Intellectual property is an important asset to a company’s identity and competitive advantage. These assets can be in the form of patents, copyrights, trademarks and trade secrets. Businesses create them to protect their innovations and creations. However, when a company faces financial distress and seeks bankruptcy protection, its IP rights may also come under scrutiny.

Treatment of IP rights in bankruptcy

The treatment of intellectual property rights in bankruptcy can vary based on the type of bankruptcy filed, whether Chapter 7 or Chapter 11.

  • Chapter 7 bankruptcy: Chapter 7 bankruptcy involves the liquidation of a business’s assets to pay off creditors. As a business’ intellectual property is also an asset of the company, business owners can use it to generate funds for debt repayment. They just have to make sure that the buyer of the IP is aware of any existing licenses or agreements associated with the property.
  • Chapter 11 bankruptcy: Filing for Chapter 11 bankruptcy may mean the business still aims to reorganize and continue operations. In this case, they can utilize their intellectual property to help them secure financing or attract potential investors. They can also sell or license their IP during the reorganization. But they may need approval from the bankruptcy court to do this.

Note that intellectual property rights often involve complex legal considerations. Factors such as licensing agreements, prior assignments and the nature of the IP itself can also impact their treatment in bankruptcy.

The impact of bankruptcy on IP rights

During bankruptcy, IP rights are evaluated to determine their worth. This assessment aids in deciding whether to sell, license or retain the IP assets. The bankruptcy court and creditors may analyze the IP’s contribution to the company’s overall value. They may even look at its potential to generate revenue.

Some businesses may also choose to license their IP to others during bankruptcy. This allows them to generate income while retaining ownership. However, license agreements must be carefully crafted to ensure the licensee’s rights are well-defined and do not conflict with the bankruptcy process.

Filing for bankruptcy is never an easy decision. Even your business’ intellectual property rights won’t be untouched. But their treatment may vary, and there is also a way to keep ownership of your IP rights. It does have a lot of legal considerations, so it would be wise to seek legal counsel to help you understand the terms.