Delivered by Email to: Ms. Susan Jensen, Minority Counsel November 15, 2013

House Judiciary Committee
c/o The Honorable John Conyers, Jr., Ranking Member
United States House of Representatives
Washington, DC 20515

Re: H.R. 3309 (Innovation Act)

Dear Chairman, Ranking Member, and Members of the House Judiciary Committee:

I am writing to you in my capacity as Chair of the Committee on Legislation of the National Bankruptcy Conference (NBC or Conference). The NBC is a voluntary, non-partisan, not-for-profit organization composed of about 60 of the nation's leading bankruptcy judges, professors and practitioners; it has provided advice to Congress on bankruptcy-related legislation for over 75 years. The Conference takes substantive policy positions on issues. It also provides technical advice on bankruptcy legislation without regard to its policy positions so that, to the extent possible, such legislation will achieve the objectives intended by its supporters.

The Innovation Act, which is primarily focused on patent litigation reform, contains an amendment to section 1520 of chapter 15 of the Bankruptcy Code that the Conference opposes in its present form. The proposed amendment appears in SEC. 6. PROCEDURES AND PRACTICES TO IMPLEMENT AND RECOMMENDATIONS TO THE JUDICIAL CONFERENCE and provides as follows:

• (d)
  PROTECTION OF INTELLECTUAL-PROPERTY LICENSES IN BANKRUPTCY. —
• • (1)
    IN GENERAL. —Section 1520(a) of title 11, United States Code, is amended —
  • • (A)
      in paragraph (3), by striking "; and"and inserting a semicolon;

• (B)
  in paragraph (4), by striking the period at the end and inserting "; and"; and
• (C)
  by inserting at the end the following new paragraph: '(5) section 365(n) applies to intellectual property of which the debtor is a licensor or which the debtor has transferred."
• • (2)
    EFFECTIVE DATE. — The amendments made by this subsection shall take effect on the date of the enactment of this Act and shall apply to any action for which a complaint is pending on, or filed on or after, such date of enactment.

Chapter 15 of the Bankruptcy Code, included in the 2005 amendments to the Code with large bipartisan majorities, is designed to achieve worldwide cooperation in the liquidation or reorganization of a multinational company in order to preserve value for creditors and other stakeholders, especially employees. Its fundamental structure is "universalist" in that it requires that each country recognize a foreign main proceeding in the debtor's home country as the leader in the worldwide effort and that it cooperate with that jurisdiction to achieve the best results for all concerned. Among other advantages, this approach permits the sale of whole divisions with assets and operations in several nations as a single piece, which almost always will yield a higher price. It is also essential to reorganization of a global business.

Chapter 15 incorporated the UNCITRAL Model Law on Cross-Border Insolvency "to encourage cooperation between the United States and foreign countries with respect to transnational insolvency cases."¹ While the Model Law required modifications to fit into the existing judicial and legislative scheme, chapter 15 followed the exhortation of UNCITRAL: "Therefore, in order to achieve a satisfactory degree of harmonization and certainty, it is recommended that States [countries] make as few changes as possible in incorporating the model law into their legal systems."² The proposed amendment to section 1520 violates the purpose of chapter 15 to further international cooperation and, to that end, the guidance of UNCITRAL to minimize modifications to the Model Law.

Adding a provision to chapter 15 that deals with a special situation violates the principle of uniformity that makes the Model Law a valuable mechanism for greater legal certainty for trade and investment. This is true even if one believes that, as a matter of public policy, the special situation should always be decided applying U.S. law. By such a unilateral, non-uniform amendment, the United States invites other countries to modify their versions of the Model Law in ways that may be detrimental to United States parties in foreign proceedings. The situation addressed by the proposed amendment is already before the courts and the tools to address the situation are already within chapter 15. The courts can deal with the issue appropriately and predictably without opening the door to other countries to reciprocate with their own deviations from the Model Law.

Section 1520, Effects of recognition of a foreign main proceeding, provides automatic relief on recognition of a foreign main proceeding.³ It implements Article 20 of the Model Law by incorporating sections of the Bankruptcy Code that are consistent with the purpose of Article 20.⁴ Both Article 20 and section 1520 operate automatically upon recognition of a foreign main proceeding and impose "effects" that "are necessary to allow steps to be taken to organize an orderly and fair cross-border insolvency proceeding. . . ."⁵ The fundamental effects necessary for an orderly and fair cross-border insolvency are (a) a stay of actions against or concerning the debtor or its assets, rights, obligations or liabilities, including a stay of execution against the debtor's assets and (b) a stay of the debtor's transfer, encumbrance or disposition of assets.⁶ Section 1520 imposes the stay by incorporating the automatic stay of section 362 (but limited to the debtor and its assets within the territorial jurisdiction of the United States) and the transfer restrictions of sections 549, 363 and 552.⁷

The Innovation Act would introduce into section 1520 a section of the Bankruptcy Code, section 365(n), that has nothing to do with allowing "steps to be taken to organize an orderly and fair cross-border insolvency proceeding." This would be a blow to the goals of uniformity and harmonization embodied in the Model Law and chapter 15. Instead of a provision that affects all parties with an interest in a foreign proceeding, that effectively preserves the status quo and (potentially) going concern value and that does not intrude on the foreign proceeding, section 365(n) is not concerned with preservation of the status quo and affects the rights of a subset of licensees of intellectual property in the event that their license agreement is rejected or otherwise subjected to nonperformance in a foreign main bankruptcy case of a debtor who is their licensor. It may impose U.S. law on the foreign proceeding whether or not U.S. law should apply to a particular license. If the legislation is adopted, it should, at the very least, be limited to licenses that are within the territorial jurisdiction of the United States.⁸

Automatically applying section 365(n) upon recognition of a foreign main proceeding would ignore the territorial limits of chapter 15 to property within the territorial jurisdiction of the United States, since license grants by the foreign debtor may not be governed by U.S. law or may not even involve U.S. intellectual property. There should be a choice of law analysis performed before section 365(n) is applied in a chapter 15 case.⁹ Section 365(n) would then be applied in appropriate situations on an appropriate showing under section 1522(a) and (b).¹⁰ Applying it automatically, without considering whether U.S. law should apply to the license in question and without the safeguards of sections 1521 and 1522 would be detrimental to the goals of the Model Law and chapter 15.¹¹ Rather than enhancing a cross-border insolvency proceeding, automatic application of section 365(n) would likely deter foreign representatives from seeking recognition to obtain necessary assistance for the foreign proceeding if a condition to recognition were entanglement in the possible briar patch of licensee rights under U.S. bankruptcy law.

The genesis of section 6(d) of the Innovation Act is likely the case of In re Qimonda AG, 462 B.R. 165 (Bankr. E.D. Va. 2011). There, on the petition of the administrator appointed in Qimonda's German main proceeding, the bankruptcy court entered an order recognizing the foreign main proceeding and, on the same date, entered a Supplemental Order under section 1521 that applied several sections of the Bankruptcy Code, including section 365, to the chapter 15 case. Upon realizing that section 365(n) interfered with his rights under the German insolvency code to "elect non-performance" of contracts, the administrator sought modification of the Supplemental Order. Licensees of U.S. patents, who would lose the protection of section 365(n) if section 365 no longer applied, objected. The Bankruptcy Court, on remand from the district court, found, under the facts and circumstances of that case, that there was a fundamental U.S. policy favoring innovation and that eliminating section 365(n) protection would be manifestly contrary to that policy. The court also ruled that the requested relief should be denied on the alternative section 1522 ground that the interests of the licensees would not be "sufficiently protected" if the requested relief were granted. The Qimonda decision was certified for direct appeal to the Fourth Circuit.¹² The Fourth Circuit heard argument on September 17, 2013 but has not ruled.¹³

Rather than passing legislation that would pre-empt the ruling of the Fourth Circuit and conflict with the purpose of the Model Law and chapter 15, Congress should reject this amendment. As noted, relief is already available to licensees in appropriate circumstances under section 1522 if a foreign representative seeks to deprive them of their rights under U.S. law. Applying section 365(n) to all foreign main proceedings would implicate licenses that are not within the territorial jurisdiction of the United States and would be inconsistent with the ancillary nature of a chapter 15 case, to provide assistance to the main case in another country where the debtor has the center of its main interests.

If the debtor's property is sliced into national bits, the cooperative approach of chapter 15 and the Model Law is seriously handicapped. The proposed amendment does just that as to intellectual property. Intellectual property is itself subject to a worldwide system of recognition and enforcement, which will be shattered for companies emerging from reorganization, creating a host of difficult questions and serious uncertainty about these crucial property rights. We believe the United States would make a mistake by going it alone and by failing to let the courts develop the key issues under the existing statute.

Sincerely,
Sally S. Neely
Chair, Legislation Committee of the
National Bankruptcy Conference