national bankruptcy conference - innovation act, h.r. 3309

8/13/2019 National Bankruptcy Conference - Innovation Act, H.R. 3309

1/7

C O N F ID E N T IA L D R A F T

V IA E M IL

MEMOR N UM

To National Bankruptcy Conference Executive CommitteeCC Sally Schultz NeelyAlan N Resnick

From InternationalAspectsCommitteeRe ProposedAmendment to Section 1520Section 6(d) of InnovationAct, H.R. 3309Date November 12 2013

TheInnovation Act,whichis primarily focused on patentlitigation reform, contains anamendment to section 1520of chapter 15of theBankruptcyCodethatwe believe isinappropriate and that we recommend the Conference strongly oppose inits present form. Theproposed amendment appears inSEC.6,PROCEDURES AND PRACTICESTOIMPLEMENT AND RECOMMENDATIONS T O T HE JUDICIAL CONFERENCE andprovides as follows:

(d) PROTECTION OF INTELLECTUAL-PROPERTY LICENSES INBANKRUPTCY (1) INGENERAL.Section1520(a)of title 11,United States Code is amended(A) in paragraph (3), by striking andand inserting a semicolon;(B)in paragraph (4), bystriking theperiodat theendandinserting and* ; and C) by inserting at^e end the followingnew paragraph:(5) section365(n) applies to intellectual property ofwhichthe debtor is alicensor or which the debtor has transferred.**.(2)EFFECTIVE DATE.^The amendments made bythis subsection shall takeeffect on the date of the enactmentof this Act and shall apply to any action forwhicha complaint is pendingon, or filed on or after, suchdateofenactment.

LIBC/5010733 5


2/7

Chapter 15of the BankruptcyCode, includedin the 2005 amendments to theCodewithlarge bipartisanmajorities, is designed to achieve worldwidecooperation in the liquidationorreorganizationof a multinational company in orderto preservevaluefor creditors andotherstakeholders, especially employees. Its flindamental structure is universalist in that it requiresthat eachcountryrecognize a foreign mainproceeding in thedebtor s homecountry as the leaderin the worldwide effortand that it cooperate withthat jurisdiction to achieve thebest results forallconcerned. Among other advantages, this approach permits the sale ofwhole divisions withassets and operations inseveral nations asa single piece, which almost always will yield a higherprice. It is alsoessential to reorganization of a globalbusiness.

Chapter 15 incorporated the UNCITRAL Model Law onCross-Border Insolvency toencourage cooperation between theUnited States and foreign countries with respect totransnational insolvency cases. ^ While the Model Law required modifications to fit into theexisting judicial and legislative scheme, chapter 15 followed the exhortation ofUNCITRAL;Therefore, inorder to achieve a satisfactory degree ofharmonization and certainty, itisrecommended that States [countries] make as few changes aspossible inincorporating the modellaw into their legal systems. The proposed amendment to section 1520 violates the purpose ofchapter 15 to furthw international cooperation and, to that end, the guidance ofUNCITRAL tominimize modifications to the Model Law

Adding aprovision tochapter 5 that deals with a special situation violates the principleoflu^formity^^ the odel awavaluable mechanism for greater legal certainty for H.R.Rep. No. 109-31, pt. 1,109th Cong., 1st Sess. 105 2005) House Report orH.R.Rep. ).^UNCITRAL ModelLawonCross-Border Insolvency with Guide to Enactment adopted onMay 30.1997(theModel Law, the Guide. ). The Guide repeats this admonition in^ 50: In enacting theModel Law, itisadvisable to adhere asmuch aspossible totheuniform text inorder tomake thenational law as transparent aspossible for foreign users ofthenational law(seealsoparagraphs 11-12 and 21 above).

LIBa5 I 733 5


3/7

trade and investment. This is true even if one believes that as a matter of public policy thespecial situation shouldalways bedecided applying U.S. law. By such a unilateral non-uniformamendment the United States invites other countries to modify their versions of the Model Lawin ways that maybe detrimental to United States partiesin foreign proceedings. The situationaddressed by the proposed amendment is already before the courts andthe tools to address thesituation arealready within chapter 15. Thecourts candealwiththe issue appropriately andpredictably without opening thedoor toother countries to reciprocate with their own deviationsf ro m t he Model Law

Section 1520, Effects ofrecognition ofaforeign main proceedings provides automaticreliefon recognition ofa foreign main proceeding.^ It implements Article 20 ofthe Model Lawby incorporating sections ofthe Bankruptcy Code that are consistent with the purpose ofArticle20.^ Both Article 20 and section 1520 operate automatically upon recognition ofa foreign mainproceeding and impose effects that are necessary to allow steps to be taken to organize anorderly and fair cross-border insolvency proceeding...^ The fundamental effects necessary foran orderly and fair cross-border insolvency are (a) a stay ofactions against orconcerning thedebtor or its assets, rights, obligations or liabilities, including a stay ofexecution against the

Section 1520 provides, inpertinent part, as follows;(a)Upon recognition of a foreign proceeding thatisa foreign main proceeding(1)sections 6 and 362 apply with respect to tiie debtor and the property ofthe debtor that is within the territorialjurisdiction of the United States;(2)sections 363,549, and 552 apply to a transfer ofan interest ofthe debtor in property that is within the territorialjurisdiction ofthe United States tothe same extent that the sections would apply toproperty ofanestate;(3)unless the court orders otherwise, the foreign representative may operate the debtor s business andmay exercisethe rights and powers ofa trustee under and tothe extent provided by sections 363 and 552; and(4)section 552 applies toproperty ofthedebtor that iswithin theterritorial jurisdiction of the United States.H.R.Rep. 114-115(2005).^Guide at^ 143. Reference to the Model Law and the Guide for interpretation ofchapter 5 are encouraged bysection 1508. Seealso H.R. Rep. 109-110.LIBQSOl 733 5


4/7

debtor*s assets and (b) a stay ofthe debtor s transfer, encumbrance or disposition ofassets.^Section 1520 imposes thestaybymcorporating the automatic stayof section 362(butlunited tothedebtorand its assetswithin the territorial jurisdictionof theUnitedStates) andthe transferrestrictions of sections 549,363 and5527

The Innovation Ac t would introduce into section 1520 a section of theBankruptcy Code, section365(n), thathas nothing to dowith allowmg stepstobe taken to organize an orderly andfaircross-border insolvency proceeding .Thiswould bea blowto the goalsof uniformity and harmonization embodied intheModel lawandchapter 15. Instead of a provision thataffects all parties withan interest in a foreign proceeding, that effectively preserves the status quo and(potentially) going concern value and that does not intrude onthe foreignproceeding, section 365(n) isnotconcerned with preservation of the status quoand affects therights of a subset of licensees of intellectual property in the eventthattheir license agreement is rejected or otherwise subjected to nonperformanceina foreign main bankruptcy case ofa debtor who is their licensor. It effectivelyimposes U.S. law onthe foreign proceeding whether ornotU.S. law should applyto aparticular license. Ifthelegislation isadopted, it should, at the very least, be

Alimited to licenses that arewithin the territorial jurisdictionof theUnited States.Automatically ^plying this section upon recognition of a foreign main

proceeding would ignore the territorial limits ofchapter 15 to property within the^Model Law 20(l)(a).H.R. Rep. 114-115. Section 15102(8) provides that^ within thetenritorial jurisdiction oftheUnited States , when used with referenceto property ofadebtor, refers totangible property located within the territory ofthe United States and intangibleproperty deemed under applicable nonbankruptcy w to be located within that territory, including any propertysubject to attachment orgarnishment thatmay properly be seized orgarnished by an action in aFederal orStatecourt in th e United States

LIBC/S010733 5


5/7

territorial jurisdiction of the United States, since license grants by the foreigndebtor may not be governed by U.S. law or may not even involve U.S. intellectualproperty. There should be a choice of law analysisperformed before section365(n) isapplied ina chapter 5 case Section 365(n) could be applied inanappropriate situation on an appropriate showing under section 1522(a) and (b)).*Applying it automatically, withoutconsidering whetherU.S. lawshouldapplytothe license in question andwithout the safeguards of sections 1521 and 1522would be detrimental to the goals ofthe Model Law and chapter 15. Rather thanenhancing a cross-border insolvency proceeding, automatic application of section365(n) would likely deterforeign representatives from seeking recognition toobtain necessary assistance forthe foreign proceeding ifa condition torecognition were entanglement inthepossible briar patch of licensee rights underU.S. bankruptcy law.

The genesis of section 6(d) oftheInnovation Act is likely thecase of InreOimondaAG.462B.R. 165(Bankr. E.D.Va. 2011)whichconsidered, onremand, the request ofthe foreign representative ofa German liquidationproceeding, recognized as a foreign main proceeding, tomodify a prior order thatapplied 365 (and a laundry listof other sections of the Bankruptcy Code) in thechapter 15 case. On thepetition oftheadministrator appointed inQimonda*s /re MaxwellComm. Corp. pic93 F.3d 1036 (2d Cir. 1996) (dealing with choice oflaw inanavoidance actionbrought inconnection with a proceeding under former section 304, thepredecessor to chapter 15).Section 1522(a) and (b)provide: *(a)The court may grant relief under section 1519 or 1521, ormaymodify orterminate relief under subsection (c), only if the interests ofthecreditors and other interested entities, including thedebtor, are sufficiently protected. (b)The courtmay subject reliefgranted under section 1519 or 1521, or theoperation ofthe debtor s business under section 1520(a)(3), toconditions itconsiders appropriate, including thegivingof securityor the filingof a bond.

Reliefunder 1521 must be necessary to effectuate thepurpose of this chapter and to protect theassets ofthedebtor o r th e interests the creditors

L l B a S O l 0733 5


6/7

Germanmainproceeding, the bankruptcy courtentered anorder recognizing theforeignmain proceeding and, on the samedate, entereda Supplemental Orderunder section 1521 that appliedseveral sectionsof theBankruptcyCode,includingsection365 to the chapter 15case. Upon realizingthat section365 n)interferedwith his rightsunderthe German insolvency code to elect non-performance of contracts, the administrator soughtmodification oftheSupplemental Order. Licensees ofU.S. patents, who would lose theprotection of365 n) if 365no longerapplied, objected. TheBankruptcy Court,on remandfrom the districtcourt,foundthat therewasa fundamental U.S. policyfavoringinnovation and that eliminating 365 n)protection wouldbemanifestly contrarytothatpolicy. The court also ruled that the requested relief should bedenied onthe altemative section 1522 ground thattheinterests ofthe licensees would notbesufficiently protected iftherequested reliefwere granted. The Qimondadecisionwas certified for direct appeal to the Fourth Circuit.^^ The Fourth Circuitheardargument on September 17,2013 buthasnotruled.

Rather thanpassing legislation thatwould pre-empt the ruling oftheFourth Circuit and conflictwith the purposeof theModel Lawand chapter 15,Congress should reject thisamendment Asnoted, relief is already available tolicensees in appropriate circumstances under section 1522 if a foreignrepresentative seeks todeprive them of their rights under U.S. law. Applyingsection365 n) to all foreign mainproceedingswouldimplicate licenses that arenot within the territorialjurisdictionofthe UnitedStatesandwould be

In re Qimonda AG 470 B.R. 374 E.D. Vir. 2012V CaseNo. 12-1802.

LIBC 5010733 5


7/7

inconsistent with the ancillary nature of a chapter 15 case to provide assistance tothe main case in another country where the debtor has the center of its maininterests

If the debtor s property is sliced into nationalbits the cooperativeapproach of chapter 15and the Model Law is seriously handicapped. Theproposed amendment does just that as to intellectual property. IP is itselfsubjectto a worldwide systemof recognition and enforcement whichwill be shatteredfor companies emerging from reorganization creating a host of difficult questionsand seriousuncertainty aboutthesecrucialproperty rights TheUnitedStatesmakes a serious error by going it alone andby failing to let the courts develop thekeyissues under the existing statute In short those pushing this amendmentmight regret getting what they wishedfor.

LIBa5 1 733 S

national bankruptcy conference - innovation act, h.r. 3309

Documents