3rd Circuit: Covenant not to Sue is a License and therefore Not Dischargeable in Bankruptcy

By Dennis Crouch

In re Spansion (3rd Cir. 2012)

A recent Third Circuit decision focuses on the impact that a bankruptcy has on a patent license. In 2009, Spansion and Apple settled a patent dispute with Spansion agreeing to end its case at the ITC and to refrain from suing in district court. The agreement stated:

Provided that neither Spansion nor any successor in interest to any of the patents being asserted in the referenced ITC action do not bring an action of any nature asserting any such patent before any legal, judicial, arbitral, administrative, executive or other type of body or tribunal that has, or claims to have, authority to adjudicate such action in whole or in part against Apple or any Apple product, Apple agrees Spansion will not be disbarred as an Apple supplier as a result of the referenced ITC action.

The agreement also particularly stated that Spansion will remain a primary supplier "for the life-time of the product" and will be considered for future platforms.

Later that year, Spansion filed for bankruptcy and the trustee moved to reject the settlement as an executory contract. The normal rule in bankruptcy (under 11 U.S.C. § 365(a)) is that the debtor (here Spansion) can unilaterally reject executory contracts if it so chooses. Any resulting contract damages will be unsecured debts that are unlikely to receive any payout. IP law has a special exception codified in 11 U.S.C. § 365(n). Under that rule, a licensee can elect to retain its license rights despite a debtor's rejection. The statute states:

If the trustee rejects an executory contract under which the debtor is a licensor of a right to intellectual property, the licensee under such contract may elect . . . (B) to retain its rights . . . under such contract . . . to such intellectual property . . . as such rights existed immediately before the case commenced."

On appeal, the question is whether the contract between Spansion and Apple is a license or instead merely a promise not to sue. The bankruptcy court initially held that Apple's § 365(n) election did not apply because the agreement was not a license. Reviewing that decision, the Delaware District Court found that the agreement was a license "because it was a promise not to sue." Now, the Third Circuit has affirmed the District Court with quotation from the Supreme Court's 1927 decision in De Forest Radio.

"[A] license … [is] a mere waiver of the right to sue by the patentee." De Forest Radio Tel. & Tel. Co. v. United States, 273 U.S. 236, 242 (1927). A license need not be a formal grant, but is instead a "consent[ ] to [the] use of the patent in making or using it, or selling it … and a defense to an action for a tort." Id. The Court of Appeals for the Federal Circuit explained that the inquiry focuses on what the agreement authorizes, not whether the language is couched in terms of a license or a covenant not to sue; effectively the two are equivalent. TransCore, LP v. Elec. Transaction Consultants Corp., 563 F.3d 1271 (Fed. Cir. 2009).

Here, the promise to "dismiss the ITC action" and "not re-file the ITC action or another action related to one or more of the same patents against Apple" was a promise not to sue on a patent and therefore is a license of patent rights.

Thus, Apple retains its license regardless of who buys the patent rights.

One question not resolved by the appeal are Apple's ongoing duties vis-à-vis the agreement. The statute calls for ongoing payment of royalties. However, it appears that there is no further monetary payment due in the agreement, although Apple has promised to keep Spansion as a supplier and consider Spansion for future contracts. If Apple is released from those commitments then it will actually be better off because of its business partner's bankruptcy – a result that is not often the case.

35 thoughts on “3rd Circuit: Covenant not to Sue is a License and therefore Not Dischargeable in Bankruptcy

  1. See my post at 4:24 PM.

    I have offered a way out for anyone that QQ’s about my posts: stop posting as to bring my rebuttals. As I said, I merely hand back the offensive person’s head back to them. I am annoyed that they are annoyed and yet persist in being annoying themselves, indulging in the chicanery that you label “style and charm.” Sorry Ned, but that is not “style and charm.”

    My offer seems like an eminently fair deal to me. More than generous on my part, actually.

    Further, do you notice who actually is complaining Ned? It’s the small circle of would-be snarksters. Ask yourself Ned, why are they really complaining (hint: Leopold summed it up with his admission of: “he… has defeated me.”) You see Ned, these types of people don’t like to be defeated at their own “style and charm.” When forced to face their own chicanery, they wilt and whine. The answer:? better posting from them.

    Then we can all be happy, and I guarantee that you won’t have to hear Leopold tell the wrong people to just shut up.

  2. anon, for some reason, 6 and MM have not attacked me personally, or to the extent they have, I have understood their remarks as an emblem of their style, their charm. They are like sailors on a ship or Marines in the field. Their comaraderie is “good natured.”

    I have asked Malcolm to lay off you to the extent he accuses you of being a troll. I asked him this because you and I have had and continue to have discussions on substance, which I value. Even Dennis has cited your posts for their value.

    But a lot of folks here find you annoying; and I think it stems from the kind of remarks you make. They are personal insults and intended to be such.

  3. I don’t attack people personally Ned (except perhaps in direct response – and in kind, albeit with sharper wit – to those that attack me).

    As EG noted on another thread, I am happy to oblige handing someone’s head back to them. Likewise, as I have noted, I am happy to play by any rules that people want to play on this blog. You yourself have excused such attacks by those with whom you agree with philosophically as “swagger,” and admonished those receiving such “swagger” to enjoy it.

    Funny how much the hypocrite you sound when you and your circle mates are on the receiving end.

    As for your statement of ignoring 101… Really?

  4. Good questions Ned – and such will depend on the actual words of the licensing agreement.

    But suffice to say that you see your error and accept my gracious offer of correction.

    You are welcome.

  5. Leo, what we really need here is an “ignore” button. That would help mightily.

    FYI, I generally ignore 101. Regarding anon…

    I think anon’s basic problem is that he attacks people personally. This is annoying, at best.

  6. anon, OK.

    Let me ask you this, and I really don’t know the answer, if the license agreement is conditional on continued performance by Apple, can it be rejected?

    What if the license agreement is conditioned upon continued performance by Spansion?

    I am sure that if a license agreement is paid up and does not depend upon further performances by either party, then Apple should retain its license.

  7. Come bankruptcy. Spansion ceases to exist.

    I think you gloss over the very point in contention and assume the end result you wish to have. Come bankruptcy, certain things (such as here the license), in fact do not automatically cease to exist.

  8. I see.

    Spansion says, so long as I remain a qualified supplier, I will not sue you, Apple Inc.

    Come bankruptcy. Spansion ceases to exist.

    Apple can no longer perform. The “covenant,” by its terms, expires. It ceases to exist.

    But Apple has claimed that it retains a license?

    I think, people, that this is wrong. The trustee in bankruptcy is being cheated, big time.

  9. Wonderful tactic of attempting to depersonalize the person who highlights your foibles (shades of Jame Gumb in Silence of the Lambs)

    Thanks for adding the indicia of your mental state.

    And I laugh at your “reply when we want to stance” – if you cannot reply to my posts in any meaningful way, simply say “I choose not to” and claim “victory” anyway.

    Yeah – like that is not a transparent capitulation of the points raised.

    But please, by all means, return at a later date and spew the same crrp again. Because later that stroking of your fellow circle mates will surely address the points you choose not to address now (NOT).

    And I am sure that giving you a laugh MaxDrie is what all “reasonable” people are looking to do.

  10. I agree. Leo, it is no more necessary to reply to the anon thing than it is to reply to a bot.

    What I do is to reply when I think my reply might be of interest to readers who are capable of conducting a normal human conversation. Others reading this, please feel free to reply whenever you think it might give me a laugh.

    Otherwise, I ignore the thing. It thinks it has won, yes, but so what?

  11. I like to play a fun game…

    LOL – the fun game you like to play is “Using One’s Face to Stop a Calvinball Spike.”

    And IANAE, you play that game so well.

  12. He/she/it has defeated me – I’m out of here for a while.

    You’re not required to answer him every time, you know.

    I like to play a fun game where I wait for him to say something crazy enough that I don’t need to bother contradicting it. Then I leave his comment unanswered, for all to see.

    The best part is that it makes him think he’s won.

  13. Try reading the whole agreement. The provision you are referencing appears to be the consideration (I’ll keep you as a preferred supplier, subject to a condition subsequent of not suing me). The operative licensing provision reads:

    Spansion is willing to dismiss the ITC action against Apple, and will not re-file the ITC action or another action related to one or more of the same patents against Apple, in consideration of the
    following . . . .

    Link to underlying district court opinion: link to law.justia.com

  14. Who is “us,” MM?

    One of the circle, speaking on behalf of the others?

    You want a break? You know how to get a break – I’ve provided that answer many times.

  15. Nice QQ Leopold.

    Sorry that my analysis of your posting habits hits so close to home. And note that you continue in your obsessive anti-anon views as you single out only me as being disruptive, when quite in fact the quality improvements I have suggested pertain significantly to others and their disruptive posting habits – and (again) tellingly, you have never told any of those posters to just shut up or challenged the crrp that they post (with a possible exception of you noting that Ned was misusing the word “categorically”).

  16. Dennis, can you please make that “anon” thing go away? Go read the first thread above – anon serves no purpose here except to disrupt anything that even begins to look like a reasonable conversation.

    He/she/it has defeated me – I’m out of here for a while. That should make it easier for the rest of your readers to enjoy anon’s “substance.”

  17. What you think as “all I said” says more than you think it does. I too can read – and I can objectively synthesize what I read, I can evaluate the sum total of what I read, I can look at the bigger picture and see the content (and lack of content) in what others post, in the views they decide to post upon (and tellingly, the views they decide not to post upon).

    You’re amazing. Keep up the good work.

  18. I don’t care two shakes about

    An objective view of the types of posts that you react against says otherwise Leopold. Quite in act, it screams it out.

    Your consistency in telling the wrong people to “just shut-up” clearly indicates that your ability to read does not include the ability to read objectively.

    Your wanting to attack now (again) spreads to me, as I in no way indicated my position on Gene’s post and yet you want to attribute some sense that I was impressed with the post.

    What you think as “all I said” says more than you think it does. I too can read – and I can objectively synthesize what I read, I can evaluate the sum total of what I read, I can look at the bigger picture and see the content (and lack of content) in what others post, in the views they decide to post upon (and tellingly, the views they decide not to post upon).

  19. But it seems that you “know enough” to label a pro-patent stance as “jingoism” without verifying whether or not Gene does know the entire situation (or not).

    I don’t care two shakes about Mr. Quinn’s “pro-patent” stance or whether he knows the entire situation. I can read, however, and if Mr. Quinn is well-versed in the issues of international law and comity then it is not apparent from his column. Here’s his entire analysis of those issues:

    Yes, the DOJ doesn’t think s. 365(n) can or should be used to constrain the operation of bankruptcy law in Germany. What a wonderful kum ba yah sentiment. You have your laws, we have our laws, and what you do is no business of ours and what we do is no business of yours. We can all co-exist peacefully, in harmony. Kum ba yah! I want to vomit!

    That impresses you?

    And incidentally, why don’t you find something more comfortable to sit on, and relax? All I’ve said on this topic is that Mr. Quinn’s column doesn’t persuade me. That’s hardly an attack, and it certainly isn’t “anti-patent.”

  20. I can’t answer your question because I don’t know the entire situation

    But it seems that you “know enough” to label a pro-patent stance as “jingoism” without verifying whether or not Gene does know the entire situation (or not).

    More likely, given your past attacks, there is something you find offensive about a general pro-patent stance.

    You should look into that.

  21. Put differently in what way is DOJ protecting the “U.S. interest” by taking the position it’s taking in Qimonda AG?

    Just because the DOJ’s position is currently hurting 7 U.S. licensees doesn’t mean that it isn’t protecting the U.S. interest. I can’t answer your question because I don’t know the entire situation, but it seems to me that questions regarding international choice of law, comity, etc., could be much bigger than a single (or 7) U.S. licensees. Perhaps the DOJ is on the wrong side of the issue, but Mr. Quinn’s jingoism doesn’t persuade me.

  22. Sorry Leopold, you’re right that Qimonda AG doesn’t show that DOJ’s position reflects a “the only ‘good’ patent is a ‘dead’ patent.” There are other positions taken by DOJ that show that, such as the 9 licensing “no-no’s” of the 60′s.

    But isn’t it strange that DOJ would side with a German company versus 7 U.S. licensees that say if the bankrupt German company is able to nix those licenses through bankruptcy (which the U.S. bankruptcy court held couldn’t be nixed because of 365(n)), those U.S. licenses would then be at risk of a subsequent “shakedown” to take up new licenses under more ornerous (and expensive terms) to avoid being sued for infringement? Put differently in what way is DOJ protecting the “U.S. interest” by taking the position it’s taking in Qimonda AG?

  23. Except for the double negative noted by MLM, I agree with you about the intent of the language. I have mixed feelings about whether it really is a covenant not to sue, however.

    As far as MLM’s comment about the quality of the drafting, I agree especially from a company as large and sophisticated as Apple, but over the years I have been amazed at some of the agreements I have seen during due dillegence involving companies should have known better.

  24. Stephen, perchance do you also read the clause as I do — that what is going on here is something like,

    So long as you do not sue us, we will keep you as a preferred supplier?

  25. I believe they meant “debar” not “disbar” although I do not recall seeing that term used outside of the field of government contracts. When a company is debarred it is disqualified from selling products or services to the government.

  26. The way I read the clause is this:

    1) So long a you do not sue …

    2) You will remain a preferred supplier.

    This is NOT a covenant not to sue.

    Something smells in the state of Denmark. Maybe, a rotten apple?

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  28. Did the agreement really say “provided that neither Spansion nor any successor do not …”? Maybe I need to refresh my understanding of double negatives, but to me this reads as if both Spansion and any successor must sue Apple for patent infringement in order to avoid disbarment as a supplier.

    Also, “disbar” is a really strange choice of word for this context. Why not “disqualify”? “Disbar” uniquely refers to lawyer license status.

    Hard to believe any lawyer could so poorly draft a presumably important agreement.

  29. I’m not sure I understand how the DOJ’s position reflects a “the only ‘good’ patent is a ‘dead’ patent.” The DOJ’s position is that the patent should be stripped of its encumbrances, and thus restored to its maximum value.

    I read the IPWatchdog post. I don’t normally read it – is the writing always like that?

    It seems to me that the issue is far more complicated than Mr. Quinn lets on. The reason that 11 USC 365(n) doesn’t apply is that it’s a German firm being dissolved under German law. Mr. Quinn wants us to understand that 365(n) somehow makes patent licenses immune from foreign law, unlike other contracts. But 365(n) is a feature of U.S. bankruptcy law, not U.S. patent law.

  30. Dennis,

    Thanks for alerting us to this case. The issue of discharging patent licenses in bankruptcy is one that has haunted patent law all the way back to when I first began practice over 35 years ago. Anyway we can get a link to the case itself?

    Also, there’s a case (In re Qimonda AG in the 4th Circuit) reported by IPWatchdog involving a German bankrupt that is trying to discharge a patent license under a U.S. patent by arguing that the 365(n) doesn’t apply. What’s really bizarre is DOJ is arguing in favor of the German bankrupt’s position. Only proves that, in DOJ’s eyes, the only “good” patent is a “dead” patent.

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