Common use of Bankruptcy of the Vendor Clause in Contracts

Bankruptcy of the Vendor. [A] Protections for Customers If a vendor files for bankruptcy and rejects a license, this could have catastrophic results for a customer that is dependent on that license. To address this problem, Congress in 1988 added section 365(n) to the Bankruptcy Code. Section 365(n) states that if a license agreement is rejected by the licensor, the licensee has two basic choices: (1) treating the rejection as a breach and seeking damages through the bankruptcy court (by filing a proof of claim as an unsecured, pre-petition creditor), or (2) continu- ing to use the IP as permitted under the agreement and continuing to pay the applicable royalties (if any). [B] Limitations of Bankruptcy Code Section 365(n) While section 365(n) was a big improvement in the law for licensees, there are some important limitations regarding section 365(n). First, it does not apply to trademarks or to non-U.S. intellec- tual property. Second, upon rejection, all of the vendor ’s future obligations will cease and a customer will not be getting any con- tracted-for technical support or future IP developed by the vendor.