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Bankruptcy Pitfalls: How an infringer’s bankruptcy could impact your IP rights

published in McAfee & Taft tIPsheet | July 8, 2016

By Jessica John Bowman and Charles Greenough

As a patent owner, you have the exclusive right to prevent others from making, using, selling, offering for sale, or importing your claimed invention into the United States. You also have the ability to recover damages from a third party that violates your exclusive rights. But how is your ability to recover affected by an infringer’s decision to file a petition for bankruptcy? The answer depends upon the facts of your specific case, but the following rules generally apply:

An infringer’s bankruptcy petition will impair your ability to obtain relief for infringement that occurred before the bankruptcy. When the infringing party files a petition for bankruptcy, an automatic stay will be put in place. Absent a dismissal or an order lifting the stay, you cannot (1) take any steps to collect on any judgments issued in pre-petition patent-infringement litigation or (2) institute or continue litigation concerning pre-petition infringement. Once the stay is in place, the bankruptcy court will determine the value of any unresolved claims of infringement. Those damages, along with any liquidated damages from previously resolved infringement claims, will be treated as general unsecured debts of the bankruptcy estate. Unsecured debts are given low priority when assets of the estate are being distributed, which means that recovery for pre-petition infringement will be limited to only a small percentage of what you would otherwise recover from an infringer.

Relief remains available for infringement that takes place during the administration of the bankruptcy estate. Although the automatic stay freezes all attempts to collect on pre-petition claims, the stay does not necessarily apply to claims that arise after the filing of the petition for bankruptcy. Because each act of infringement is independently actionable, claims for post-petition acts of infringement remain independently actionable. To the extent infringing conduct is deemed necessary to the continued operation of the bankrupt’s estate, a claim for damages resulting from post-petition infringement will be classified as an “administrative claim,” which is entitled to priority in the distribution of the bankrupt’s assets. Thus, where infringement continues after the filing of the petition for bankruptcy, the chances of recovering a substantial portion of any damages resulting from the post-petition activity remain favorable.

The automatic stay of claims against the debtor may interfere with your ability to seek relief from other infringers. Although the filing of a bankruptcy petition by one infringing party will not necessarily preclude you from seeking relief from other infringers, there will be instances where the conduct of a group of infringers is so intertwined that it would not be feasible to proceed against less than all of the infringers. In such cases, a stay of the proceedings against the debtor may, for practical purposes, preclude you from pursuing relief against others who engaged in the same conduct. In such cases, it will be important to consider whether there is any value in foregoing claims for pre-petition misconduct in an effort to allow claims concerning post-petition infringement against the all parties to move forward.

Damages for pre-petition misconduct can be deemed non-dischargeable. Although pre-petition claims against the debtor are ordinarily discharged following the administration of the estate and the distribution of the debtor’s assets, a debt arising from the willful and malicious infringement of a patent may be declared non-dischargeable under the Bankruptcy Code. The patent owner must overcome the presumption that all debts of the bankruptcy estate are dischargeable, but patent owners with strong evidence of deliberate and willful infringement would be well-served to seek relief from discharge.

Although an infringer’s decision to file for bankruptcy relief is certainly an impediment to recovering damages for infringement, it is not insurmountable. Armed with these general rules, and the advice of counsel tailored to your specific circumstances, it is possible to obtain some relief from a party that infringes your intellectual property rights.