rules in the Bankruptcy Code affect the interests of parties to a license of property, including intellectual property such as patents, when one of the parties to a license of intellectual property files bankruptcy.If there were collaborations with universities, counsel should contact the technology transfer office of each university (universities with significant research activities typically have such offices, which keep records of licenses) to review licensing arrangements and other agreements.Agreements with specific laboratories within the university, however, may not be centrally located and recorded with all technology transfer offices. In order to locate licenses with other companies, contacting the companies directly may be most productive. Reviewing existing license agreements and making sure that royalties from the licenses are being paid accurately can help maintain regular cash flow into the bankruptcy estate.

Identifying and reviewing existing IP agreements is essential in determining IP rights. If the debtor collaborated prepetition with other companies or universities to improve and develop a technology, counsel must identify what kind of joint ownership arrangement was agreed on and who is responsible for paying the fees and costs of prosecuting the patent applications. By reviewing the collaborative agreements closely, the debtor will better understand the IP rights.

Things to do

List All Patents and Applications. For organizational purposes as well as to avoid missing upcoming deadlines, it is crucial to create a summary list of all patents and patent applications, including their status and deadlines.Lead IP counsel, preferably a patent attorney, should create and manage this patent portfolio with others on the IP team having access to such information. Previously hired patent counsel can easily create this summary list before transferring all the files to lead patent counsel. As soon as a comprehensive deadline docket is created, the information should also be entered on current patent counsel's IP docketing system, in order to have double reminders for all upcoming deadlines.

File a Power of Attorney. File a power of attorney naming the firm handling the prosecution of patent applications with the USPTO. In order to represent the debtor, a registered patent attorney or agent for patent applications in which he or she is not of record must file a paper form by mail or electronically. The registered patent attorney or agent must include the registration number and name with his or her signature.The correspondence address should be updated simultaneously.

Be Aware of Deadlines.Look for pressing deadlines for responding to office actions in order to keep patent applications alive. Typically, after an examiner from the USPTO has issued an office action, the period in which a response is required can be extended only up to six months from the mailing date of the office action. The six-month deadline is not extendable, and the application is abandoned if the reply to the office action is not filed on time. Determining which patent applications to continue to prosecute and which to abandon can be addressed later.Save the applications at the inception of the bankruptcy case by responding to all office actions. A nonsubstantive office action can require that the applicant comply with certain requirements and respond to the office action without options for extension. For example, compliance for sequence listing can require an applicant to respond within one month from the mailing date without options to extend. A response to the substantive portion can be extended up to six months from the mailing date of the office action. Patent counsel must remain highly vigilant and know the patent rules to ensure that deadlines are not missed.

Ensure Maintenance Fees Are Paid. If the maintenance fees are not paid within the required periods, a patent expires. If a maintenance fee has not been paid within the payment window of one year for any issued patent, however, patent counsel can file a petition to accept late payment of maintenance fees with the USPTO if the delay was unavoidable or unintentional. The process for reinstatement is involved, and success is not assured.It is much better to timely pay maintenance fees, if at all possible.

Keep Abreast of Foreign Applications. For foreign patent applications based on PCT applications, foreign counsel in a specific country is typically hired to handle patent prosecution. Foreign counsel handling foreign patent applications prebankruptcy should generally continue to handle prosecution before various patent offices postbankruptcy and be employed by the bankruptcy trustee or DIP. Foreign deadlines and patent rules can vary significantly. It is prudent to seek advice from foreign patent counsel for advice in prosecuting before various foreign patent offices. Even among Asian countries, such as Korea, Japan, and China, the patent examination rules can vary significantly. Patent counsel managing foreign applications must be in close working communication with foreign counsel to understand the issues raised by a foreign patent office and to instruct foreign patent counsel in continued prosecution. Good records can help in this process, and establishing communication with foreign counsel as soon as practicable is crucial to avoid abandonment of valuable foreign patent assets.

Identify and Protect Other IP Rights. Other IP assets, including copyrights, trademarks, trade secrets, and licenses, can be valuable. Determine the current status of any pending trademark applications with the USPTO by searching in the public database.Certain registered trademarks may be of great value. Renew marks that are still in use instead of abandoning them by failing to file renewals. Protect any trade secrets or know-how that brings significant value to the debtor. Consider doing a simple search for domain names and paying the registration fee to keep the domain names current.

Investigate Patent Assignments and Security Interests. Subject to the bankruptcy issues identified below, patents and patent applications are assignable in writing. Assignments are a transfer of an ownership interest, so assignments of patents must be recorded with the US-PTO to be valid. Assignment records relating to patents, published patent applications, registrations of trademarks, and applications for registration of trademarks are searchable and available on the USPTO Web site.Research the chain of title to patents and patent applications by checking for assignment of inventors' rights to the debtor and for records of such an assignment with the USPTO. In most cases, the inventors will have assigned their rights to the debtor and the assignment should be recorded with the USPTO. Foreign law for filing assignments is specific to each country. Foreign counsel can advise on these issues.If deadlines are not imminent, primary patent counsel should search the assignment records in the patent files before approaching foreign counsel. Retaining foreign counsel can be quite expensive in most countries, and doing homework first helps avoid unnecessary expense.Patents are general intangibles under the Uniform Commercial Code (UCC), and security interests must be recorded in the state of incorporation of the owner of the patents and patent applications under UCC Article 9. If a debtor changed the company's name, either a certificate of amendment or articles of amendment, or both, are filed with the secretary of state. Records of name change can be ordered and filed with the USPTO to establish clear chain of title if a debtor's name was changed and not recorded. Because the federal patent statute deals with ownership but not security interests, federal patent law does not preempt state law as to perfection of security interests in patents and patent applications as governed by UCC Article 9.

Seek Authorization to Employ Counsel. Obtain bankruptcy court orders authorizing the employment of counsel. Patent counsel for the DIP or trustee in bankruptcy are "professionals" under the Bankruptcy Code and must be approved for employment before beginning work in order to be compensated.Compensation is usually contingent on notice to creditors of the opportunity for a hearing.In most cases, special patent counsel can be employed. Often, using the same patent counsel who represented the debtor prepetition is in the best interests of the debtor and its creditors, at least until the patent portfolio is stabilized. Retention of existing patent counsel is much easier if the estate has adequate funds.Most patent counsel request retainers or other assurances of payment before preparing and filing a response or attending to other matters. It is not unreasonable to request an estimate for a particular service required from outside patent counsel, whether U.S. or foreign.Foreign counsel's fees and costs tend to be higher.The Office of the United States Trustee, which has standing to object to the retention of counsel and other professionals, and the bankruptcy court usually appreciate having some estimate of special counsel fees before approving retention.Establish a clear understanding about what is expected by both patent counsel and the DIP or trustee.

Determine the Value of the Portfolio

Collect Information.The DIP or trustee may wish to hire an independent consultant to provide valuation information or approach an incubator, particularly through established connections, for information, investment, and potential licensing opportunities.The consul-tant should have some understanding of the specific technology at issue.Even if an incubator decides not to invest, the incubator can provide invaluable expertise by assessing the technology and identifying competitors in the relevant field.Inventors, officers, and employees of the debtor who were intimately involved in the prosecution process can be helpful in explaining the relevance of the particular technology, assisting counsel with understanding the marketplace for the technology, and networking with investors.But opinions from inventors, officers, and employees of the debtor company or previous insiders can never substitute for independent analysis by an outside consul-tant with knowledge of and expertise in the technology involved.If the debtor is in Chapter 7 (and thus going out of business), or if the debtor is a Chapter 11 company that is being liquidated in Chapter 11, it is best to obtain advice from a consultant with experience in either commercializing or developing technology to help determine value.

Prioritize Key Assets. After gaining an understanding of the relevant technology and gleaning useful information from meetings with angels, incubators, consultants, and other interested parties, one should know which IP should be retained. Choosing which patent applications to prosecute can be one of the hardest decisions, especially if the estate is low in funds. Asking some of the questions below can assist the debtor, trustee, and patent counsel in deciding which patent applications to abandon or to prosecute. Buyers or investors may also look to value a patent portfolio by asking the following questions:

  • What patents and patent applications have value according to others in the field?

  • What is the potential market position?How strong is the technology in the potential market niche?

  • What does the marketplace competition look like?

  • Is there a potential for licensing or collaborating to strengthen the IP position?

  • How developed is the technology?How far along the pipeline?Are there products for sale and commercial activities?

  • What does the management team look like?Is there a business plan?

    How likely is the management team to raise funds to further continue running the company?

  • How strong is the IP position?What is the term of the patents?How big is the market for the particular patents?Are there other markets to penetrate?

    Due Diligence Checklist for Counsel.

  • Research any blocking patents and potential infringement issues.

  • Define and clarify intellectual property ownership for the debtor company with past and current joint ownership with other companies or institutions, identify relevant licenses and other agreements in place, and research past intellectual property transactions.

  • Investigate security interests and assignments of patent applications and patents.

  • Perform clearance or freedom to operate searches and create a patent map if the debtor company is interested in presenting the technology to potential investors.

  • Establish contacts with or prepare the debtor company to meet with potential investors for funding or developing the technology, depending on the maturity of the debtor company's patented technology and market penetration.
Prepare to Meet with Potential Investors or Buyers. Sophisticated investors may have knowledge bearing on the value of the patent portfolio and may be interested in purchasing some or all of the portfolio or participating in the recapitalization of the company. Obviously, the statements of insiders are not disinterested, and are not a substitute for information and analysis from independent outside experts. Angels can be a source for valuation and for initial funding. For patent portfolios, incubators can be interested in either investing in the technology in various stages of development or licensing the technology to add to the incubator's existing licensing portfolio. Ask whether the technology can be described in a 10- to 15-minute presentation supporting strong claims for potential growth or profit. Investors are particularly interested in hearing about the technology in a succinct presentation that is supported by evidentiary data. Investors are not interested in hearing about what should, could, or did not happen. Investors are interested in issues such as blocking patents or infringement; clearly defined intellectual property rights, including licensed-in, licensed-out, and jointly developed arrangements; and future cash-flow projections so that they can assess and determine the technology's position in the marketplace and return on investments.

IP and Executory Contracts

A license of intellectual property, including patents and patent applications, is an executory contract under the Bankruptcy Code. Subject to provisions of the Bankruptcy Code, the trustee or DIP may assume or reject the contract and, upon assumption, assign the contract. As part of the examination of a contract that may be executory, care must be taken to verify that the contract is not actually a sale.

Assumption and Assignment. The circuits are split on the issue of assumption and assignment of licenses of patents in bankruptcy. In In re Catapult Entertainment, Inc. , 165 F. 3d 747 (9th Cir. 1999), the court ruled that if applicable nonbankruptcy law prohibits the assignment of an executory contract (in this case nonexclusive patent licenses), a DIP may not even assume it. The Bankruptcy Code's assumption provision, 11 U. S. C. § 365(c), bars assumption of an executory contract without the nondebtor licensor's consent when applicable law (in this case federal patent law) precludes assignment of the contract to a third party. Because the debtor licensee cannot first assume the patent licenses without the nondebtor licensee's consent, the licenses are nonassignable. In re CFLC, Inc. , 89 F. 3d 673, 680 (9th Cir. 1996). Under federal patent law, nonexclusive patent licenses are personal and nondelegable. Catapult, 165 F. 3d at 750. The First Circuit has ruled otherwise in Institut Pasteur v. Cambridge Biotech Corp. , 104 F. 3d 489 (1st Cir. 1997), as to assumption of nonexclusive licenses by a reorganized debtor. There the court held that a reorganized debtor licensee was not a different entity from the prepetition licensee, so assumption of the patent licenses by the reorganized debtor was allowed.

Adequate Assurance. A predicate to assumption of an executory contract under 11 U. S. C. § 365(b)(1) (assuming that assumption is even possible given the CFLC holding) is that the trustee or DIP must provide adequate assurance of future performance of the executory contract or lease. Under 11 U. S. C. § 365(f)(2), in order to assign the estate's interests in an executory contract, the trustee or DIP must give adequate assurance of the assignee's future performance. This is a fact-specific analysis. In In re GlycoGenesys, Inc. , 352 B. R. 568(Bankr. D. Mass. 2006), the court held that federal common law did not prohibit the assignment of an exclusive patent license, and found that the trustee had met his burden of showing adequate assurance of future performance of the licensee's duties under a patent license agreement because the trustee established that the proposed assignee of the license could pay cure amounts, filing fees, maintenance fees, and costs of patent application preparation and prosecution and could "take all other steps necessary to perfect and maintain the Licensed Patents. "

Rejection of Executory Contracts/Business Judgment Test. A bankruptcy court will usually approve a motion by the trustee to reject a contract. Courts generally defer to the reasonable business judgment of a DIP's management or the trustee. But some courts have found a proposed license rejection not to be within the sound business judgment of debtors. When a debtor licensor rejects an exclusive license of intellectual property and the nondebtor licensee elects to retain its rights under 11 U. S. C. § 365(n), the licensee can enforce exclusivity rights, but the debtor licensor is freed of duties as to "any other right under applicable nonbankruptcy law to specific performance of [the] contract. "So, for instance, a debtor licensor of a licensed patent would not be required to pay maintenance fees for a licensed patent, once the patent license was rejected under a bankruptcy court order.

Exit Strategy

Look for Potential Buyers. Insiders of the debtor company, such as executives, inventors, and other management members, may have an interest in investing in or acquiring some or all of the patent portfolio. Depending on the value of such patent assets and the willingness of insiders to invest in or to reorganize the debtor company, insiders may be a good target for initial investments. And through networking with venture capital firms or other potentially interested companies, the patent portfolio can be introduced to interested parties to obtain either an initial bid for acquiring the portfolio or potential financing. Companies in a similar field or IP storehouses may be interested in viewing the patent portfolio and performing their own buyer analysis to value the portfolio.

Look Into Different Types of Sales. Sales and sales procedures, including auctions and bidding procedures, are subject to bankruptcy court approval. Negotiated, court-approved stalking-horse bid and auction procedures may be effective. One advantage of an Internet auction is the large pool of interested buyers or representatives of interested parties to which an established Internet auction house has access. Live auctions are also available. As with Internet auctions, companies specializing in live auctions of intellectual property have extensive and specialized contact lists. The fees for live auction companies, however, can be significantly higher than for Internet auction companies.

Look for DIP Financing or Funding Under the Plan of Reorganization. The plan of reorganization could include a refinance of the company through the infusion of new capital, the sale of the company or its assets, or the licensing of the technology. Sales of assets are clearly appropriate in Chapter 7 cases. Not all courts will allow sales of major estate assets in a Chapter 11 case, except through a confirmed Chapter 11 plan of liquidation.


When a company that owns a patent portfolio files for bankruptcy, whether Chapter 7 or 11, numerous patent, bankruptcy, scientific, and business considerations are implicated. The best result will be obtained by the use of professionals with specialized skills in each area of law, such as bankruptcy, business, and patent. By identifying, protecting, and maintaining valuable IP assets of a company in bankruptcy, the DIP or trustee maximizes the opportunity to salvage business operations or to monetize on valuable IP assets.

Helpful Information

FDA Web site for the New Drug Development Process: www.fda.gov/cder/handbook/develop.htm.

U.S. Patent and Trademark Office's Web site: www.uspto.gov.

In In re Cybernetic Services, Inc., 239 B.R. 917 (9th Cir. BAP 1999), aff'd, 252 F.3d 1039 (9th Cir. 2001), cert. denied, 534 U.S. 1130 (2002), the Ninth Circuit affirmed the bankruptcy court, holding that neither 35 U.S.C. § 261 nor UCC Article 9 requires the holder of a security interest in a patent to record that interest with the USPTO.
Groshong is a partner in the Seattle, Washington, office of Miller Nash LLP, specializing in bankruptcy law. Pak is an associate in the same office, specializing in intellectual property law. Their respective e-mails are geoff.groshong@millernash.com and samantha.pak@millernash.com.

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