IP and Chapter 11 Intersection: Kodak Files for Bankruptcy

As anticipated, Eastman Kodak Co. filed a petition for Chapter 11 bankruptcy relief this morning in the United States Bankruptcy Court for the Southern District of New York. This development followed a recent flurry of patent infringement suits involving Kodak, and on the heels of Kodak’s unrequited efforts to license or sell off its substantial intellectual property (“IP”) portfolio.

Kodak recounted in its supporting affidavit its path of decline over recent years, citing, among other factors, liquidity challenges precipitated by difficulties collecting licensing fees from infringers of its intellectual property. The affidavit indicates that Kodak’s IP portfolio comprises nearly 9,000 U.S. patent and trademark registrations and applications, and over 13,000 foreign patents and trademarks registrations and applications. Thus, a critical component of its reorganization strategy is the sale of approximately 1,150 digital imaging patents. The patent portfolio has an estimated value of $2.2 to $2.6 billion, according to Kodak’s financing motion filed today. Kodak’s agreement with its lender, Citigroup, sets a June 30, 2012 deadline for Kodak to file a bidding procedures motion with the court with respect to the patent sale.

Between 2003 and 2010, Kodak generated approximately $450 million annually of licensing revenue from its digital-imaging patents. Last year, revenues shrank to $98 million. According to Kodak, the drop resulted largely from “infringers” employing a “strategy of delay in light of Kodak’s liquidity position.” Nevertheless, the digital-imaging portfolio is sure to generate significant interest. Readers should recall that last July, Nortel sold its patent portfolio in a bankruptcy auction. The sale of approximately 6,000 patents, including approximately 2,600 U.S. patents, yielded $4.5 billion in proceeds. According to one observer, Nortel represented the biggest skirmish to date in “a global commercial war being waged” wherein “patents have become the new lethal weaponry.”

Whatever fate awaits Kodak itself, IP law issues will surely permeate throughout the bankruptcy proceedings. For instance, Section 365(n) of the Bankruptcy Code, gives a patent licensee of a debtor some level of protection against the rejection of a license by the bankruptcy trustee. The trustee has the power to either accept or reject so-called “executory agreements,” an ongoing contract between a licensee of the debtor and a third party where both parties have ongoing material obligations. When the bankruptcy trustee rejects an executory agreement, the wronged-party may seek to collect damages for breach of contract, but this relief is as an unsecured creditor, who typically receives little to no consideration from the liquidating party. Importantly, courts typically allow the trustee to prevent assignment of non-exclusive licenses, and, a licensee who does not come forward timely risks forfeiting their right as licensee.

Mark B. Conlan is a Director in the Gibbons Financial Restructuring & Creditors’ Rights Department. Brett S. Theisen, an Associate in the Gibbons Financial Restructuring & Creditors’ Rights Department, and Ralph A. Dengler, a former Director in the Gibbons Intellectual Property Department, co-authored this post.
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