In the space of three days last month we got both a legislative and a judicial solution to the Qimonda problem.  The issue in Qimonda was whether a German insolvency administrator could use Chapter 15 to terminate the rights of a U.S. licensee of the German debtor’s patents.  In a U.S. bankruptcy case, section 365(n) would preserve the licensee’s rights to use the patent notwithstanding rejection of the license agreement.  In contrast, under German bankruptcy law rejection of the agreement terminated the licensee’s rights. 

On December 3, 2013, the Fourth Circuit Court of Appeals affirmed the bankruptcy court’s order denying such relief to the administrator.  See Jaffee v. Samsung Elect. Co., Ltd., 737 F.3d 14 (4th Cir. 2013).  The Court reasoned that the section 1522(a) requirement of “sufficient protection” authorized the bankruptcy court to apply the section 365(n) limitations to any relief given the administrator.  This approach balanced the debtor’s interests against those of the patent licensees, with the Court emphasizing the importance of the section 365(n) protections.

Only two days later, on December 5, the House of Representatives passed the Innovation Act, H.R. 3309.  That bill would add a new section (e) to section 1522 and apply section 365(n) to all Chapter 15 cases.  While both solutions protect licensees of intellectual property, the difference between the two approaches is that the judicial approach involves the exercise of discretion whereas the legislative one imposes an absolute rule.

Chapter 15 is relatively short and includes two generally-worded provisions that can accommodate public policy issues like the intellectual property protection provided by section 365(n).  Section 1522 requires a balancing of interests in all cases of discretionary relief to provide “sufficient protection” to U.S. parties affected by a Chapter 15 case.  In addition, section 1506 protects U.S. parties from any action that would be “manifestly contrary” to our public policy.  The lesson from Jaffe is that the courts are doing a pretty good job of making these provisions work.  They also worked in another recent high profile case, In re Vitro, 701 F.3d 1031 (5th Cir. 2012), where they were used to block enforcement of Mexican non-debtor releases.  The Bankruptcy Code is riddled with provisions that grant special protection to various interest groups.  If we add a new subsection (e) to section 1522 for section 365(n), do we also need to fill section 1522 with dozens of other subsections to cover each of those provisions?