CAN A DEBTOR ASSIGN A PIECE OF YOUR SOUL?
The medium through which people view, read and listen to art is ever changing. New technology can turn a tried and true publisher or record company into old news quickly. This can create a frightening and disorienting scenario for artists with copyrights that are licensed to a now failing company. Over the years I have been privileged to meet and befriend a number of talented writers and artists. As a confessed “bankruptcy nerd,” I sometimes consider the implications to these friends if the licensee of their copyright files for relief under the Bankruptcy Code. I understand how many artists feel about their work. Their work is a part of them - a part of their soul they are brave enough to put in the public eye to be judged. Since I am not that brave, I can only imagine the trauma of reading that the party with control over your work just filed a Chapter 11 case. That trauma can be diminished with some information and even a basic understanding of an artist’s rights in a bankruptcy case.
A copyright is what gives an artist the exclusive right to use and profit from her work. That copyright is sometimes licensed to the company (often a publisher or record company called the “licensee”) that will bring that work to market, so that company can profit from that work legally. Sometimes, a publisher or record company may directly own the copyright to the work. The first thing to know when that licensee, or corporate copyright owner, files a bankruptcy case (and becomes a “debtor”) is the license or other right to use and profit from an artist’s work is the debtor’s intellectual property – not the artist’s. As such, the license or copyright becomes an asset of the bankruptcy estate. An intellectual property license is considered an executory contract which may be “sold” through the assumption then assignment of the license to a part chosen by the debtor company (and approved by the court) under section 365 of the Bankruptcy Code.[1]
An artist may not be able to prevent a sale of copyright because it is owned by the debtor. Likewise, a license that requires the company’s consent for anyone else (including her) to use or profit from the work in any way (or an “exclusive license”) is also considered the debtors’ property. If an artist retains some rights to use and profit from her work (for example - give another party the right to write a screenplay based on it), without consent, the license is said to be “non-exclusive.” In many jurisdictions, a debtor in bankruptcy cannot assign a non-exclusive license of intellectual property to third party without the holder’s (the “licensor’s”) consent.[2] In some, a debtor cannot even assume such a license for its’ own use as part of its reorganization without the artist’s consent.[3] These courts generally find the basis for this denial in other federal law that implies the non-exclusive license does not hold a property interest in the license. Luckily, if you are owed any money on a license, it will have to be paid before any license can be sold.[4] Artists should always appear in the case as they may have grounds to object the assignment for reasons other than those discussed here.
The first step for artists in a bankruptcy is to do some research and decide whether the assignment of your license or copyright is good for you as a practical matter. Remember, the company currently controlling the intellectual property (and filing for bankruptcy relief) likely cannot pay its debts as they came due, and is very likely pressed for cash. The company buying the license may have more resources and a new perspective on how best to monetize those rights. If you don’t object – don’t object. If the case is in one of the jurisdictions that curtail the ability to sell intellectual property licenses, it is important to object to any proposed sale or the artist will be deemed to have consented to the sale. Irrespective of the situation, artists are well advised to negotiate hard for a non-exclusive license without explicit consent clauses if they want to avoid having their work assigned to a third party in a bankruptcy case.
[1] See Generally In re Patient Education Media, Inc., 210 B.R. 237 (Bankr. SDNY 1997); 11 U.S.C. (the “Bankruptcy Code”) Section 365(a)
[2] See Unarco Indus. Inc. v. Kelley Co. Inc., 465 F.2d 1303 (7th Cir. 1972) cert. denied, 410 U.S. 929 (1973), (analyzing assignability of patent license); In re Golden Books Family Entertainment Inc., 269 B.R.311 (Bankr. D. Del.2001); In re N.C.P. Marketing Group Inc., 337 B.R. 230 (D. Nev. 2005) (trademark not assignable). In re Patient Educ. Media Inc., 210 B.R.at 239 (Bankr. SDNY 1997); but See Gardner v. Nike, 110 F.Supp.2d 1282 (C.D. CA 2000)
[3] In re Sunterra, 361 F.3d 257 (4th Cir. 2004); Perlman v. Catapult Ent. Inc. (In re Catapult Entertainment Inc.), 165 F.3d 747 (9th Cir. 1999); City of Jamestown v. James Cable Partners LP (In re James Cable Partners LP), 27 F.3d 534, 537 (11th Cir. 1994)
[4] Bankruptcy Code Section 365(b)
