Q. For those unfamiliar with the term, what is enterprise software and how are not only midstream, but increasingly upstream companies using it to their advantage?

A. Enterprise resource planning (ERP) for oil and gas companies is typically a software as a service (SaaS) system that serves as an epicenter of function for different departments, including accounting, cost management, human resources, asset management (equipment, leases), facilities, management and data storage. ERP software is a type of intellectual property which can generally include patents, copyrights, trademarks and trade secrets.

Q. If an oil and gas company files bankruptcy or is acquired, what rights could it lose in terms of intellectual property created using enterprise software?

  1. This is a big question and could fill a lengthy article. Quite simply, though, in a bankruptcy situation, the right to use the intellectual property and all interpretative data could be lost altogether, depending upon the nature of the contractual relationship. A true owner of intellectual property typically will not lose its ownership rights to bankruptcy unless ownership is sold with consent or the owner it has pledged that intellectual property as collateral for some type of loan, there is a default and the lender forecloses. However, protection of intellectual property rights created using ERP will depend upon the terms set out in the licensed ERP contract—typically a license agreement.

The most common situation is where a licensor grants an intellectual property license to a licensee, who then files bankruptcy. A licensor of intellectual property to a bankrupt debtor could lose many contractual rights and restrictions in the license agreement if it does not diligently follow the events of a Chapter 11 or Chapter 7 bankruptcy case.

There are three primary options for the debtor/licensee to choose from with respect to any license agreement, which is a type of “executory contract”—one that still requires performance on both sides:

  • First, in a typical bankruptcy case, the bankruptcy debtor/licensee may “assume” the license agreement, which generally means continue the contractual relationship for its own use as long as all defaults are cured.
  • Second, the debtor/licensee can also choose to “assign” that license agreement to a third party for value. That third party may not be one with whom the licensor wants to do business, especially if the intellectual property is highly confidential or contains protected trade secrets. Fortunately, intellectual property rights are granted significant protections in bankruptcy, more so that other types of contractual rights, and the licensor may “object” to the assumption and/or assignment of its licensed property in many situations. The licensor can assert that the attempted transfer causes a “change-in-control” which may not be permitted under the license agreement, or that other anti-assignment provisions of the license agreement be upheld. The licensor could then extract a fee or demand other protections before it will grant its consent to let the third party take an assignment of the license agreement. In many other non-intellectual property situations, such anti-assignment clauses are void in bankruptcy and the debtor can freely assign contracts without consent. So, intellectual property licensors have greater rights than other non-debtor contract parties in bankruptcy if they know to assert them.
  • Finally, the debtor/licensee could “reject” the license agreement, which amounts to a permissible breach, allowing the licensee to walk away and allowing the licensor to terminate the license agreement and retrieve its property. Generally, licensees of intellectual property where the licensor files bankruptcy have a right to continue to use the licensed property, even if the debtor/licensor chooses to “reject” the license agreement, as long as licensee still pays any required license fees that become due. However, the licensee in this scenario cannot demand future performance from the bankruptcy debtor unless the debtor chooses assume (such as demand enforcement against intellectual property infringers).

Q. What are some common misconceptions about the transfer of these rights when a company is acquired or files bankruptcy?

A. A common misconception is that contractual restrictions upon assignment and other de facto termination clauses in contracts are not always upheld in bankruptcy. First, many of these rights are void altogether in bankruptcy. Second, even when a party may be able to insist upon the application of such anti-assignment or change-in-control provisions (such as in most IP contexts), those rights must be formally asserted in the bankruptcy or they can still be lost.

Bankruptcy Courts have significant power to modify contractual rights, so simply relying on existing language in a license agreement or other contract is not sufficient protection. See the explanation above for what happens to license agreements in bankruptcy. Outside of bankruptcy, in the case of a merger or acquisition, anti-assignment or de facto termination clauses are more likely to be upheld, but it will always depend upon the law of the jurisdiction that applies to the contract.

Q. What are some potential consequences to both sides—the bankrupt or acquired company as well as the enterprise software company—when the rights aren’t properly transferred?

The consequences in bankruptcy for contractual rights related to intellectual property will necessarily depend on the terms of the contract, but if a transfer of rights is not property protected, documented and/or negotiated, then (i) the licensor of intellectual property could lose the right to restrict assignment to third parties or lose the right to assert additional license fees that could ordinarily be asserted; (ii) a licensee of intellectual property could lose the right to use the intellectual property altogether and all interpretive data, although, as stated above, a licensee of a bankrupt licensor can in many cases continue to use the licensed property for the continued payment of a license fee. It may still lose the right to enforce any other contractual terms that the licensor was previously obligated to perform, such as to enforce infringement of the IP rights by third parties.

Q. Whose responsibility is it to ensure the rights are properly transferred?

In bankruptcy, the debtor has the statutory right to assume or reject licenses of intellectual property to reorganize its business affairs or to liquidate. It is the responsibility of the non-debtor party to any license agreement to protect their rights against any proposed treatment by the debtor. Of course, non-debtor parties are entitled to due process under the law, so adequate notice of any proposed treatment of contractual intellectual property rights must be given by the debtor to the non-debtor in advance of any final order from the bankruptcy court.

Q. Is it accurate to classify the enterprise software company as, for lack of a better word, the victim when the rights aren’t properly transferred? Why?

A. To me, a victim is one who has no power to prevent a wrong. With contractual intellectual property rights, including ERP, each side has the right to protect itself and sometimes may have the duty to protect third parties.

Protection of any IP rights should always start through open negotiations wherever possible; but if not possible, then through enforcement using the legal process. What is unique in bankruptcy is that, while the terms of contracts are usually interpreted under state law, the Bankruptcy Code often turns those rights upside down and parties who feel they know what will happen legally in a normal contract dispute may be rudely awakened when they enter the realm of bankruptcy. For non-debtor parties, that is usually not a choice, so urgent consultation with a lawyer experienced in protecting intellectual property rights in bankruptcy is always advisable.

Q. Are you seeing, or do you anticipate, more aggressive enforcement of these rights transfers? Why or why not?

A. The recent spate of oil and gas bankruptcies has brought many of these issues to the forefront for users of intellectual property. Certain sectors in the energy industry have been very aggressive in protecting intellectual property rights, yet others have been fairly idle. It is only when a “bet the company” issue arises do non-debtor intellectual property contract parties take notice, but it is often too late. If you are a user or a licensor of intellectual property, immediate involvement and legal protection is vital. With intellectual property and bankruptcy, once rights are lost, they can be lost forever. Once a trade secret is no longer secret, it loses its value and cannot be protected.

Q. What other concerns should people keep top-of-mind?

A. The conditions under which an intellectual property licensor can restrict assumption and/or assignment are myriad. Many of these oil and gas companies are filing “prepackaged” bankruptcy plans (which means, pre-negotiated with certain lenders), and with many oil and gas debtors under extremely short timetables from their lenders to get in and out of bankruptcy, an unsuspecting licensor could miss crucial deadlines or notices, or simply fail to understand how to protect their licenses, and therefore lose valuable rights.

Duane J. Brescia, with Strasburger & Price LLP, is a litigator and strategist who assists clients in all matters concerning insolvency risk, bankruptcy law, corporate reorganization, and business, fiduciary and insurance/surety litigation. His practice focuses on financial issues in the insolvency context for borrowers and creditors, as well as addressing all matters of Chapter 11 plan negotiation and financial restructuring. He can be reached at duane.brescia@strasburger.com