How Does Bankruptcy Affect Rights Under An Agreement Not To Sue On Patents?

When a debtor rejects an executory contract, Section 365(n) of the Bankruptcy Code allows a licensee of intellectual property to retain certain rights under the rejected contract. An important question arises, therefore, whether a particular agreement indeed involves a license. In a recent decision, the Third Circuit Court of Appeals has reaffirmed the definition of a license as "a mere waiver of the right to sue by the patentee." In re Spansion, Inc., 2012 U.S. App. LEXIS 26131, *7 (3d Cir. Dec. 21, 2012) (citing De Forest Radio Tel. & Tel. Co. v. United States, 273 U.S. 236, 242, 47 S. Ct. 366, 71 L. Ed. 625, 63 Ct. Cl. 677 (1927)).

Prior to commencing its bankruptcy case, Spansion, Inc. filed a patent infringement action against Samsung and Apple. Thereafter, by letter agreement, Spansion agreed to dismiss the infringement action against Apple and agreed to refrain from suing Apple again with respect to the patents at issue in the lawsuit. Apple agreed, in return, to retain Spansion as a supplier and to consider Spansion for future business.

During its bankruptcy case, Spansion rejected the letter agreement. The bankruptcy court approved the rejection but denied Apple's Section 365(n) rights. The district court reversed the ruling of the bankruptcy court that Apple did not have Section 365(n) rights. In affirming the district court, the Third Circuit held that a license "need not be a formal grant," therefore a mere letter agreement, in which the debtor promised to dismiss...