Notes & Comment
Vol. 2004, No. 5
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Bankruptcy And Intellectual Property Licenses
Does "or" mean "and" or does "or" mean "or"? While this might sound like presidential grand jury testimony, it's actually a question that's been asked by many federal appellate and bankruptcy courts, most recently by the U.S. Court of Appeals for the Fourth Circuit. In re: Sunterra Corporation, No. 03-1193 (March 18, 2004), available at www.ca4.uscourts.gov (Opinions tab, enter case name or case number).
The Bankrupt Licensee
In 1997, Sunterra Corporation (Sunterra) entered into an intellectual property license with RCI Technology Corporation (RCI) to license certain RCI software and paid RCI a license fee of $3.5 million. The agreement authorized Sunterra to develop a customized version of the RCI software for use in the resort and hospitality industry, and gave Sunterra ownership of any enhancements that it made to the RCI software in the customized version. RCI received a license grant to use the Sunterra enhancements. Sunterra then sank some $38 million into developing a customized version of the RCI product before going bottom up. On May 31, 2000, it filed for protection under Chapter 11 of the Bankruptcy Code.
At issue in the case was Sunterra's continued right, as a bankrupt "debtor in possession", to continue use of the RCI technology pursuant to the 1997 license agreement. RCI moved to reject the license, claiming that RCI was not obligated, under bankruptcy law, to permit Sunterra's continued to use the RCI software under the 1997 license. The trial court rejected RCI's assertion, holding that Sunterra was entitled to continue use of the RCI technology under license. RCI appealed.
The "And/Or" question arose from the specific provision of bankruptcy law at issue. 11 U.S.C. §365(c) provides, in part, that Sunterra "may not assume or assign any executory contract…if…applicable law excuses [RCI]…from accepting performance from or rendering performance to an entity other than [Sunterra]…and… [RCI] does not consent to such assumption or assignment." (Italics added). Translated into English, a licensor is not required to honor an intellectual property license with a bankrupt licensee if the licensor, under copyright law, is not required to let a third party use the licensed technology and the licensor does not want the licensee or a third party to use the technology under the license.
Sunterra argued that 11 U.S.C. 365(c) did not authorize RCI to reject the license because the "assume or assign" wording of the statute must be read to mean "assume and assign." In other words, the statutory "or" means "and", and read as a conjunctive, permitted Sunterra to assume the license so long as it did not intend to assign the license to a third party; as long as Sunterra did not "actually" intend to assume and assign the license, the "or" in the statute should be read to mean "and". As the Court noted, there is considerable legal authority for this "actual test" position. Indeed, the trial court had agreed with Sunterra's interpretation.
However, the Fourth Circuit reversed. The Court adopted what they labeled the "literal test" (or means "or", not "and"), the same view, it observed, held by several other federal appellate courts. It matters not, according to the Fourth Circuit, what Sunterra "actually" intends to do with the license after assuming it; a literal reading of the statute provides that RCI was authorized to reject the license.
In re Sunterra involves highly technical arguments and analysis under complex provisions of bankruptcy law. The essence of its holding is to add growing weight to the proposition that, should the original licensee file for bankruptcy, intellectual property licensors cannot be required to continue doing business with that licensee or with third parties they did not originally contract with.
Practice Tip: The facts are not clear from the opinion, but it seems that RCI had little economic incentive to continue with the license because it had apparently been paid a large royalty up front. The statutory test has two prongs: RCI is not required under copyright law to permit a third part to use the technology, and RCI wants to reject the license. If RCI had ongoing economic incentive to preserve the Sunterra license (such as a continuing royalty stream), they might not have chosen to reject it.
Ownership of Copyrights
Gail Zyla collaborated with Marie Struble to produce the second and third editions of a nutrition textbook. During Zyla's work on the third edition, she'd signed a contract with the textbook publisher assigning all present and future copyrights to the third edition, "(including revised editions [of the third edition]) and supplements thereto."
In September 1997, upon signing an addendum to the third edition agreement on royalties and responsibilities governing a fourth edition, Zyla and Struble began work on the fourth edition. The co-authors then had a falling out and Struble finished the fourth edition herself. Upon publication of the fourth edition (Zyla had quit in a dispute over workload, attribution and pay), Zyla registered copyrights for some of the content in the fourth edition that she'd created. In the registration form, she claimed that the registered materials were derivative works based upon the nutrition textbook's third edition.
Her subsequent lawsuit for copyright infringement (among other claims) was dismissed when the trial court granted summary judgment, and the U.S. Court of Appeals for the First Circuit affirmed. Zyla v. Wadsworth, Civ. No. 03-1801 (February 25, 2004), available at www.ca1.uscourts.gov (Opinions tab, Search tab, enter case name or case number). The trial court concluded, and the Court of Appeals agreed, that Zyla had surrendered any claim to the copyrights in third edition derivative works when she transferred ownership of "future copyrights" to such derivative works to the publisher in the third edition agreement.
Practice Tip: Zyla v. Wadsworth is a relatively straightforward case that suggests perhaps two useful lessons. First, one needs to be careful when signing agreements that potentially forfeit copyright ownership particularly to works that may be created in the future. Understand exactly what is being transferred, and what works, current and future, may be affected. Second, statements made in copyright registration forms can come back to bite. Zyla had signed away "future" rights to derivative works based on the nutrition textbook's third edition. When she filed copyright registrations later, she'd classified the registered works as derivative works based upon the third edition. Zyla's own registration statement was used to defeat her copyright infringement claims.
© Matthew Joseph 2004. Law Offices of Matthew Joseph, San Mateo, California, practices in the areas of intellectual property licensing, commercial real estate leasing, and corporate and business transactions. No legal advice is intended by the information provided herein and recipients should independently consult counsel before taking any action related to this subject matter.