Overview
IP licenses are the most analytically demanding category of executory contract in bankruptcy. Three doctrinal threads converge: (1) the § 365(n) statutory protection enacted in 1988 in direct response to the Fourth Circuit's Lubrizol decision; (2) the long-running circuit split — recently narrowed by the Supreme Court in Mission Product v. Tempnology — about what "rejection" actually does to a licensee's continued use of the licensed IP; and (3) the § 365(c)(1) non-assumability question, where the Ninth Circuit's Catapult "hypothetical test" and the First Circuit's Institut Pasteur "actual test" continue to divide the circuits.
Official citations: 11 U.S.C. § 365(n) (licensee election rights); 11 U.S.C. § 365(c)(1) (non-assumability where applicable law excuses counterparty); 11 U.S.C. § 101(35A) (definition of "intellectual property").
Section 365(n): the licensee's election
Section 365(n) was Congress's reaction to the Fourth Circuit's holding in Lubrizol Enterprises v. Richmond Metal Finishers, 756 F.2d 1043 (4th Cir. 1985), which held that rejection of a technology license terminated the licensee's right to use the technology. Congress thought that was destructively wrong — licensees had built businesses and product lines around licensed technology, and rejection-equals-termination put them at the mercy of the licensor's bankruptcy.
Under § 365(n), if a debtor-licensor rejects an executory IP license, the licensee gets a choice:
- Treat the contract as terminated and assert a pre-petition damages claim under § 502, like any other rejection counterparty; or
- Retain rights under the license — including any right to enforce exclusivity — for the duration of the contract and any extension period exercisable by the licensee, in exchange for continuing to pay all royalties due.
If the licensee elects to retain, the licensor is excused from any affirmative performance duties (the licensee gets no further updates, no further support, no enforcement help against third-party infringers), but the basic license to use the IP stays in force.
"Intellectual property" is defined narrowly. Section 101(35A) defines "intellectual property" for purposes of § 365(n) as trade secrets, patents, patent applications, plant variety protections, copyrighted works, and mask works. Trademarks are conspicuously excluded. That exclusion drove the circuit split that the Supreme Court eventually resolved in Mission Product v. Tempnology.
Sunbeam and the “rejection is breach, not rescission” doctrine
The Seventh Circuit's decision in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012), addressed what happens when a debtor-licensor rejects a trademark license — a contract not covered by § 365(n). Judge Easterbrook reasoned from first principles: § 365(g) provides that rejection "constitutes a breach" of the contract. Outside bankruptcy, a non-breaching party to a breached contract is not stripped of contract rights it has already acquired; it has an action for damages, and it keeps whatever non-monetary rights the contract conferred.
Applied to a trademark license: rejection by the debtor-licensor is a breach. The licensee can sue for damages (a pre-petition unsecured claim). But the licensee's already-conferred right to use the mark survives breach, just as it would outside bankruptcy. Sunbeam rejected the Lubrizol approach (rejection equals termination) and aligned trademark licenses with the § 365(n) regime by judicial reasoning rather than statute.
Mission Product v. Tempnology: the Supreme Court resolves the split
In Mission Product Holdings, Inc. v. Tempnology, LLC, 587 U.S. 370 (2019), the Supreme Court (Justice Kagan writing for an 8–1 majority) adopted the Sunbeam approach and rejected the First Circuit's contrary holding. The Court's reasoning closely tracks Judge Easterbrook's: § 365(g) means what it says — rejection is a breach. Breach gives the non-breaching party damages, not the ability to retroactively void rights it had already acquired.
The Court's holding sweeps broadly across non-365(n) executory contracts: rejection by a debtor of an executory contract does not rescind rights already conferred on the counterparty. For trademark licensees, the practical result is the same as § 365(n) gives technology licensees — the right to continue using the mark survives rejection, subject to continued royalty payment and the licensor's discharge from any affirmative-performance duties under the license.
What changed and what didn't. Mission Product did not amend § 101(35A) or § 365(n) — trademarks are still outside the statutory protection. What changed is the common-law backstop: rejection of a trademark license is now a breach, not a termination, in every circuit. Licensees retain their use rights; licensors are relieved of affirmative duties going forward.
Section 365(c)(1): the Catapult / Quantegy split
Section 365(c)(1) prohibits assumption (and thus, in most cases, assumption and assignment) of an executory contract if "applicable law excuses [the counterparty] from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession." Federal IP law generally treats non-exclusive patent and copyright licenses as personal to the licensee, meaning the licensee cannot transfer them without the licensor's consent. The question becomes: does § 365(c)(1) bar assumption by a debtor-licensee that does not intend to assign?
Two camps developed:
The Catapult (hypothetical) test
The Ninth Circuit, in In re Catapult Entertainment, Inc., 165 F.3d 747 (9th Cir. 1999), read § 365(c)(1) literally. The statute asks whether applicable law would excuse the counterparty from accepting performance from "an entity other than the debtor." A debtor in possession, the Ninth Circuit reasoned, is technically a different legal entity from the pre-petition debtor. If applicable law (federal patent law) would let the licensor block assignment to "an entity other than the debtor," then by the text of the statute, assumption itself is barred — even if the debtor in possession has no intention to assign. The "hypothetical" assignment is enough to trigger the prohibition.
Under the hypothetical test, a debtor-licensee under a non-exclusive patent license cannot assume that license without licensor consent, full stop. The Third and Fourth Circuits have followed similar reasoning.
The Quantegy / actual test
The First Circuit in Institut Pasteur v. Cambridge Biotech Corp., 104 F.3d 489 (1st Cir. 1997), and other courts including those that have engaged with the issue in Quantegy-type fact patterns, took the opposite view: the bar in § 365(c)(1) should apply only when the debtor in possession actually proposes to assign the contract. Where the debtor in possession is merely assuming and continuing performance itself, the personal-services concern animating the statute is not implicated.
The First and Fifth Circuits, by approach, lean toward the actual test. The result for IP licensing in those circuits is markedly more debtor-friendly: a Chapter 11 debtor-licensee can typically assume non-exclusive licenses without consent, so long as no assignment is in the picture.
Practical consequence of the split. Where to file a Chapter 11 case that turns on IP-license assumption matters. A debtor whose central asset is its ability to continue operating under non-exclusive patent or copyright licenses will get a different answer in the Ninth Circuit than in the First Circuit. Licensors structure license terms around their preferred circuit; debtors with IP-dependent business models structure venue accordingly.
The licensor-debtor versus licensee-debtor distinction
One frame that helps organize the doctrine:
- Licensor-debtor scenarios — the bankrupt party owns the IP. Rejection threatens to terminate the license. § 365(n) (technology and copyright) and Sunbeam / Mission Product (trademark) protect the non-breaching licensee.
- Licensee-debtor scenarios — the bankrupt party uses someone else's IP under a license. Assumption is potentially blocked by § 365(c)(1) where applicable IP law makes the license non-assignable. Whether the bar attaches turns on the Catapult/Quantegy split.
The two doctrinal threads are independent. A debtor that is simultaneously a licensor of some IP and a licensee of other IP must analyze each contract separately, with the right framework for its position in each.