In re: Spansion Inc. et al.
Filing
20
OPINION. Signed by Judge Robert B. Kugler on 7/28/2011. (lid)
NOT FOR PUBLICATION
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
OPINION
___________________________________
: Chapter 11
:
In re:
: Case No. 09-1069 (KJC)
:
SPANSION INC., et al.,
: Jointly Administered
:
Reorganizing Debtors.
___________________________________ :
:
:
APPLE, INC.,
: On Appeal from the U.S. Bankruptcy
: Court for the District of Delaware
Appellant,
:
: Civil No. 10-252 (RBK)
v.
:
:
SPANSION, INC., et al.,
:
:
Appellees.
____________________________________ :
:
:
SPANSION, INC., et al.,
: On Appeal from the U.S. Bankruptcy
: Court for the District of Delaware
Cross-Appellants,
:
: Civil No. 10-554 (RBK)
v.
:
:
APPLE, INC.,
:
:
Cross-Appellee.
____________________________________ :
KUGLER, United States District Judge:
Before the Court are two appeals from decisions by the Bankruptcy Court. Both appeals
relate to the Bankruptcy Court’s application of 11 U.S.C. § 365, which permits a reorganizing
debtor to reject executory contracts that it entered into before petitioning for bankruptcy.
Pursuant to § 365, the Bankruptcy Court granted Spansion, Inc., et al.’s (“Spansion”) motion to
1
reject a letter agreement between Spansion and Apple, Inc. (“Apple”). Apple subsequently
moved pursuant to § 365(n), which permits a party to retain any intellectual property rights
secured by an executory contract that the reorganization debtor rejected, to retain a patent license
contained in the letter agreement. The Bankruptcy Court denied Apple’s motion, but found that
Spansion’s rejection of the Letter Agreement did not terminate the Letter Agreement. Both
parties appealed. Apple appeals the Bankruptcy Court’s denial of its motion to retain the patent
license. Spansion appeals the Bankruptcy Court’s ruling that the Letter Agreement is not
terminated. For the reasons discussed below, the Court denies Spansion’s appeal, grants Apple’s
appeal, and remands this matter to the Bankruptcy Court for a rehearing regarding Apple’s
motion to retain the patent license.
I.
BACKGROUND
In November 2009, before Spansion filed for Bankruptcy, Spansion commenced
litigation against Samsung Electronics Co. (“Samsung”). Samsung is a primary competitor of
Spansion in the market for flash memory chips. Spansion filed a complaint in the United States
District Court for the District of Delaware alleging that Samsung infringed certain of Spansion’s
patents related to flash memory. Spansion also filed a complaint against Samsung with the
International Trade Commission (“ITC”), seeking an order barring importation of numerous
consumer electronic products that use Samsung flash memory chips. In addition to naming
Samsung as a respondent in the ITC action, Spansion also named numerous purchasers of
Samsung memory chips, including Apple. Spansion sought to prevent Apple from importing to
the United States certain very popular Apple products because those products contained
Samsung memory chips.
2
Apple purchases memory chips from many suppliers, including Samsung and Spansion.
Because Spansion’s litigation strategies frustrated Apple’s ability to bring its products to market
in the United States, Apple considered ending its business relationship with Spansion. (See Br.
of Appellant Apple Inc. at 3) (“Apple prefers not to do business with suppliers that sue it”).
However, Apple and Spansion negotiated an agreement. On February 10, 2009, the parties
executed the Letter Agreement, which provides:
Spansion is willing to dismiss the ITC action against Apple, and
will not re-file the ITC action or another action related to one or
more of the same patents against Apple, in consideration of the
following:
Provided that neither Spansion nor any successor in interest to any
of the patents being asserted in the referenced ITC action do not
bring an action of any nature asserting any such patent before any
legal, judicial, arbitral, administrative, executive or other type of
body or tribunal that has, or claims to have, authority to adjudicate
such action in whole or in part against Apple or any Apple product,
Apple agrees Spansion will not be disbarred as an Apple supplier
as a result of the referenced ITC action.
Spansion will remain primary supplier on current platforms where
Spansion is qualified for the life-time of the product and will also
be considered for future platforms given the following:
o Spansion possess [sic] or develops the products Apple
requests to meet design, qualification, and production
schedules
o Spansion provides best commercial terms (Quality,
Delivery, Pricing, etc.)
(A. 78-79).1
After entering the Letter Agreement, but before taking any steps to dismiss the ITC
action against Apple, Spansion initiated reorganization proceedings in the Bankruptcy Court.
During the Bankruptcy proceedings, Spansion and Samsung negotiated a settlement agreement
regarding the ITC action. However, the Bankruptcy Court rejected the settlement. Thus, in June
1
All record citations are to the Appendix to the Brief of Appellant Apple, Inc. (“A _”) unless otherwise noted.
3
2009, Spansion resumed its efforts in the ITC action against all respondents, including Samsung
and Apple.
In July 2009, Spansion moved pursuant to 11 U.S.C. § 365 for an order authorizing it to
reject the Letter Agreement as an executory contract. See 11 U.S.C. § 365 (providing that a
bankruptcy trustee may petition the court to assume or reject any executory contract of the
debtor). Apple opposed Spansion’s motion, and the Bankruptcy Court held a hearing. At the
hearing, Spansion’s Chief Executive Officer testified that Spansion was “presently supply[ing]
Apple with certain products” and that Spansion “ha[d] continued to supply Apple since the filing
of the motion.” (A. 119). Nevertheless, Spansion argued that Apple’s continued business was
not worth dismissing Apple from the ITC action. In other words, Spansion made a business
determination that it was more beneficial to sue Apple regarding Samsung’s alleged infringement
of Spansion’s patents than secure Apple’s continued business.
The Bankruptcy Court granted Spansion’s motion and signed an Order drafted by
Spansion’s counsel. The Order provides, among other things:
ORDERED, that the Agreement, to the extent it is an executory
contract, is hereby rejected; and it is further
ORDERED, that the filing and service of the Motion and this
Order upon Apple, Inc. shall constitute adequate written notice of
termination thereof.
(A. 179).
After the Bankruptcy Court granted Spansion’s rejection motion, Apple moved pursuant
to 11 U.S.C. § 365(n) to retain all intellectual property rights secured by the Letter Agreement.
Apple’s motion papers explained that the Letter Agreement constituted a license to the patents at
issue in the ITC action because Spansion promised not to sue Apple regarding infringement of
those patents. Apple therefore argued that because 11 U.S.C. § 365(n) permits parties to a
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rejected executory contract to move to retain intellectual property rights secured by the contract,
Apple was entitled to retain the patent license notwithstanding Spansion’s rejection.
In response to Apple’s motion, Spansion moved to “enforce” the Bankruptcy Court’s
September 1, 2009 Order. Spansion argued that relief under § 365(n) is proper only if the
underlying contract is “rejected” and the Bankruptcy Court had “terminated” the Letter
Agreement in its September 1, 2009 Order. Thus, according to Spansion, Apple was not
permitted to seek relief under § 365(n). Apple opposed Spansion’s motion to enforce the Court’s
September 1, 2009 Order. Apple argued that Spansion moved pursuant to 11 U.S.C. § 365,
which provides for “rejection” of executory contracts and that § 365(n) specifically precludes a
debtor from unilaterally terminating an intellectual property license. The Bankruptcy Court held
a hearing. At the hearing, the Bankruptcy Court noted that its September 1, 2009 Order was
problematic because it referred to termination of the Letter Agreement. The Court suggested that
Apple separately move for relief from the Order.
Apple subsequently moved for clarification of the Court’s September 1, 2009 Order
pursuant to Federal Rule of Civil Procedure 60(b). Apple argued that the Court’s reference to
“termination” was improper because: (1) Spansion’s motion requested “rejection” – not
“termination” – of the Letter Agreement; (2) the Order was ambiguous, and (3) it would be
contrary to § 365(n) to permit Spansion to unilaterally terminate Apple’s patent license under the
Letter Agreement. Spansion opposed Apple’s motion.
At the hearing regarding Apple’s motion to clarify the Bankruptcy Court’s September 1,
2009 Order, Spansion’s counsel represented to the Bankruptcy Court that Apple had ceased
purchasing memory chips from Spansion because Spansion refused to honor the Letter
Agreement. Apple’s Counsel later requested an opportunity to supplement the record because he
5
believed that Spansion’s counsel misrepresented the nature of Apple and Spansion’s business
relationship. The Bankruptcy Court did not permit Apple’s counsel to supplement the record.
(A. 429).
On February 5, 2010, the Bankruptcy Court held a telephonic conference and announced
its decision regarding Apple’s motion to retain its intellectual property rights pursuant to §
365(n). The Bankruptcy Court found as follows:
[T]he Court concludes that there is no ambiguity in the September
1, 2009 order authorizing rejection of the February 10, 2009
agreement between Spansion and Apple. I conclude secondly that
there is insufficient evidence in the record before me, including
any arguments and factual record made at the September 1 hearing,
to conclude that the provision in the February 10, 2009 agreement
to dismiss Apple from the ITC action gave rise to a license
sufficient to trigger any Section 365(n) right in favor of Apple.
And even if the February 10, 2009 agreement did give rise upon
rejection to a theoretical right to Apple under Section 365(n), there
is insufficient evidence in the record before me upon which to
conclude that there remains any post rejection life to any such
license due to the apparent cessation of business between Spansion
and Apple to which any license is necessarily related. Therefore,
the Debtor’s motion to enforce this Court’s September 1, 2009
order will be granted. To the extent that it asks Apple’s notice of
election under Section 365(n) be stricken.
(A. 442). Regarding the “termination” issue, the Bankruptcy Court found:
[W]ith respect to Apple’s request for relief under [Fed. R. Civ. P.]
60(b)(6) because Spansion did not allege any fact in its motion to
reject the February 10, 2009 agreement in support of any right to
terminate that agreement and did not argue any right to termination
at the September 1 hearing on the motion, this Court’s September 1
order will be amended to provide that such order is without
prejudice to the issue of whether, under the applicable state law,
the February 10, 2009 agreement has been or can be terminated by
Spansion.
(A. 442-43).
6
After the Bankruptcy Court issued its decision, the Administrative Law Judge (“ALJ”) in
the ITC action ruled in favor of Samsung, Apple, and the other respondents. However, the ALJ
rejected Apple’s defense that it had a license to use Samsung’s memory chips even if Samsung’s
chips infringed Spansion patents. The ALJ rejected that defense by Apple based on the doctrine
of issue preclusion. The ALJ found that the Bankruptcy Court previously determined that the
Letter Agreement did not create a patent license, and that he was bound by that determination.
Apple now appeals to this Court from the Bankruptcy’s Court’s February 5, 2010
decision denying Apple’s motion to retain the patent license. Apple argues that the Letter
Agreement created a valid patent license, and, because § 365(n) permits a party to retain patent
licenses notwithstanding a reorganizing debtor’s rejection of the underlying executory contract,
the Bankruptcy Court erred in denying Apple’s motion. Spansion opposed Apple’s appeal and
cross-appealed regarding the Bankruptcy Court’s modification of the September 1, 2009 Order.
According to Spansion, Apple did not satisfy its burden for modification of a judgment under
Federal Rule of Civil Procedure 60(b), and this Court should find that the September 1, 2009
Order terminated the Letter Agreement. Consequently, Spansion argues that Apple’s appeal
should be denied because the Letter Agreement is no longer operative.
II.
JURISDICTION AND STANDARD OF REVIEW
This Court has jurisdiction over Apple and Spansion’s appeals pursuant to 28 U.S.C. §
158(a). See 28 U.S.C. § 158(a) (granting jurisdiction to district courts over appeals from “final
judgments, orders, and decrees” of “bankruptcy judges”). A District Court reviewing a decision
of a Bankruptcy Court “review[s] the Bankruptcy Court’s legal determinations de novo, its
factual findings for clear error, and its exercise of discretion for abuse thereof.” In re O’Brien
Envtl. Energy, Inc., 188 F.3d 116, 122 (3d Cir. 1999). For mixed questions of law and fact, the
7
Court “accept[s] the Bankrucpty Court’s findings of ‘historical or narrative facts unless clearly
erroneous,’” but “‘exercise[s] plenary review of the trial court’s choice and interpretation of legal
precepts and its application of those precepts to the historical facts.’” In re Genesis Health
Ventures, Inc., 340 B.R. 729, 732 (D. Del. 2006) (quoting Mellon Bank, N.A. v. Metro Comm’n,
Inc., 945 F.2d 635, 642 (3d Cir. 1991)). “A bankruptcy court abuses its discretion when its
ruling is founded on an error of law or a misapplication of law to the facts.” Stonington Partners
v. Lernout & Hauspie Speech Prods. N.V., 310 F.3d 118, 122 (3d Cir. 2002) (internal quotation
marks and citation omitted).
III.
DISCUSSION
A. Whether the Bankruptcy Court Properly Amended its September 1, 2009 Order
The Bankruptcy Court amended the September 1, 2009 Order to “provide that such order
is without prejudice to the issue of whether . . . the February 10, 2009 agreement has been or can
be terminated by Spansion.” (A. 442-43). Spansion argues that the Bankruptcy Court abused its
discretion in amending the Order because Apple failed to satisfy the stringent standard for
altering a judgment under Rule 60(b)(6).
Rule 60(b) provides, in pertinent part:
On motion and just terms, the court may relieve a party or its legal
representative from a final judgment, order, or proceeding for the
following reasons: (1) mistake, inadvertence, surprise, or excusable
neglect; (2) newly discovered evidence that, with reasonable
diligence, could not have been discovered in time to move for a
new trial under Rule 59(b); (3) fraud (whether previously called
intrinsic or extrinsic), misrepresentation, or misconduct by an
opposing party; (4) the judgment is void; (5) the judgment has
been satisfied, released, or discharged; it is based on an earlier
judgment that has been reversed or vacated; or applying it
prospectively is no longer equitable; or (6) any other reason that
justifies relief.
8
“The general purpose of Rule 60(b) . . . is to strike a proper balance between the conflicting
principles that litigation must be brought to an end and that justice must be done.” Boughner v.
Sec’y of Health, Educ. & Welfare, 572 F.2d 976, 977 (3d Cir. 1978) (quoted in Coltec Industries,
Inc. v. Hobgood, 280 F.3d 262, 271 (3d Cir. 2002)).
A motion filed pursuant to Rule 60(b) is addressed to the sound
discretion of the trial court guided by accepted legal principles
applied in light of all the relevant circumstances. Rule 60(b),
however, “does not confer upon the district courts a standardless
residual of discretionary power to set aside judgments. Rather,
relief under Rule 60(b) is available only under such circumstances
that the overriding interest in the finality and repose of judgments
may properly be overcome. The remedy provided by Rule 60(b) is
extraordinary, and only special circumstances may justify granting
relief under it.
Tischio v. Bontex, Inc., 16 F. Supp. 2d 511, 533 (D.N.J. 1998) (internal quotation marks and
citations omitted). Relief is available only in cases evidencing extraordinary circumstances. See
Ackermann v. United States, 340 U.S. 193,201-02 (1950); Stradley v. Cortez, 518 F.2d 488, 493
(3d Cir. 1975). To establish extraordinary circumstances, the moving party must show “extreme
and unexpected hardship.” Talley v. City of Atlantic City, 406 F. App’x. 584, 585 (3d Cir.
2011). A motion under Rule 60(b)(6) “must be fully substantiated by adequate proof and its
exceptional character must be clearly established.” FDIC v. Alker, 234 F.2d 113, 116-17 (3d
Cir. 1956).
When reviewing a lower court’s application of Rule 60(b), a reviewing court “will not
interfere with the [lower court’s] exercise of discretion unless there is a definite and firm
conviction that the court . . . committed a clear error of judgment in the conclusion it reached
upon a weighing of the relevant factors.” Welch & Forbes, Inc. v. Cendant Corp., 234 F.3d 166,
170 (3d Cir. 2000) (internal quotation marks and citation omitted).
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The Court finds no reason to disturb the Bankruptcy Court’s ruling. The Bankruptcy
Court determined, based on Spansion’s submissions and appearances before the Bankruptcy
Court, that “termination was not an issue that was discussed in any fashion.” (A. 417). Thus, the
Court amended its Order so as to make no finding regarding Spansion’s right to terminate the
Letter Agreement. In essence, the Bankruptcy Court found that it was appropriate to amend the
September 1, 2009 Order because Spansion had not requested termination. Additionally, the
Bankruptcy Court found that even if Spansion had requested termination “Spansion did not
allege any fact . . . in support of any right to terminate the agreement.” (A. 442-43).
A review of the record confirms that Spansion did not assert a contractual right to
terminate the Letter Agreement. Rather, Spansion moved only to “reject” the Letter Agreement
pursuant to 11 U.S.C. § 365, which operates independently of any common-law right to
terminate the Letter Agreement.2 (See A. 69) (captioning Spansion’s motion as: “Motion of the
Debtors for an Order Pursuant to 11 U.S.C. § 365 Authorizing the Rejection of an Executory
Contract Between Spansion Inc. and Apple, Inc.”). Indeed, Spansion explained its reason for
moving for rejection of the Letter Agreement as follows:
The Debtors have determined, in the existence of their sound
business judgment, that the Agreement is no longer in the best
interests of the debtors’ estates and should be rejected. The
reasons underlying the Debtor’s business judgment include the fact
that Spansion’s business relationship with Apple is sufficiently
profitable to justify Spansion’s dismissing Apple from the ITC
Action. The Debtors believe the rejection of the Agreement is in
the best interest of the Debtors’ creditors because the Agreement
provides no continuing benefit to the Debtor’s estates.
2
Section 365 does not give reorganizing debtors a right to terminate contracts. Eastover Bank for Sav. v. Sowashee
Venture, 19 F.3d 1077, 1082 (5th Cir. 1994) (“the trustee may reject any of these contracts, but termination does not
occur except at the other party’s option”). Thus, Spansion’s right to terminate the Letter Agreement (if any) comes
from general contract law principles, which the parties never addressed and the Bankruptcy Court did not invoke.
10
(A. 70-71). Clearly, Spansion moved to obtain relief from the Letter Agreement pursuant to 11
U.S.C. § 365 and not because it believed that it had a contractual right to terminate the Letter
Agreement. Thus, the Bankruptcy Court properly amended its September 1, 2009 Order to
clarify that it was “without prejudice as to the issue of whether, under applicable state law, the
February 10, 2009 agreement has been or can be terminated by Spansion.” (A. 443).
Spansion nevertheless argues that the Bankruptcy Court erred because Apple has not
established “extreme and unexpected hardship.” Talley, 406 F. App’x. at 585. That argument is
specious. The Bankruptcy Court found that Spansion had not requested a determination from the
Court regarding its right to terminate the Letter Agreement. Apple would certainly suffer an
“extreme and unexpected” hardship if Spansion was able to obtain relief beyond the scope of its
motion and the substance of the Court’s ruling by including an errant reference to “termination”
in an order that it drafted for the Court’s signature. Spansion seeks to gain a substantive ruling
regarding an issue that it never placed before the Court and never gave Apple fair notice of. The
Bankruptcy Court correctly amended its September 1, 2009 Order to confine the Order’s scope
to the subject of Spansion’s motion.
B. Whether the Bankruptcy Court Properly Denied Apple’s Motion Pursuant to 11
U.S.C. § 365(n) to Retain Intellectual Property Rights
Apple argues that the Bankruptcy Court erred in at least two respects when it denied
Apple’s motion pursuant to 11 U.S.C. § 365(n). First, Apple argues that the Bankruptcy Court
incorrectly concluded that the Letter Agreement did not grant Apple a license to Spansion’s
patents. Second, Apple argues that the Bankruptcy Court incorrectly found that even if the
Letter Agreement created a license, Apple could not retain that license under § 365(n) because of
the “cessation of business between Spansion and Apple.” (A. 442). The Court agrees, reverses
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the Bankruptcy Court’s ruling, and remands this matter for a rehearing regarding Apple’s motion
to retain the patent license.
1. The Letter Agreement Gave Apple a License to Spansion’s Patents
A patent grants the right to exclude others from practicing the patented invention.
TransCore, LP v. Elec. Transaction Consultants Corp., 563 F.3d 1271, 1275 (Fed. Cir. 2009); see
35 U.S.C. § 154(a)(1). The Federal Circuit has held that a patent license is “nothing more than a
promise by the licensor not to sue the licensee.” Spindelfabrik Suessen-Schurr, Stahlecker &
Grill GmbH v. Schubert & Salzer Maschinenfabrik Aktiengesellschaft, 829 F.2d 1075, 1081
(Fed. Cir. 1987). No special language is required to create a patent license. De Forest Radio
Tel. Co. v. United States, 273 U.S. 236, 241 (1927) (“No formal granting of a license is
necessary in order to give it effect. Any language used by the owner of the patent, or any
conduct on his part exhibited to another from which that other may properly infer that the owner
consents to his use of the patent in making or using it, or selling it, upon which the other acts,
constitutes a license and a defense to an action for a tort.”). The Federal Circuit has “on
numerous occasions explained that a non-exclusive patent license is equivalent to a covenant not
to sue.” TransCore, LP, 563 F.3d at 1275. “The real question, then, is not whether an agreement
is framed in terms of a ‘covenant not to sue’ or a ‘license.’ That difference is only one of form,
not substance – both are properly viewed as ‘authorizations.’ Rather, the pertinent question . . .
is . . . what the . . . agreement authorizes.” Id. at 1276 (emphasis added).
Here, it is clear that Apple negotiated with Spansion for Spansion’s promise not to sue
Apple regarding patents that Samsung allegedly infringed. Spansion sued Apple in the ITC
action because some of Apple’s consumer electronics contained Samsung memory chips that
Spansion believed to infringe its patents. Spansion sought an order barring Apple from
12
importing those products into the United States. Apple responded to Spansion’s litigation
strategy by threatening that it would stop purchasing memory chips directly from Spansion for
use its in products. In order to remain as one of Apple’s suppliers, Spansion agreed to not sue
Apple regarding any of the patents that Samsung allegedly infringed. In other words, in
exchange for Apple’s promise not to “disbar” Spansion as an Apple supplier, Spansion granted
Apple a non-exclusive license regarding the disputed patents.3 The Letter Agreement is a valid
patent license.4
The Bankruptcy Court nevertheless concluded: “[T]here is insufficient evidence in the
record before me, including any arguments and factual record made at the September 1 hearing,
to conclude that the provision in the [Letter Agreement] to dismiss Apple from the ITC action
gave rise to a license . . . .” (A. 442). That conclusion was error. The Letter Agreement
provides: “Spansion is willing to dismiss the ITC against Apple, and will not refile the ITC
action or another action related to one or more of the same patents against Apple, in
consideration of” Apple’s promise to, among other things, not disbar Spansion as an Apple
supplier. (A. 78-79). Because both parties agreed to those terms, the Letter Agreement created a
valid patent license. No other facts or arguments were necessary to determine whether Spansion
granted Apple a valid license. Additionally, the Bankruptcy Court’s reasoning suggests (and
Spansion argues) that Spansion’s dismissal of Apple from the ITC action and Apple’s continued
purchase of memory chips from Spansion are conditions precedent to creation of the license.
That is also incorrect. The Letter Agreement’s clear language demonstrates that the parties
3
Although Spansion argues that the Court’s September 1, 2009 Order terminated the Letter Agreement, neither
party contests that the Letter Agreement was a valid and binding contract when formed on February 10, 2009.
4
The Court notes that Spansion argued before the Bankruptcy Court that a covenant not to sue is a patent license.
(See A. 33). Principles of judicial estoppel prevent Spansion from now arguing to the contrary regarding the Letter
Agreement.
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entered into a valid contract by exchanging promises to act or refrain from acting. In exchange
for Apple’s promise to refrain from disbarring Spansion as an Apple supplier, Spansion agreed to
withdraw its claims against Apple in the ITC action and forbear from suing Apple in any other
forum regarding the same patents. That exchange of promises was valuable consideration that
created a binding patent license agreement. The Bankruptcy Court erred in finding that the
Letter Agreement did not amount to a patent license.
2. § 365(n) Entitles Apple to Retain its Patent License
The Bankruptcy Court found that even if the Letter Agreement was a patent license,
Apple was not entitled to retain its rights under the Letter Agreement pursuant to § 365(n)
because the parties had ceased their business relationship. Specifically, the Bankruptcy Court
found that the purported license was “necessarily related” to Spansion’s supply of memory chips
to Apple and that the license did not have any “post rejection life.” Apple argues that the
Bankruptcy Court misconstrues the nature of the Letter Agreement, and that § 365(n) applies.
The Court agrees.
Section 365 permits a reorganizing debtor to reject certain executory contracts in order to
facilitate the “ultimate rehabilitation of the debtor. See In re Exide Techs., 607 F.3d 957, 962
(3d Cir. 2010) (quoting Nicholas v. United States, 384 U.S. 678, 687 (1966)); see also In re
Phila. Newspapers, LLC, 599 F.3d 298, 316 (3d Cir. 2010) (discussing the general purpose of
Chapter 11 as “preserv[ing] the Debtor as a viable economic entity postreorganization.”).
However, § 365(n) provides that if a debtor “rejects an executory contract under which the
debtor is a licensor of a right to intellectual property,” the licensee under the contract may elect
“to retain its rights . . . under such contract and under any agreement supplementary to such
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contract, to such intellectual property . . . as such rights existed immediately before the case
commenced.” 11 U.S.C. § 365(n).
Congress enacted § 365(n) in response to “industry concerns that . . . any patent . . .
licensor could go into Chapter 11 and invalidate a license perfectly valid under contract law.” In
re Exide Techs., 607 F.3d at 965 (Ambro, J., concurring) (internal quotation marks and citation
omitted); see also S. Rep. 100-505, at 9 (1988), reprinted in, 1988 U.S.C.C.A.N. 3200, 3206.
“Through this provision, Congress sought ‘to make clear that the rights of an intellectual
property licensee to use the licensed property cannot be unilaterally cut off as a result of the
rejection of the license pursuant to Section 365 in the event of the licensor's bankruptcy.’” Id.
(quoting S. Rep. No. 100-505, at 1 (1988), reprinted in 1988 U.S.C.C.A.N. 3200, 3206). “Thus,
in the event that a bankrupt licensor rejects an intellectual property license, § 365(n) allows a
licensee to retain its licensed rights – along with its duties – absent any obligations owed by the
debtor-licensor.” Id. at 966.
Here, the Bankruptcy Court granted Spansion’s motion to reject the Letter Agreement
pursuant to § 365. Apple responded by making an appropriate motion pursuant to § 365(n) to
retain its license under the Letter Agreement. Because, as discussed above, the Letter
Agreement includes a patent license, § 365(n) permits Apple to retain its contractual rights (and
obligations) under the Letter Agreement insofar as those rights and obligations relate to the
patent license.
The Bankruptcy Court nevertheless denied Apple’s motion because there was
“insufficient evidence in the record before [the Bankruptcy Court] upon which to conclude that
there remains any post rejection life to any such license due to the apparent cessation of business
15
between Spansion and Apply to which any license is necessarily related.” (A. 442). The
Bankruptcy Court’s reasoning is flawed.
First, the Third Circuit has held that for purposes of § 365, “‘[t]he time for testing
whether there are material unperformed obligations on both sides is when the bankruptcy petition
is filed.’” In re Exide Techs., 607 F.3d at 962 (quoting Enterprise Energy Corp. v. United States,
50 F.3d 233, 240 (3d Cir. 1995)). Thus, for purposes of determining what obligations a debtor
may reject under § 365, and, consequently, what intellectual property rights a licensee may move
to retain under subsection (n), the court must look to the status of the parties’ relationship at the
time of the bankruptcy petition. Here, when Spansion filed for bankruptcy, Apple and Spansion
were both bound by the Letter Agreement. Apple was bound to refrain from disbarring Spansion
as an Apple supplier, and Spansion was barred from pursuing any claims against Apple related to
the patents that Samsung allegedly infringed. Thus, § 365(n) permits Apple to retain those rights
and obligations, and the Bankruptcy Court erred in striking Apple’s motion for relief under §
365(n).
Second, the “cessation of business between Spansion and Apple” does not necessarily
provide Spansion with a substantive defense to enforcement of the patent license. Section 365(n)
requires both Spansion and Apple to fulfill their respective contractual obligations related to the
patent license. See 11 U.S.C. § 365(n). In this case, Apple agreed not to disbar Spansion as an
Apple supplier in exchange for a patent license from Spansion. Thus, if Apple disbars Spansion,
it breaches the Letter Agreement, and Apple may be excused from its obligation under the patent
license. However, the Bankruptcy Court did not determine whether Spansion was permitted to
terminate the Letter Agreement under common-law contract principles as a result of Spansion’s
purported failure to perform under the Letter Agreement. Instead, it concluded that because the
16
parties were not currently conducting business, there was no need for the patent license, and,
consequently, no need for relief under § 365(n). That conclusion was erroneous. The patent
license remains valuable to Apple so long as Apple purchases memory chips from Samsung.
The purpose of the patent license was to ensure that Spansion would not obstruct Apple’s ability
to sell products that contained Samsung memory chips. Apple bargained for that continuing
assurance in exchange for its promise to not disbar Spansion as a supplier.5 Apple’s purchase of
memory chips from Spansion is irrelevant regarding the license’s “post-rejection life.”
The Bankruptcy Court erred in striking Apple’s motion pursuant to § 365(n). The Letter
Agreement includes an enforceable patent license, and Apple properly moved to retain its rights
to the license pursuant to § 365(n). However, because the Bankruptcy Court granted Spansion’s
motion to enforce the September 1, 2009 Order and strike Apple’s motion to retain the patent
license, the Court remands this matter for rehearing of Apple’s motion to retain the patent license
consistent with this Opinion.
IV.
CONCLUSION
For the reasons discussed above, the Court upholds the Bankruptcy Court’s amendment
to the September 1, 2009 Order and reverses the Bankruptcy Court’s denial of Apple’s motion to
retain the patent license. The Court remands this matter to the Bankruptcy Court for a rehearing
regarding Apple’s motion to retain the patent license pursuant to § 365(n), and for such other
relief as is consistent with this Opinion.
5
Spansion ultimately lost the ITC action. However, the judgment in the ITC action did not render this case moot.
Pursuant to the Letter Agreement, Spansion agreed to “dismiss the ITC against Apple, and [to] not re-file the ITC
action or another action related to one or more of the same patents against Apple.” (A. 78). Thus, the license
pertains not only to the ITC action, but also to any future actions that Apple may initiate regarding Apple’s use of
Samsung’s memory chips. The Letter Agreement therefore provides continuing protection to Apple from any suit
by Spansion regarding Samsung’s alleged infringement of Spansion’s patents. Moreover, the ITC judgment did not
address the merits of Apple’s claim that it held a license to the disputed patents. Indeed, the ALJ expressly declined
to address the merits of Apple’s claim and relied instead on the Bankruptcy Court’s erroneous conclusion that the
Letter Agreement did not constitute a patent license. Thus, the ITC judgment does not have any preclusive effect
regarding Apple’s claim to a patent license based on the Letter Agreement.
17
Dated: 7/28/2011
/s/ Robert B. Kugler
ROBERT B. KUGLER
United States District Judge
18
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