IP Consequences of Asset Sales in Bankruptcy

A bankruptcy case of a licensee creates a series of pitfalls that can impact the rights of a licensor of intellectual property (IP). A recent decision from the Southern District of New York in the In re Old Market Group Holdings Corp, et al. (“Fairway”) bankruptcy underscores this point, highlighting a purchaser’s entitlement to the quiet enjoyment of its acquired assets and the impact this can have on IP counterparties.

Prior to bankruptcy, Fairway entered into a license with Ferguson and Katzman Photography, Inc. permitting Fairway to use a series of photographs to create non-broadcast media, including advertising displays. Fairway did not have the right to transfer its rights under the license and was simply permitted to reproduce the photographs to create these displays, which were created while the now-expired license was in effect and continuously displayed thereafter.

In bankruptcy, Fairway conducted an auction sale of its assets, including these displays. Pursuant to the sale order: Fairway’s assets were transferred to Village Super Market, Inc. “free and clear” of claims or interests and no holder of any interest or claim could interfere with Village’s quiet use and enjoyment of the purchased assets. The sale order included a finding that Village has no successor or derivative liability.

The court subsequently confirmed Fairway’s plan of reorganization and approved provisions enjoining parties from interfering with the plan. Katzman later commenced a district court action alleging Fairway violated the Copyright Act by displaying its photographs post-expiration and transferring the photographs to Village. Katzman further argued that Village was infringing on its copyrights by continuing to display the photographs. Village responded by seeking a bankruptcy court order enforcing the sale order and enjoining Katzman from continuing the district court action.

The bankruptcy court found that Katzman’s intellectual property, as incorporated into the store furnishings, was transferred as part of the sale. Moreover, the court found that Katzman received adequate notice of the sale and plan and therefore had an opportunity to object to both, but failed to do so. The court then found the transfer was not invalidated by the fact that the license was expired at the time of the transfer and that the sale order stripped Katzman of its right to assert claims related to its IP. As a result, Village was permitted to continue to use all purchased assets, including the store furnishings containing the copyrighted photographs free and clear of any claims.

The court then found that the continued display of Katzman’s photographs did not give rise to new, post-closing infringement claims because the photographs were continuously displayed and open to the public, and the post-closing display related back to any pre-closing claims Katzman may have had, which were barred by the entry of the sale order.

IMPLICATIONS FOR OWNERS OF INTELLECTUAL PROPERTY

This decision underscores a purchaser’s entitlement to quiet enjoyment of acquired assets, including IP. Although the parties argued about whether the displays constituted derivative works, rights Fairway possessed under the expired license, and which rights survived the sale, the entry of the sale order and the confirmation of the plan were found to have eliminated any recourse the licensor had with respect to pre-closing actions regardless of applicable non-bankruptcy law.

The court reasoned that because the IP was incorporated into the physical assets sold by Fairway, any claims arising out of those assets, including with regard to the photographs, were barred by the sale order. The drastic result is that Village is now permitted to use the photographs in perpetuity.

Critically, notwithstanding publication notice of the sale and actual notice of the plan’s injunction provision, Katzman did not object. Had Katzman objected, it may have been able to protect its rights. Instead, it seemed determined to adjudicate its claims before a venue of its choosing and to ignore the chapter 11 cases.

This case is a reminder to licensors of the importance of involvement in a licensee’s bankruptcy in order to protect its rights. Licensors of IP should be particularly mindful of how agreements address:

• Notice of bankruptcy.
• Notice of the sale of property containing licensed IP in bankruptcy.
• Rights of the licensor concerning the transfer of licensed IP and materials containing the licensed IP.
• Rights of the licensee that remain upon the termination of the agreement.

Counterparties who choose to ignore bankruptcy proceedings and fail to object to a sale or chapter 11 plan do so at their peril. Substantial rights can be lost without recourse.