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Lehman Brothers: Where do patents fit in a bankruptcy?

Photo by Tshein http://www.flickr.com/photos/drnewton/2857718837/

by Charl Goussard
With the recent announcement of Lehman Brothers' bankruptcy petition, several questions arose about the fate of their patents: What happens to patents after a petition for bankruptcy has been filed? Who manages them? How are they managed?

Appointment of a Trustee

When Lehman Brothers filed their bankruptcy petition, an estate was created including all of Lehman's patents and patent applications (as well as all of their other assets and rights). The bankruptcy court then appointed a Trustee or a debtor-in-possession (DIP) to manage the estate, and this official will in return appoint counsel for the protection of Lehman’s patent portfolio.

Identifying and Protecting Assets

First, counsel has to find, catalogue and assess Lehman's patent portfolio. Lehman Brothers probably had an in-house patent counsel or patent manager who will be helpful in this regard. Vital information can also be gathered by talking to patent counsel involved in the prosecution of Lehman's various patents. Websites of the major patent offices can be screened for information on patents granted and assigned.

Once all of Lehman's patents and patent applications have been listed, counsel should be able to catalog and manage the portfolio based on each patent's status. Counsel should particularly pay attention to meeting deadlines and paying all fees in order to keep applications alive.

Then, to assess the value of Lehman's patent portfolio, counsel can meet with incubators, consultants and venture capitalists. For patents pending, the difficulty lies in determining which of Lehman's patent applications should be prosecuted and which should be abandoned. Market-related factors, such as the value of similar patents in the field, marketplace competition, potential for licensing... etc., will give an indication as to the potential value of each patent.

Dealing with Licenses

In the meantime, counsel for Lehman's estate will be required to make sound business judgments on whether to reject or accept licenses of intellectual property (IP). According to US Bankruptcy code, IP-licenses are of an executory nature and may accordingly be assumed or rejected by the Trustee or DIP. Upon assumption of such licenses, the Trustee or DIP may also assign such contracts.

Should the Trustee or DIP decide to reject a patent license agreement, the bankruptcy court will defer to their reasonable business judgment. Usually, bankruptcy courts grant motions by Trustees to reject contracts, but some courts have ruled that rejections were not founded on sound business judgments and could therefore not be granted.

Once a license agreement has been rejected, Lehman Brothers, as licensees, would not be bound to the license agreement – bad news for licensors who were expecting royalties.

In the case of exclusive licenses, Lehman's licensees may elect to retain their rights under 11 U.S.C. § 365(n) despite the rejection of the license agreement. These exclusive licensees may thus continue to enforce their exclusivity rights; however, under a rejected license agreement, Lehman Brothers will be freed from their obligations with regards to Specific Performance. For example, Lehman would not be required to pay patent office maintenance fees for their licensed patents if those patent license agreements were rejected.

Winding-up the Bankruptcy

Ultimately Lehman's Trustee's objective is to liquidate all of Lehman Brothers' assets – which include their patents. One can only speculate as to the route Lehman's patent portfolio will eventually go. Possible solutions include: selling some patents or even the whole portfolio to insiders such as previous Lehman Bros. managers; selling the patent portfolio to interested outsiders such as companies in the financial sector; or auctioning off the portfolio – either online or live.

After transfer/assignment of all of Lehman's assets has taken place, Lehman Brothers will be deregistered as a company and the last chapter of 158 years of the once mighty investment giant will have been completed.

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    On September 24, 2008 at 11:30 PM Anonymous said...

    108 is not equal to 500+


    Thanks for the comment. Lehman indeed currently has only 108 published applications in the US. But in total, including its roles as collateral/security agent and internationally, Lehman is estimated to have over 500 patents.

    On October 29, 2008 at 11:26 PM Anonymous said...

    Informative article. Hopefully we can see some more like this in the near future.
    EM 291008

    On October 30, 2008 at 6:18 PM Anonymous said...

    Informative and concise. Keep it up


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