In re: Virgin Offshore USA, Inc.

Filing 11

ORDER & REASONS re 1 Bankruptcy Appeal filed by TGS-NOPEC Geophysical Company, L.P: The Bankruptcy Court's Order entered on November 20, 2012 authorizing the assumption of a certain Master License Agreement for Geophysical Data pursuant to 11 U.S.C. 365 is AFFIRMED. Signed by Judge Carl Barbier on 9/10/13.(sek, ) Modified on 9/10/2013 - (cc Bankruptcy Court, Bankruptcy Judge Elizabeth W. Magner.)(sek, ).

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA

IN RE VIRGIN OFFSHORE USA,
INC.

CIVIL ACTION
NO: 13-79
SECTION: "J”(1)

ORDER AND REASONS
Before

the

Court

is

TGS-NOPEC

Geophysical

Company,

L.P.

("TGSN")'s Appeal of the Bankruptcy Court's Order entered on
November 20, 2012 authorizing the assumption of a certain Master
License Agreement for Geophysical Data pursuant to 11 U.S.C. §
365 (Rec. Doc. 1). The Court, having considered the parties'
briefs,

the

record,

and

the

applicable

law,

finds

that

the

Bankruptcy Court's Order should be AFFIRMED for the reasons set
forth more fully below.
PROCEDURAL HISTORY AND BACKGROUND FACTS
On

January

16,

2003,

several

years

before

the

instant

bankruptcy proceeding commenced, TGSN granted to Virgin Offshore

1

USA, Inc. ("Virgin Offshore" or "Debtor") a non-exclusive license
("TGSN License" or "License") to use certain (1) geophysical and
geological data resulting from seismic surveys performed by or on
behalf of TGSN, (2) TGSN's interpretations of any generated data,
and (3) results of any processing, reprocessing, and re-display
of

such

data

and/or

interpretations

(collectively,

"Seismic

Material"). Virgin Offshore paid consideration for this License
and was thereby permitted access to Seismic Material that related
to lands covered by a specific mineral lease.1 The consideration
paid was a one-time payment for full use of the Seismic Material
for the full term of the agreement.
On

September

16,

2011,

Precision

Drilling

Company,

LP,

Dynamic Energy Services, LLC, and Tanner Services, LLC filed an
involuntary

Chapter

11

bankruptcy

petition

against

Virgin

Offshore, and Virgin Offshore consented to entry of the Order for
Relief. Virgin Offshore moved to appoint a Chapter 11 Trustee on
October 6, 2011 and Gerald H. Schiff was appointed as Trustee of
the Estate on October 14, 2011 ("Schiff" or "Trustee").
The Trustee moved to assume the TGSN License on October 23,
2012, and Whistler Energy, Plan Trustee for Virgin Oil Company,
1

Virgin Offshore was given access to Seismic Material for lands covered by
the following mineral lease: Oil and Gas Lease of Submerged Land under the
Outer Continental Shelf Lands Act dated effective July 1, 1997, covering Ship
Shoal 153 and designated OCS-G 18011.

2

Inc. ("Plan Trust") filed a Joinder in the Trustee's motion. TGSN
opposed the motion, and a hearing was held on November 15, 2012,
at

which

time

the

Bankruptcy

Judge

approved

the

Trustee's

assumption of the TGSN license. TGSN filed a Notice of Appeal
regarding the Assumption Order and a Motion to Stay Pending the
Appeal2 on November 27, 2012. Appellant submitted its brief on
January 30, 2013, Appellees submitted their briefs3 on February
14, 2013, and Appellant submitted a reply on February 27, 2013.
(Rec. Docs. 3, 6, 7)
THE PARTIES’ ARGUMENTS
TGSN

asserts

four

issues

on

appeal:

(1)

whether

the

Bankruptcy Court erred in finding and concluding that the Chapter
11 Trustee for Virgin Offshore is entitled to assume the TGSN
License

under

Bankruptcy

11

U.S.C.

Court

erred

§

365(a)

in

and

finding

(c),

(2)

whether

and

concluding

the
that

registration with the Copyright Office is required to prohibit
the assignment of a non-exclusive license of copyright rights
under federal copyright law, (3) whether the TGSN License is a

2

The Bankruptcy Court denied the Motion to Stay, finding that TGSN did
not identify any law that would operate to bar an assignment of the License,
and that, even if such law did exist, this is an assumption and, under an
"acutal test," 11 U.S.C § 365(c) does not prohibit an assumption even if an
assignment is barred. In re Virgin Offshore USA, Inc., No. 11-13028, 2012 WL
6059359 (Bankr. E.D. La., Dec. 6, 2012).
3

The Plan Trust submitted an Appellee's brief adopting the Trustee's
brief. (Rec. Doc. 7)

3

copyright license under federal copyright law, and (4) whether
the

Seismic

Material

licensed

by

the

TGSN

License

is

copyrightable under federal copyright law. The Trustee adopted
these issues, with the exception of the second issue because he
felt it mischaracterized the Bankruptcy Court's findings. The
Trustee argues that the Bankruptcy Court merely noted that TGSN
had not registered a copyright over the Seismic Material as
reinforcement for its finding that TGSN did not take any steps to
treat the Seismic Material as copyrighted data.
LEGAL STANDARD
For a bankruptcy appeal, the applicable standard of review
by a district court is the same as when the Court of Appeals
reviews a district court proceeding. 28 U.S.C. § 158(c). Findings
of fact by the bankruptcy courts are to be reviewed under the
clearly erroneous standard. In re Killebrew, 888 F.2d 1516, 1519
(5th Cir. 1989). Conclusions of law are reviewed de novo. In re
Kennard, 970 F.2d 455 (5th Cir. 1991). Mixed questions of fact
and law are also reviewed de novo. In re Bowyer, 916 F.2d 1056
(5th Cir. 1990).
DISCUSSION
TGSN asks the Court to reverse the Bankruptcy Court's Order
allowing the Trustee to assume the License over Seismic Material

4

that TGSN granted to the Debtor in 2003. In making this request,
TGSN

asks

the

Court

to

make

several

large

leaps

within

the

current state of the law. The crux of TGSN's argument is that 11
U.S.C. § 365(c) prohibits the assumption of the License by the
Trustee. 11 U.S.C. § 365(c) states, in pertinent part:
The trustee may not assume or assign any executory
contract or unexpired lease of the debtor, whether or
not such contract or lease prohibits or restricts
assignment of rights or delegation of duties, if–
(1)(A) applicable law excuses a party, other than
the debtor, to such contract or lease from accepting
performance from or rendering performance to an
entity other than the debtor or the debtor in
possession, whether or not such contract or lease
prohibits or restricts assignment of rights or
delegation of duties; and
(B) such party does not consent to such assumption
or assignment
11 U.S.C. § 365(c). To find that this provision bars the present
assumption, the Court will have to find that (1) the License is
an executory contract, (2) some non-bankruptcy law applies, (3)
such applicable law bars assignment, (4) because the applicable
law bars assignment, any assumption is also barred, and (5) TGSN
does not consent to the assumption of the License. Upon a de novo
review4 of the Bankruptcy Court's Order, the Court finds that all

4

As the issues presented are question of law or mixed questions of law
and fact, the Court will review the Bankruptcy Court's Order de novo.

5

of the foregoing conditions are not met; therefore, the Order of
the Bankruptcy Court must be affirmed.
A. Is the License an Executory Contract?
In its brief, the Trustee asserts that the License is not an
executory contract because TGSN granted Virgin Offshore the right
to use its Seismic Material based on a one-time fee. The Trustee
contends

that

because

Virgin

Offshore's

duty

to

perform

was

extinguished by its payment of the one time fee, the contract is
not

executory.

certain

taxes,

He

further

TGSN

itself

points

out

that,

successfully

to

argued

avoid
to

the

paying
Texas

Supreme Court that the License agreement was really just a sale
of use. See TGS-NOPEC Geophysical Co. v. Combs, 340 S.W.3d. 432
(Tx. 2011). The Trustee admits, however, that he never made this
argument during proceedings in the Bankruptcy Court, nor did he
include it in his Statement of the Issues. Thus, TGSN argues that
this argument is waived. Even if the argument is not waived, TGSN
asserts the License is an executory contract because performance
is still owed by both sides. Specifically, TGSN has an ongoing
performance obligation to refrain from suing Virgin Offshore for
using its material, and Virgin Offshore has an ongoing duty not
to breach confidentiality. TGSN points out that several courts
have held that such licenses are executory contracts.

6

It is unclear whether an appellee, who has no duty to submit
a Statement of the Issues under the Bankruptcy Code, waives an
argument by not raising it prior to the submission of his brief.
See Fed. R. Bankr. P. 8006. However, the Court finds that this
issue need not be dealt with because (a) § 365(c) will not apply
for other reasons discussed below, and (b) there is considerable
support for finding that licenses such as the one at issue are
executory contracts, and the Court finds this support persuasive.
See In re Sunterra Corp., 361 F.3d 257, 264 (4th Cir. 2004)
(under the Countryman standard, which has been adopted by the
Fifth

Circuit,

software

license

agreement

was

an

executory

contract because the parties "possessed an ongoing obligation to
maintain the confidentiality of the source code.")
B. Does Some Non-Bankruptcy Law Apply?
TGSN contends that the non-bankruptcy law that applies in
this matter is federal copyright law. It argues that, though raw
data

is

not

copyrightable,

"the

selection,

coordination

and

arrangement" of such data is copyrightable. TGSN urges the Court
to consider its Seismic Material as something akin to a map or
photograph,

which

are

copyrightable

because

the

author

makes

original decisions in creating the product. TGSN argues that the
Seismic Material is dataset that represents the Earth's internal
structures, which is essentially a "photograph" of cross-sections
7

of the Earth. Because TGSN had to choose the parameters to gather
the data and decide how to assemble and process the data, the
resulting dataset is an original expression of raw data that is
copyrightable.

The

Trustee,

on

the

other

hand,

opposes

this

position, noting that the Seismic Material at issue is nothing
but uncopyrighable raw data, and that TGSN does not provide any
legal support for its argument.
While TGSN's copyright argument has never been directly
refuted by a court, it is at odds with opinions from several
jurisdictions,

including

the

Fifth

Circuit,

which

have

traditionally treated seismic data as trade secrets.5 See, Musser
Davis Land Co. v. Union Pacific Resources, 201 F.3d 561, 569-70
(5th

Cir.

2001);

see

also

Mayne

&

Mertz,

Inc.

v.

Quest

Exploration LLC, No. 06-800, 2006 WL 3797194 (W.D. La., Dec. 5,
2006) (seismic "data appears to meet the statutory definition of
trade secret information."); see also, Anadarko Petroleum Corp.
v. Davis, No. 06-2849, 2006 WL 3837518, *15 (S.D. Tx., Dec. 28,
2006); see also,

In re Bass, 113 S.W.3d 735, 740 (Tex. 2003)

(compiling cases from other jurisdictions that found that seismic
data is a trade secret); see also, Sprint Corp. v. C. I. R., 108

5

To the Court's knowledge, no court has ever found that seismic data is
copyrightable.

8

T.C. 384, 406 (1997) (dissent) (In dicta, a dissenting judge
stated that seismic data is a recording of "a natural phenomenon
[that]

is

the

result

of

human

exertion,

it

is

neither

the

expression of an idea nor an un-obvious improvement of prior
technology or art. Accordingly, copyright or patent protection is
not available for it.") Though there is a significant lack of
affirmative support for TGSN's copyright argument, there is just
as significant a lack of cases refuting its position, making this
a truly novel argument.
The

Court

respects

TGSN's

argument,

and

recognizes

that

novel arguments will not have support in case law; however, the
Court is not convinced that the Seismic Material is afforded
copyright protection based on the apparent industry-wide practice
of treating such data as a trade secret. Moreover, it is clear
that

TGSN

never

intended

to

treat

the

Seismic

Material

as

copyrightable. The License refers to the data as trade secrets.
See Rec. Doc. 3-1, ¶¶ 4.1, 4.3. TGSN never registered a copyright
over the data. While it is true that TGSN is not required to
register its copyright, this fact is relevant in determining
whether TGSN treated the data as copyrightable. See, Barris v.
Hamilton, 96-9541, 1999 WL 311813 *5 (S.D.N.Y., May 17, 1999)
(cumulating

cases

that

note

that

9

registration

is

not

a

prerequisite for copyright protection). Despite the fact that
TGSN has never claimed that its seismic data is protected by
copyright law, it asserts now that it is in fact copyrightable
just as a photograph or map would be. Though the Court recognizes
the potential of this argument, TGSN simply does not provide
enough proof to allow the Court to make this leap. Further, the
Court finds that § 365(c) is not applicable even if copyright law
does apply, as will be discussed below.
C. Does Copyright Law Prohibit Assignment of the License?
The Court has already determined that copyright law does not
apply in this matter, but even if it did, the inquiry would not
stop

there.

Assuming

that

copyright

law

would

apply

to

the

instant matter, TGSN correctly states, and it is apparently wellsettled, "that nonexclusive intellectual property licenses do not
give rise to ownership rights and cannot, as a matter of law, be
assigned without the consent of the licensor." In re Golden Books
Family Entm't, Inc., 269 B.R. 300, 310 (Bankr. D. Del. 2001);
re CFLC, Inc., 174 B.R. 119

In

(N.D. Cal. 1994) aff'd, 89 F.3d 673

(9th Cir. 1996). The parties do not dispute that the License is
non-exclusive, thus if copyright law did apply, the License would
be unassignable. The fact that an assignment would be barred does
not end the inquiry, however, because the transaction at issue

10

was an assumption of the License by the Trustee. Whether an
assumption would also be barred is treated below.
D. Does Copyright Law's Prohibition of Assignment Create a
Prohibition of Assumption under 11 U.S.C. § 365(c)?
The parties do not seem to dispute that the transfer of the
License from Virgin Offshore to the Trustee is an assumption.
Therefore,

even

if

the

Court

found

that

copyright

law

bars

assignment, such a finding would only provide TGSN the relief it
desires if the prohibition of assignment translates into a bar on
assumption.
courts

To

apply

make
a

this

determination

"hypothetical

test"

under

which

§

asks,

365(c),
"under

some
the

applicable law, could the [non-debtor party to the contract]
refuse performance from an entity other than ... the debtor in
possession." Texaco Inc. v. Louisiana

Land & Exploration Co.,

136 B.R. 658, 669 (M.D. La. 1992)(internal citation omitted).
Under this test, if the debtor "lacks hypothetical authority to
assign a contract, then it may not assume it—even if the [debtor]
has no actual intention of assigning the contract to another."
N.C.P. Mktg. Grp., Inc. v. BG Star Prods., Inc., 129 S. Ct. 1577,
1577 (2009). On the other hand, some courts apply an "actual
test" wherein "a

Chapter 11 debtor-in-possession may assume an

executory contract provided it has no actual intent to assign the
contract to a third party." Id. at 1578.
11

Following a 1984 amendment to the language of § 365(c), a
circuit split formed regarding the appropriate test to apply
under § 365(c), with the First Circuit expressly adopting the
actual test, and the majority of other circuits adopting the
hypothetical test. Id. at 1577. The Fifth Circuit has yet to
expressly adopt either test as it relates to the current version
of § 365(c), and TGSN urges this Court to follow the majority of
circuit courts and apply the hypothetical test. The Trustee,
however, argues that the Fifth Circuit ordered courts to apply an
actual test in In re Mirant. In re Mirant, 440 F.3d 238 (5th Cir.
2006).
While the Court recognizes that the hypothetical test has
gained much support, it finds that Fifth Circuit jurisprudence
leans towards the adoption of the actual test. See, In re Mirant,
440 F.3d at 248-49 cumulating cases, Cajun Elec. Members Comm. v.
Mabey (In re Cajun Elec. Power Coop., Inc.), 230 B.R. 693, 705
(Bankr.M.D.La. 1999); In re Lil' Things, Inc., 220 B.R. 583, 587
(Bankr.N.D.Tex. 1998); Texaco Inc. v. La. Land & Exploration Co.,
136

B.R.

658,

669

(Bankr.M.D.La.1992)

(concluding

the

West

hypothetical test is incorrect for three primary reasons); In re
Hartec Enters., Inc., 117 B.R. 865, 871 (Bankr. W.D. Tex. 1990)
(stating that the West hypothetical test “does not fulfill the

12

purposes of the non-assignment statutes it seeks to enforce,
creates inherent inconsistencies in the language of ... the Code,
and fails to adequately account for” amendments to the Code),
vacated by settlement, 130 B.R. 929 (W.D.Tex. 1991).
Though the Mirant court used the actual test in the context
of § 365(e), which was not amended in the same way as § 365(c)
and thus is not subject to the same circuit split, the Court
nonetheless finds this decision to be an indicator of the way
that

the

Fifth

Circuit

would

undertake

an

analysis

under

§

365(c). Further, in In re O'Connor, the Fifth Circuit appears to
have applied an actual test to determine that a partnership
interest was strictly personal under Louisiana law, thus not
assumable under § 365(c).
actual

test

because,

The court did not expressly adopt the

regardless

of

the

test

applied,

the

partnership interest would have been unassumable under § 365(c);
however,

the

language

used

in

predilection for the actual test.

the

opinion

indicated

a

Finally, other Bankruptcy

courts within the Fifth Circuit's jurisdiction have expressly
rejected

the hypothetical test, concluding that:

If the court were to adopt the [hypothetical test] and
focus primarily upon assignability, a chapter [sic] 11
filing would have the virtual effect of rejecting
executory contracts covered by section 365(f). As
suggested by the court in Texaco, this analysis would
extend section “365(c) beyond its fair meaning and
13

intended purpose, contrary to the ultimate
rehabilitation of the debtor's enterprise.

goal

of

Cajun., 230 B.R. 693, 705 (Bankr. M.D. La. 1999) citing Texaco,
Inc., 136 B.R. at 670.
Therefore, the Court finds that it should apply the actual
test, meaning that the relevant inquiry is whether the Trustee
had any intention of assigning the License to a third party.
Because it is evident that this is not the case, the Court finds
that the bankruptcy judge properly determined that the Trustee
may assume the License.
E. Did TGSN consent to the assumption?
As

discussed

above,

there

are

several

complex

issues

involved in this matter, most of which are further muddled by
either a lack of, or conflicting, authority. Though these issues
have been discussed, the Court need not definitively decide any
of these issues today because it finds that, even if federal
copyright

law

applies

and

even

if

the

hypothetical

test

is

adopted, § 365(c) does not bar the Trustee’s assumption of the
License because the License explicitly allows the Trustee to
“use” the Seismic Material.

Section 365(c) does not direct

courts to disregard all provisions in the contract, but rather to
ignore provisions that restrict or prohibit assignment.

14

Here,

not only does no such nonassignment provision exist, the License
actually grants permission to “use” the material.

Section 365(c)

only operates when the contract is silent on granting permission.
Therefore, the Bankruptcy Court correctly granted the motion to
assume the License.
Section 365(c) "is interpreted as prohibiting the trustee
from

assigning

over

objection

a

contract

of

the

sort

that

applicable law makes nonassignable when the contract itself is
silent about assignment." In re CFLC, Inc., 174 B.R. at 121
("Subsection 365(f) operates to delete a nonassignability clause
from a contract and render it “silent” regarding assignment, but
subsection 365(c) restores the nonassignability if applicable law
holds such “silent” contracts to be nonassignable.) Therefore,
courts should "'simply look to see whether [applicable law would]
make the duty assignable where the contract is silent.'” Matter
of Midway Airlines, Inc., 6 F.3d 492, 495 (7th Cir. 1993) (citing
In re Pioneer Ford Sales, Inc.,729 F.2d 27,29 (1st Cir. 1984)).
In allowing a lease to be assigned, the Seventh Circuit pointed
out that the contract did "not prohibit or restrict anything or
merely

fail

to

prohibit

or

restrict

anything;

instead,

this

language affirmatively relieves this [lease] of lease provisions
otherwise

applicable.

The

language

clearly

contemplates

assignment in bankruptcy[...]." Midway Airlines, 6 F.3d
15

at 497;

see also In re Supernatural Foods, LLC, 268 B.R. 759, 792 (Bankr.
M.D. La. 2001)(referring explicitly to contractual provisions
that restrict or prohibit assignment). Similarly, the court in In
re Sunterra agrees that a proassignment clause in a contract is
dispositive when applying § 365(c), but only insomuch as the
Debtor seeks to assign a contract. In re Sunterra Corp., 361 F.3d
at 271. Strictly construing a contract, the Sunterra court held
that the inclusion of a proassignment clause in the contract
would indicate the parties' consent to an assignment, but did not
indicate consent to an assumption of the contract. Id.
Based on In re Sunterra, it seems that the contract would
have to expressly allow for an assumption to be valid. The Court
finds that this is the case here. The License states that "a
Related Entity shall have the same right to Use the Seismic
Material as Licensee without payment to TGSN." Appellant's Brief,
Exh. A Rec. Doc. 3-1, ¶ 5.3. The License further states that
any company or other entity formed after the date of
this Agreement as part of a corporate reorganization or
restructuring of the Licensee or a Related Entity of
the licensee and any new company or entity otherwise
formed within the corporate family of the Licensee
shall be deemed a Related Entity provided, that the new
company or other entity is owned or controlled by the
Licensee or one of its Related Entities. Except as used
in Section 5.1, as used in this Agreement, "owns or
controls" [...] means direct or indirect owner-ship or
indirect ownership or control of one hundred percent
(100%) of the Equity of such company or entity.
16

Appellant's Brief, Exh. A, Rec. Doc. 3-1, ¶ 5.2. Based on these
sections of the License, it is clear that TGSN contemplated the
situation that has arisen in this matter, but is now attempting
to circumvent the contract using § 365(c). Therefore, the Court
finds that the License was properly assumed and the Bankruptcy
Court's Order must be affirmed.
Accordingly,
The Bankruptcy Court's Order entered on November 20, 2012
authorizing the assumption of a certain Master License Agreement
for Geophysical Data pursuant to 11 U.S.C. § 365 is AFFIRMED.
New Orleans, Louisiana this 10th day of September, 2013.

____________________________
CARL J. BARBIER
UNITED STATES DISTRICT JUDGE

17