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The plain meaning of section 365 (c): the tension between bankruptcy and patent law in patent licensing.

INTRODUCTION

I.   EXECUTORY CONTRACTS IN BANKRUPTCY LAW
     A. Contracts as Property of the Bankruptcy Estate
     B. Patent Licenses as Executory Contracts
        1. Rejection of an Executory Contract
        2. Assumption of an Executory Contract
        3. Assignment of an Executory Contract
II.  BASIC PRINCIPLES OF PATENT LAW
     A. The Balance Between Exclusivity and Disclosure
     B. Two Types of Patent Interests: Assignments and Licenses
     C. Exclusive Versus Nonexclusive Patent Licenses
     D. Patent Law's Strong Protection of Owners' Rights
III. THE LEGAL SYSTEM'S APPROACH TO THE TENSION BETWEEN
     BANKRUPTCY AND PATENT LAW
     A. Transferability of Patent Licenses and the
        Federal Common Law Principle
     B. Inconsistent Case Law
        1. Development and Adoption of the
           Hypothetical Test
        2. Development and Adoption of the
           Actual Test
     C. Recent Case Law Trends in Interpretation
IV.  INTERPRETING SECTION 365 (C): IS THE "OR"
     REALLY AN "AND"?
     A. The "or" as a Disjunctive "or"
     B. The "or" as a Conjunctive "and"
        1. Does the Literal Reading Create
           Inconsistencies?
           a. Section 365(c)'s Interaction with
              Section 365(f) (1)
           b. Section 365(c)'s Interaction with
              Section 365(e)
        2. The Legislative History of Section 365
        3. The Literal Reading and General
           Bankruptcy Policies
V.   THE LITERAL READING AS A CREDITOR-PROTECTION MEASURE
     A. Patents Are a Property Right
     B. Patent Law's Injunctive Relief Against Infringers
CONCLUSION


INTRODUCTION

This Comment examines the underlying tension between bankruptcy law and intellectual property law in the context of nonexclusive patent licenses. The tension arises when a patent owner (i.e., a licensor) (1) grants a license for its patent and the licensee" files for bankruptcy under Chapter 11 of the United States Bankruptcy Codes while the license is still in effect, In a traditional Chapter 11 filing, the debtor-licensee assumes an asset (here, the patent license) by becoming a debtor-in-possession (4) and is then free to assign the asset to another entity in order to facilitate its restructuring and reorganization plan. (5) From the licensor's perspective, however, the debtor-licensee is not free to assign the license because it is nontransferable. Furthermore, patent law's fundamental "fight to exclude" principle allows the patent owner to sue for patent infringement in the absence of a license agreement. (6) Thus, the question becomes whether a debtor-licensee should be allowed to continue operating under its license once it files for bankruptcy, or if a conflict in bankruptcy and patent law should prevent the debtor-licensee from assuming and using the license. If the debtor-licensee's ability to use an essential asset is subject to conflicting law, then neither the licensor nor the licensee can be sure of its fights.

With technology at the forefront of today's economy, many companies increasingly rely on technology licenses in order to conduct their businesses. Unsurprisingly, the fight to continue using intellectual property licenses--in particular, patent licenses--is critical to the survival of a distressed debtor. Most importantly, the debtor-licensee's assured ability to assume and assign the license will determine whether it will be able to successfully obtain financing or even continue operations after undergoing a Chapter 11 filing.

Part I of this Comment outlines the considerations of Chapter 11 bankruptcy law relating to patent licenses and a debtor-licensee's interests. Part II identifies the competing interests of patent law. Part III explores the various approaches courts have taken to address the conflict between bankruptcy and patent law, focusing on the development of the two main tests that courts have adopted to resolve the conflict. In addition, Part III examines the recent case law trends in some bankruptcy courts. Part IV investigates the statutory interpretation and legislative history of section 365 (c) of the Bankruptcy Code and focuses on why the literal reading of the statute should prevail. Part V discusses how the literal reading of section 365 (c) enables patent rights to be a form of creditor protection against the competing interests of a strong bankruptcy policy.

I. EXECUTORY CONTRACTS IN BANKRUPTCY LAW

A. Contracts as Property of the Bankruptcy Estate

Bankruptcy law relies on the concept of freely assignable rights of property in order to facilitate the restructuring and reorganization of the debtor. (7) In particular, Chapter 11 of the Bankruptcy Code tries to preserve the ongoing value of the business and maximize the economic return to all constituents of the business. (8) At its heart, a business is no more than a series of contracts enabling the development, production, or sale of a good or service. Putting aside a company's physical assets (e.g., land, buildings, equipment, inventory), the majority of a company's value comes from its contracts with its creditors, distributors, suppliers, customers, and the like.

Section 541 of the Bankruptcy Code provides that a bankruptcy estate is created upon the filing of a bankruptcy petition. (9) The bankruptcy estate is considered to have a separate legal existence than that of the debtor who filed the case. (10) The Bankruptcy Code defines "property of the estate" as all of the debtor's legal and equitable interests in property as of the bankruptcy petition's filing date. (11) Courts have interpreted a debtor's bankruptcy estate to include the debtor's contractual rights. (12) In the case of a debtor business filing for Chapter 11, the bankruptcy estate includes the debtor's physical assets as well as the debtor's contracts with any creditors, distributors, suppliers, customers, and the like. (13)

B. Patent Licenses as Executory Contracts

The conflict between intellectual property and bankruptcy law arises from the Bankruptcy Code's treatment of a special type of contract, known as an "executory contract," under section 365. (14) Any contracts that require, at the time of the bankruptcy petition filing, further performance from each party are considered executory. (15) In particular, nonexclusive licenses, such as those commonly found in patent licenses, are considered executory contracts within the meaning of the Code. (16) This is because both parties have continuing obligations--in the case of a nonexclusive patent license, the licensor has a continuing obligation not to sue the licensee for infringement of its patent, and the licensee has a continuing obligation to commercialize the licensed invention. (17)

With executory contracts, a debtor has three options: (1) rejection of the contract, (2) assumption of the contractual obligations, or (3) assignment (i.e., transfer) of the contract. (18) The ability to freely choose and exercise these three options is fundamental to a debtor's ability to maximize the value of its assets during reorganization or restructuring.

1. Rejection of an Executory Contract

The first option, rejection, is relatively straightforward. The debtor simply rejects the contracts it deems to be of low value or highly cumbersome to operate. (19) Under section 365(g) of the Bankruptcy Code, the debtor's trustee, (20) with the approval of the bankruptcy court, may reject an executory contract. (21) This rejection constitutes a breach of the contract, effective immediately prior to the debtor's bankruptcy filing. (22) In technology licensing cases, section 365(n) of the Bankruptcy Code provides a remedy for breach of contract if the debtor party is the licensor--in these cases, the nondebtor party may treat the license as terminated. (23) Similarly, if the debtor party is the licensee, rejection of the license allows the nondebtor party to treat the license as terminated. (24) Thus, regardless of whether the debtor is the patent licensor or licensee, if the debtor chooses to reject the license, the license will be deemed terminated. (25)

2. Assumption of an Executory Contract

The situation becomes more complex if the debtor party wishes to assume and assign the license as a patent licensee, due to bankruptcy's protections of a debtor's interests and estate. In Chapter 11 filings, the assumption and assignment of an executory contract fundamentally affects the debtor's ability to restructure. (26) The debtor will want to assume the contracts it deems to be valuable and, upon assumption, retain the contracts as part of its reorganization. (27) Since a patent license authorizes the debtor-licensee to operate under the terms of the license, the debtor-licensee will likely assume the license in order to continue its business operations during bankruptcy. For example, a debtor may be in the business of manufacturing widgets and has licensed a patent enabling it to produce the widget. After filing for bankruptcy, if the debtor wishes to be able to continue its business operations and (hopefully) make a profit, it must assume the patent license in order to continue manufacturing the widgets legally, or risk being sued for patent infringement by the patent owner.

The specific requirements for assuming a contract are governed by section 365 (b) of the Bankruptcy Code. The main conditions are that the debtor must assure the court of its "ability to cure past defaults and meet future obligations." (28) These two conditions are intended to ensure that the nondebtor party, who is forced to continue performance, receives the full benefit of its bargain. (29) In the case of a patent license, because the licensor is foregoing its right to sue the licensee for conduct that "but for the license, would be an infringement," (30) the licensor must be assured that the debtor-licensee is in a position to fulfill the commercialization terms of the patent license. (31)

When a debtor assumes a contract, the debtor's estate becomes obligated to take on the contract in its entirety. (32) The debtor cannot pick and choose parts of the contract it wishes to assume. (33) Furthermore, upon assumption of the contract, the nondebtor party is given priority-claimant status for both previous and future amounts due under the contract. (34) Thus, the debtor's assumption of an executory contract elevates the noncreditor party over the debtor's other creditors. (35)

3. Assignment of an Executory Contract

If the debtor assumes the contract but chooses not to retain it, then the debtor can elect to assign (i.e., transfer or sell) the contract. (36) Once the debtor has assumed the contract, it has the power to assign the contract to third parties. (37) A debtor might assign the contract in order to raise capital through financing or cash to pay its creditors. For example, in In re Haven Eldercare, the debtor, an operator of several nursing, assisted living, and residential care facilities, petitioned for authority to sell some of its facilities as part of its Chapter 11 reorganization plan. (38) As part of this sale, the debtor sought to assume and assign executory contracts and unexpired leases that were vital to the operation of these facilities. (39) The bankruptcy court held that assumption and assignment of the executory contracts and unexpired leases were vital to the operation of the nursing facilities being sold and thus integral to the debtor's restructuring proposal. (40) AS In re Haven Eldercare demonstrates, the assignment of the executory contract can play an essential role in the debtor's restructuring or reorganization. The Bankruptcy Code recognizes the importance of this power and provides that the debtor's right to assign an executory contract overrides most non-bankruptcy law and contractual restrictions on assignment. (41)

To assist the debtor entity in maximizing its value under reorganization or restructuring, many courts have interpreted the Code to allow the trustee or debtor-in-possession (42) to assign most contracts regardless of contrary nonbankruptcy law or contractual provisions. (43) For example, in In re U.L. Radio Corp., the debtor was in the business of selling and servicing televisions and had entered into a lease with its landlord to rent a storefront for its operations. (44) After the debtor filed for bankruptcy, it tried to assume and assign (i.e., sell) its lease to a third party to operate the space as a small bistro. (45) The bankruptcy court held that the lease could be assumed and assigned to the third party despite the "deviation in use ... from an appliance store to a small bistro." (46)

In the context of patent licensing, because the bankruptcy estate is considered a separate legal entity than that of the debtor, an assumption of the license is also an assignment of the license, regardless of whether the debtor-licensee actually assigns the license to a third party. (47) When the debtor's estate assumes the license, the estate also receives an assignment of the license. This automatic assignment creates an issue for the patent licensor because the licensee is no longer the same legal entity as it was prebankruptcy. (48) To better understand this issue, we must first examine the basic principles of patent law.

II. BASIC PRINCIPLES OF PATENT LAW

A. The Balance Between Exclusivity and Disclosure

Though the power of free assignability is paramount to bankruptcy law, it runs directly counter to the policies of exclusive use and monopolistic control in patent law. The Founding Fathers recognized the importance of strong patent rights by granting Congress the power "To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive right to their respective Writings and Discoveries." (49) From this language, Congress developed exclusive-use policies in order to provide inventors and innovators with incentives to create. (50) By rewarding inventors and innovators with a period of exclusive use in exchange for disclosure of their creation, Congress furthered the societal advancement of knowledge. (51)

The Drug Price Competition and Patent Term Restoration Act of 1984, (52) more commonly known as the Hatch-Waxman Act, is a recent example of Congress's attempts to balance the limited period of exclusivity with invention disclosure. The Hatch-Waxman Act was designed to promote genetic drug manufacturing while preserving a financial incentive for the research and development conducted by pioneering drug companies (often brand-name pharmaceutical companies). (53) The Act allows genetic drug companies to obtain marketing approval from the U.S. Food and Drug Administration (FDA) by submitting bio-equivalence studies of the drug compositions described in the pioneering drug company's patent application. (54) The Act also grants the pioneering drug company a period of additional marketing exclusivity of up to five years to compensate for the time the drug remains under review for regulatory approval. (55) Thus, in exchange for disclosing the drug, the pioneering drug company is rewarded with a period of market exclusivity. (56)

A patent grants its owner the right to exclude others from practicing its teachings (i.e., the invention). (57) Through this exclusivity, patents create incentives for companies to engage in research and development. (58) Without the protection of patent rights, companies would not be willing to invest in research and development if third parties could simply copy their research and steal their profits. (59) In addition to large-scale funding, patent fights also enable small inventors, (60) in exchange for interests in the patent, to raise capital in order to bring inventions to market. (61)

B. Two Types of Patent Interests: Assignments and Licenses

An interest in a patent can be in the form of an assignment (62) or a license. (63) The distinction between a patent assignment and license is not merely one of word choice but of legal effect. (64) A patent assignment is a transfer of an ownership interest in the patent. (65) As the Supreme Court stated in Waterman v. Mackenzie, there are three types of patent assignments:
   The patentee ... may ... assign, grant and convey, either, 1st, the
   whole patent, comprising the exclusive right to make, use and vend
   the invention throughout the United States; or, 2d, an undivided
   part or share of that exclusive right; or, 3d, the exclusive right
   under the patent within and throughout a specified part of the
   United States. (66)


The Court noted, however, that "[a]ny assignment or transfer, short of one of these, is a mere license, giving the licensee no title in the patent, and no right to sue at law in his own name for an infringement. (67) Thus, when a patent owner licenses its patent to a licensee, the patent owner is effectively granting the licensee a promise not to sue for patent infringement. (68) The licensee has not gained "ownership" of the patent in any traditional sense of property, (69) because a license does not equal an assignment. (70) Simply put, a license is merely a covenant not to sue for infringement and not the transfer or conveyance of any property interest. (71) Thus, the patent owner's ability to choose and control which parties license its technology is tantamount to exercising its right to exclude. (72) Without a valid license, the practicing party has no authority to practice the patented invention and, therefore, is committing patent infringement. (73)

C. Exclusive Versus Nonexclusive Patent Licenses

A patent owner can choose to grant the licensee an exclusive or nonexclusive license. In an exclusive license, the patent holder promises that it will neither exploit the patent itself, nor permit any use of the patent other than by the licensee. (74) A single patent can have multiple "exclusive licensees," such that each licensee is granted exclusive rights to a portion of the overall patent rights. Such exclusive rights are often divided temporally, geographically, by field of use, by type of use, or on a claim-by-claim basis. (75) As a general rule, if an exclusive licensee wishes to bring forth an infringement suit, the patent holder must be joined, either voluntarily or involuntarily. (76) The courts, however, have regarded this rule "as being prudential rather than constitutional in nature," (77) and thus subject to an exception in the case when "all substantial rights" in the patent are transferred. (78) Accordingly, when all substantial rights in the patent have been transferred to the licensee, the licensee has effectively become an assignee of the patent, and therefore has legal title to the patent. (79)

On the other hand, a nonexclusive license is characterized by the patent holder promising only that it will not sue the licensee for infringement, with no other promises regarding how it will exercise its monopoly power. (80) The nonexclusive licensee "has no property interest in the monopoly of the patent." (81) Furthermore, unlike an exclusive licensee, the nonexclusive licensee does not have a contract with the patent owner that forbids others from practicing the invention. (82) "[T]he patent owner may freely license others, or may tolerate infringers," without violating any rights of the nonexclusive licensee. (83) Thus, a nonexclusive patent licensee only has the right to practice the patented invention and does not have the right to sue others for infringing the patent. (84)

D. Patent Law's Strong Protection of Owners' Rights

As the economic climate shifts from an industrial-based economy to a knowledge-based economy, strong protection of patent rights is used to ensure that knowledge is not exploited. (85) For example, on the international level, in the Uruguay Round of the General Agreement on Tariffs and Trade (GATT), the United States entered into an international agreement known as the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) to establish standards for global patent regulation. (86) Additionally, as discussed previously, the Constitution provides that inventors and creators be rewarded with exclusive rights to their creations and discoveries. (87)

In exchange for disclosing the invention, the patent owner is given the exclusive right to the invention. (88) As part of this right, the patent owner has the choice of granting, to whomever it desires, a full assignment, an exclusive license, or a nonexclusive license for the patented invention. (89) The type of license granted determines the licensee's rights and scope of use of the patented invention. (90)

In order to exercise her right to the fullest extent, the patent owner must have control over the identity of the patent licensee. (91) This, however, becomes an issue when a Chapter 11 debtor-licensee wishes to assume the patent license during bankruptcy proceedings through the bankruptcy estate, which is considered a separate legal entity from the debtor. (92) In bankruptcy, when the debtor's estate assumes the license, the debtor-licensee effectively assigns the license to the estate. This automatic assignment, though beneficial to the debtor-licensee, is problematic for the patent licensor because the patent license is no longer held by the same legal entity as it was prebankruptcy. (93) Furthermore, even assuming that the patent license was still held by the same prepetition "entity," the same fight-to-control problems would arise once the debtor-licensee tried to sell the license to a third party as part of its restructuring or reorganization plan under Chapter 11.

III. THE LEGAL SYSTEM'S APPROACH TO THE TENSION BETWEEN BANKRUPTCY AND PATENT LAW

A. Transferability of Patent Licenses and the Federal Common Law Principle

As every law student has learned in Civil Procedure, the general rule, as stated in Erie Railroad Co. v. Tompkins, is that "[t]here is no federal general common law." (94) The courts have allowed federal common law, however, where a federal rule of decision is "necessary to protect uniquely federal interests." (95) In such cases, the creation of a federal rule should be "limited to situations where there is a 'significant conflict between some federal policy or interest and the use of state law." (96) In the special case of patents and patent licensing, the courts have developed a federal common law principle to govern the transferability of patent-license rights. (97) The default rule is that, unless the patent license expressly authorizes the transfer of the license, a patent licensee's rights are personal and nontransferable. (98)

The federal common law principle of patent nonassignability "has been the rule at least since 1852 when the Supreme Court decided Troy Iron & Nail v. Coming." (99) Even after the Supreme Court stated in Erie that there is no general federal common law, federal courts have continued to apply the default rule of patent nonassignability. (100) As explained by the Seventh Circuit in Unarco Industries, Inc. v. Kelley Co., application of the rule is justified because patent law policy "is so dominated by the sweep of federal statutes that legal relations which they affect must be deemed governed by federal law having its source in those statutes, rather than by local law." (101) In addition, the Ninth Circuit's express acknowledgment that patents are a matter of federal policy justifies the application of federal law. (102)

Many lower federal courts have agreed with the Seventh and Ninth Circuits' rationales, recognizing that the federal common law prohibits a bankruptcy assignment of a patent license without the consent of the licensor. (103) Further, these courts have recognized that the federal common law preempts any state law or bankruptcy policy that would permit a bankruptcy assignment despite the licensor's opposition. (104) Thus, these courts consider the federal common law of nonassignability to be within the scope of "applicable law" under section 365(c) (1) (A) of the Bankruptcy Code. (105) Accordingly, the free transferability principle codified in section 365 (f) is subject to the limitations of the federal common law of nonassignability. (106)

Some state courts, however, have rejected the application of such a common law principle. (107) Most notably, in Farmland Irrigation Co. v. Dopplmaier, Justice Traynor rejected the notion of a federal common law and held that state law should govern the assignment of patent licenses. (108) Justice Traynor identified three bases for the decision: (1) because the nonassignability doctrine was decided before Erie, it did not address the issue of whether state or federal law should apply; (2) the fact patterns in earlier cases had license agreements based on the personal skills of the licensee; and (3) the federal common law rule undermined important state rules that favored free assignability. (109)

Many commentators have adopted Justice Traynor's reasoning, noting that neither the Seventh nor the Ninth Circuit ever truly addressed whether there was an underlying conflict between state and federal policy, or whether such a conflict would justify undermining state law. (110) Others argue that under a proper economic approach, state law should prevail because it allows "the parties to maximize the value of the licenses to themselves and to society." (111) In addition, some commentators take the view that "federal courts appear to have overreached themselves in continuing to invent federal common law to forbid the assignment of a license agreement." (112)

B. Inconsistent Case Law

Despite the debate, one central factor emerges from these competing approaches: the patent holder's consent to transferability. From a bankruptcy perspective, those opposed to the federal common law approach view nonexclusive patent licenses as undermining the fundamental principle of maximizing a debtor's estate. (113) Under this view, requiring a licensor's explicit consent impedes the free transferability of the license, thereby undermining the heart of bankruptcy restructuring. (114) From a patent perspective, however, a licensor's control over its competitors is fundamental to a patent owner's right to exclude. (115) Thus, in order to prevent injury to the nondebtor party, a patent owner's express authorization should be required before a debtor-licensee may assume and assign its patent license. (116)

The question then becomes whether a nonexclusive licensee can continue to operate under its license once it files for bankruptcy. Put another way, does the combination of bankruptcy and patent law result in a prohibition against assumption and assignment of patent licenses such that the debtor can no longer use the license? (117) Because a nonexclusive patent license does not constitute a sale of the patent and no ownership rights are transferred, the debtor-licensee cannot sell its license agreement in order to pay its creditors in a bankruptcy proceeding. (118) Ultimately, reconciling the conflict between patent rights and bankruptcy principles requires determining whether the licensor must provide express consent to the transferability of the license in order for the debtor, as debtor-in-possession, to assume and assign the license to support its reorganization. (119)

The case law, however, has not provided a clear answer. In re Alltech Plastics, Inc., decided in 1987, was the earliest bankruptcy court decision to hold that the federal common law principle of nonassignability forecloses the transfer of a patent license. (120) In Alltech, the debtor had acquired a nonexclusive license to manufacture plastic containers using a patented process. (121) Upon filing for bankruptcy, the debtor sought to sell its interest to a third party, but the patent holder contended that under the federal common law such an assignment was prohibited without its express consent. (122) The patent holder further asserted that the contract was nondelegable and that, therefore, section 365(c) of the Code applied and precluded the debtor from assumption or assignment. (123) By contrast, the intended third party transferee took the position that the court should apply the free transferability principle of section 365(f), which meant any antiassignment clause in "applicable law" was unenforceable. (124) The court ultimately held that, despite the provisions of section 365 (f), the federal common law principle of patent nonassignability governed. (125) The court concluded that,
   although [a patent license's] nonassignment is not statutorily
   mandated, the century old common law classification of patent
   licenses appears to place them within the realm of the types of
   contracts traditionally associated with section 365 (c). As such
   ... the Trustee in this instance does not have the power to assign
   the patent license absent consent from the licensor. (126)


After Alltech, this question of federal common law applicability in bankruptcy proceedings did not reach the circuit court level for approximately ten years.

Finally in 1996, the Ninth Circuit addressed the issue in Everex Systems, Inc. v. Cadtrak Corp. (In re CFLC, Inc.). (127) In In re CFLC, the debtor was in the business of manufacturing personal computers and had a nonexclusive license to use Cadtrak's computer-graphics technology. (128) When the debtor sought to sell substantially all of its assets, Cadtrak objected to the sale on the basis that the patent license was not assignable under federal common law. (129) The Ninth Circuit, while recognizing that "[t] here is no federal general common law," (130) was concerned that the "free assignability" notion of state law would undermine the monopoly rights fundamental to federal patent policy and hinder the critically important economic incentive that encourages innovation. (131) The court ultimately held that the federal common law principle of nonassignability applied, and the debtor was barred from assigning the license without Cadtrak's consent. (132)

Since Alltech and In re CFLC, two competing judicial approaches have developed at the circuit court level: the "hypothetical" test and the "actual" test. The hypothetical test, which requires the licensor's explicit consent for assignment, has been adopted by four circuits--the Third, Fourth, Ninth, and Eleventh--and is frequently applied in cases involving technology companies, (133) Most bankruptcy courts, however, do not follow the hypothetical test. (134) Instead, they, along with the First Circuit, have adopted the actual test, which does not require explicit consent. (135)

1. Development and Adoption of the Hypothetical Test

The hypothetical test was first introduced in In re West Electronics Inc. (136) West was not a patent-licensing case; instead, the case involved an executory contract for missile-launcher power-supply units between a defense contractor and the United States. (137) West, the supplier, suffered from operational problems, late deliveries, and irregularities in its accounting procedures. (138) Upon investigation, the United States sought to terminate the contract prior to West's bankruptcy filing, a fact suggesting that there was a material problem with West's ability to perform. (139) When West filed its bankruptcy petition and received an automatic stay, the government sought an order to lift the stay so it could terminate the contract agreement. (140) West contended that "it had the capacity and intention to cure the default" and should be given the opportunity to perform. (141) Both the bankruptcy court and the district court on review denied the government's motion, finding that the agreement constituted an executory contract. (142)

The issue facing the Third Circuit was whether the debtor could assume the executory contract even if it had no intention of assigning it to a third party. (143) The court answered in the negative. (144) The tension was between 41 U.S.C. [section] 15, which prevents transfers of government contracts to third parties, and section 365 (f) of the Bankruptcy Code, which provides that executory contracts are generally freely transferable. (145) The Third Circuit reversed the lower courts, holding that the government contract could not be assumed because "West could not force the government to accept the 'personal attention and services' of a third party without [the government's] consent." (146) West was barred from assuming and assigning the contract. (147) In reaching its conclusion, the court examined the plain meaning of the statute and stated that
   11 U.S.C. [section] 365(c)(1) creates a hypothetical test--i.e.,
   under the applicable law, could the government refuse performance
   from "an entity other than the debtor or the debtor in possession."
   ... [T]he relevant inquiry is not whether 41 U.S.C. [section] 15
   would preclude an assignment from West as a debtor to West as a
   debtor in possession, but whether it would foreclose an assignment
   by West to another defense contractor. (148)


Although West did not involve a patent license, it developed the hypothetical test that was later used by the Eleventh Circuit in a case relating to a franchise agreement. (149) It was not until 1999 that the hypothetical test was applied in the context of patent licensing.

In In re Catapult Entertainment, Inc., the Ninth Circuit expressly adopted the hypothetical test, holding that the "applicable law," as relating to section 365(c)(1) of the Bankruptcy Code, was the federal common law principle of patent nonassignability. (150) Catapult Entertainment was in the business of creating an online gaming network for 16-bit console videogames. (151) Catapult also entered into two nonexclusive license agreements with Stephen Perlman for the use of his patents and patent applications. (152) When Catapult filed for reorganization under Chapter 11, it proposed a reorganization plan involving a reverse triangular merger with two other companies in which Catapult would emerge as the surviving corporation. (153) The reorganization plan also proposed that after the merger, Catapult would assume the patent licenses in order to continue operations. (154) Catapult's creditors and equity holders voted in favor of the reorganization plan and the bankruptcy court confirmed it. (155) Perlman, however, objected to the plan and appealed. (156)

On appeal, the Ninth Circuit reversed the confirmation of Catapult's reorganization plan. (157) In doing so, the Ninth Circuit became the first circuit court to hold that a nonexclusive patent license could not be assumed in a bankruptcy proceeding without the consent of the licensor. (158) Similar to West, the issue facing the Ninth Circuit was whether Catapult, as the debtor-in-possession, could assume the Perlman licenses without Perlman's consent. (159) The court, noting the tension between the hypothetical and actual test, adopted and explained the hypothetical test:
   The literal language of [section] 365(c)(1) is thus said to
   establish a "hypothetical test": a debtor in possession may not
   assume an executory contract over the nondebtor's objection if
   applicable law would bar assignment to a hypothetical third party,
   even where the debtor in possession has no intention of assigning
   the contract in question to any such third party. (160)


Under the hypothetical test, the court ruled that Catapult could not assume the Perlman licenses if "(A) federal patent law excuses Perlman from accepting performance from or rendering performance to an entity other than Catapult ...; and (B) Perlman does not consent to such assumption." (161) Thus, if a debtor cannot assume a license, this is equivalent to a rejection and the license effectively terminates as a matter of law upon bankruptcy, unless the licensor agrees otherwise. (162)

Most recently, the Fourth Circuit adopted the hypothetical test in RCI Technology Corp. v. Sunterra Corp. (In re Sunterra Corp.). (163) There, Sunterra, the debtor, had entered into a software license agreement with RCI in which RCI granted Sunterra a nonexclusive license for the use of its software. (164) Sunterra filed for bankruptcy and, prior to the court's approval of the reorganization plan, RCI filed a motion to have the software license deemed rejected. RCI asserted that the license was an executory contract and that Sunterra, as debtor-in-possession, was precluded by section 365(c) from assuming the license without RCI's consent. (165) RCI further contended that because it had not given Sunterra permission to assume the license, the court was required, as a matter of law, to deem the license rejected. (166) The bankruptcy court, adopting the actual test, (167) held that section 365(c) did not prohibit Sunterra, as debtor-in-possession, from assuming the license because Sunterra never intended to assign the license to a third party. (168) Under this interpretation, "Sunterra, as debtor in possession, was entitled to assume the [license] because it did not intend to assign, and RCI would not actually be forced to accept performance from a party other than Sunterra." (169) On review, the district court affirmed the bankruptcy court, ruling that because RCI would not be asked to accept performance from a party other than Sunterra, Sunterra was not precluded from assuming the patent license under section 365 (c)). (170)

On appeal, the Fourth Circuit rejected the lower courts' adoption of the actual test and adopted the hypothetical test. (171) The court, in rejecting the actual test, refused to interpret the "or" in the statutory phrase "assume or assign" as a conjunctive "and." (172) In addition, the court held that federal copyright law was the "applicable nonbankruptcy law," and thus Sunterra was precluded from assuming the nonexclusive license because the federal common law prohibited assignment. (173)

2. Development and Adoption of the Actual Test

Although several circuits have adopted the hypothetical test, most bankruptcy courts, as well as the First Circuit, have expressly rejected it in favor of the actual test. (174) Under the actual test, section 365(c) is read in reference to the "actual" intent of the debtor with respect to assigning the license. (175) If the debtor has no intent to assign the license, then section 365(c) does not prevent assumption of the license. (176) Under the actual test, the debtor does not need the licensor's consent in order to assume the license. (177)

The actual test was first developed by the First Circuit in Summit Investment & Development Corp. v. Leroux. (178) In Leroux, the court looked to the legislative history of the Bankruptcy Code and concluded that Congress intended section 365 (c) to provide the nondebtor party with the benefit of its bargain. (179) Relying on the 1984 Amendments to the Bankruptcy Code, the court noted that the change in statutory language from "debtor" to "the debtor or the debtor in possession" indicated Congress's intent that the prohibition on assumption does not apply when the debtor-in-possession is the party who will be performing the debtor's duties and accepting performance from the nondebtor party. (180) The court noted that this type of analysis results in a "case-by-case inquiry into the actual consequences ... to the nondebtor party," instead of the abstract rule of the hypothetical test. (181) The court further stated that in order to prevent assumption of the contract, the nondebtor party "must make an individualized showing that it would not receive the 'full benefit of [its] bargain' were an entity to be substituted for the debtor from whom performance is due." (182)

Although Leroux was not a patent-licensing case, it was not long before the First Circuit applied the actual test in the context of patent rights. In Institut Pasteur v. Cambridge Biotech Corp., Cambridge Biotech Corporation (CBC) entered into a mutual cross-license agreement with Institut Pasteur. (183) In the agreement, CBC was authorized to utilize Pasteur's HW diagnostic procedures in any diagnostic kits CBC sold in the United States and other countries. (184) When CBC filed for Chapter 11, its reorganization plan proposed that it assume the license and continue to operate its diagnostics division using Pasteur's patented procedures. (185) CBC's reorganization plan also called for the sale of CBC's stock to a subsidiary of bioMerieux, one of Pasteur's direct competitors. (186) Naturally, Pasteur objected to CBC's reorganization plan, contending that the proposed sale of CBC's stock to bioMerieux amounted to CBC's assumption of the cross-licenses and their de facto assignment to a third party (here, bioMerieux). (187) Of particular note, Pasteur's licensing director "attested that Pasteur would not have granted its competitor, bioMerieux, or a subsidiary, a patent license under the terms allowed CBC." (188)

Although it conceded that Pasteur's position was understandable, the First Circuit, following its precedent in Leroux, rejected the hypothetical test and instead ruled that there needed to be a case-by-case inquiry into whether the nondebtor party (i.e., Pasteur) was actually being forced to accept performance from someone (i.e., bioMerieux) other than the party with whom it had originally contracted (i.e., CBC). (189) In this context, the First Circuit held that "the bankruptcy court cannot simply presume as a matter of law that the debtor-in-possession is a legal entity materially distinct from the prepetition debtor with whom the nondebtor party ... contracted." (190) Rather, the focus should be "on the performance actually to be rendered by the debtor-in-possession," and whether Pasteur would be denied the full benefit of its bargain. (191)

Surprisingly, the First Circuit also permitted CBC's stock sale to bioMerieux. (192) In fact, the court held that the stock sale did not result in a "different entity" than that with which Pasteur had originally contracted, even though CBC was technically now owned by bioMerieux. (193) Instead, the court held that because the cross-licenses contained no provision either limiting or terminating CBC's rights if its stock changed hands, there was no change in beneficial ownership in Pasteur's license agreement. Under this interpretation, Pasteur could not restrict the license. (194)

The Fifth Circuit, in Bonneville Power Administration v. Mirant Corp. (In re Mirant Corp.), also adopted the actual test but provided a different justification than the First Circuit. (195) Mirant, an electrical power producer and seller, entered into a contract with Bonneville Power Administration (BPA), a federal power-marketing agency within the United States Department of Energy. (196) When Mirant filed for bankruptcy, BPA sought to terminate the contract for future power purchases, asserting the right to do so under an ipso facto default provision that authorized BPA to terminate the contract upon Mirant's bankruptcy filing. (197) Mirant and BPA agreed that ipso facto clauses were generally invalid under section 365(e). (198) However, they disputed whether ipso facto default provisions remained enforceable under section 365(c) if the contract excused the nondebtor party from accepting performance from a trustee or assignee. (199)

Although Mirant was not about a patent license, the court noted that the dispute involved essentially the same issue the apparent conflict between subsections 365(c) and 365(f) raises--namely whether a prohibition on assignment applies in cases where no assignment is actually sought. (200) The Fifth Circuit held that the "plain text" of section 365(e) (2) requires the use of the actual test because the prohibition on assignment is "tethered ... to 'applicable' law" and the "applicable law must apply to a set of circumstances." (201) The court held that "[t]he applicability of the law under [section] 365(e) (2) (A) is determined not in the abstract but on the record at hand." (202) Furthermore, the court criticized the hypothetical test as being too abstract and complained that it could force courts to decide whether an assignment would be permitted, even given circumstances not actually before the court. (203) The Fifth Circuit was likely concerned with the prospect of rendering an advisory opinion were it forced to rule on an assignment under a host of fact patterns not actually presented.

C. Recent Case Law Trends in Interpretation

Although the hypothetical test is currently favored, since In re Catapult and Pasteur were decided there has been a trend toward a "plain meaning" interpretation of section 365(c). The leading case in this line of reasoning is In re Footstar, Inc. (204) Footstar, the debtor, had entered into a series of agreements with Kmart that provided for Kmart to operate a separate "Shoemart Corporation" owned 51% by Footstar and 49% by Kmart. (205) The agreements also gave Shoemart Corporation the exclusive right to operate footwear departments in particular Kmart stores. (206) In addition, the agreements expressly prohibited assignment of the contract. (207) Thus, when Footstar filed for bankruptcy and sought to assume the agreements, Kmart asserted that assumption was prohibited. (208)

In Footstar, Judge Hardin addressed the conflict between the actual and hypothetical tests and ultimately concluded that the actual test is more appropriate. (209) In his analysis, however, Judge Hardin held that neither the hypothetical nor the actual test applied. Instead, he focused on the "plain meaning" of the statute "to reach a conclusion which is entirely harmonious with both the objective sought to be obtained in Section 365(c) (1) and the overall objectives of the Bankruptcy Code, without construing 'or' to mean 'and ,,210 In particular, he held that the previous decisions were fundamentally flawed because they were based on the premise that the term "trustee" was synonymous with "debtor" or "debtor in possession." (211) He continued by stating that neither the Bankruptcy Code nor its legislative history equates a "trustee" with a "debtor" or "debtor in possession." (212) As a result, when the Code refers to both a "trustee" and a "debtor" or "debtor in possession," the two terms must have different meanings. (213) Accordingly, section 365(c) need not restrict assumption of the contract by the debtor-in-possession because it only refers to limitations on the trustee's ability to assume or assign the contract. (214) Under this interpretation, the rights of the nondebtor party remain protected because the nondebtor party may decline performance from a party other than the debtor-in-possession. (215) Furthermore, the debtor party is protected by avoiding "the perverse and anomalous consequence of the 'hypothetical test' rule under which a debtor may lose the benefit of a non-assignable contract vital to its economic future solely because it filed for bankruptcy." (216)

Bankruptcy courts have recently adopted the rationale set forth in Fotstar. (217) In In re Adelphia Communications Corp., Judge Gerber rejected the hypothetical test, concluding that the "the right to object to assignment does not by itself affect the right to assume." (218) Furthermore, he held that no purpose was served by disqualifying a debtor-in-possession from assuming an executory contract because "[w]hen a debtor in possession, as contrasted to a trustee, wishes to assume, the underlying needs and concerns to be protected have nothing to do with each other." (219)

The Bankruptcy Court for the District of New Mexico recently applied the Footstar analysis in a patent-licensing case. (220) Aerobox, the debtor, entered into a nonexclusive license for the use of Tubus Bauer's patent rights and confidential information in manufacturing thermoplastic sandwich panels. (221) The license agreement contained an ipso facto clause terminating the agreement if Aerobox became insolvent or went into bankruptcy. (222) Upon Aerobox's bankruptcy filing, Tubus Bauer filed a motion seeking rejection of the license, asserting that the license could not be assumed or assigned under the hypothetical test. (223)

The court, accepting the logic of Footstar, agreed that it "makes no sense to read 'trustee' to mean 'debtor in possession'" because "[d]oing so would 'render the provision a virtual oxymoron." (224) It also held that the limitations of section 365(c) (1) are directed at protecting the nondebtor party from being forced to accept performance from an entity other than the party with whom it originally contracted. (225) Furthermore, the court agreed with the Institut Pasteur v. Cambridge Biotech Corp (226) decision that a debtor-in-possession "is not materially distinct from the pre-bankruptcy entity that is a party to the [license]." (227) On these grounds, the court denied Tubus Bauer's motion to compel rejection. (228)

Interestingly, the court acknowledged the license agreement's provision requiring the licensor "not to unreasonably withhold its consent to assignment." (229) Although the creditors' committee argued that this provision was less restrictive than the general federal common law and constituted either a form of "preconsent" to assumption or an indication that the licensor had "opted out of generally applicable law, the court ultimately declined to address this point. (230)

Despite In re Adelphia and In re Aerobox, not all bankruptcy courts have followed Footstar. Most notably, the Bankruptcy Court for the Western District of Pennsylvania rejected the Footstar analysis in Federal Insurance Co. v. Continental Casualty Co. (231) Here, the court, noting that the Western District of Pennsylvania's bankruptcy courts have always employed a broad interpretation of In re West Electronics, (232) concluded that the debtor-in-possession was "a distinct entity from the prepetition debtor." (233) The court, however, also went on to discuss the uncertainty surrounding the treatment of the debtor and the debtor-in-possession as distinct legal entities. (234)

IV. INTERPRETING SECTION 365 (C) : IS THE "OR" REALLY AN "AND"?

A. The "or" as a Disjunctive "or"

The plain-meaning rule of statutory interpretation requires that when the statutory language "is plain and admits of no more than one meaning," the court should not try to "interpret" the statute. (235) The language of section 365(c) reads, in part, that "[t]he trustee may not assume or assign any executory contract ... of the debtor." (236) Although the statute clearly says "assume or assign," the dispute between the hypothetical and actual tests centers on whether the "or" in the phrase should be read as a disjunctive "or" or as a conjunctive "and." (237)

Proponents of the hypothetical test argue that the test is premised on a literal interpretation of the statute--namely, reading the "or" as a disjunctive "or." (238) Reading the "or" literally, section 365 (c) states that the bankruptcy trustee or debtor-in-possession (239) can neither assume nor assign an executory contract if "applicable law excuses a party, other than the debtor, ... from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession ... [and] such party does not consent to such assumption or assignment." (240) Therefore, under this interpretation, the act of assuming an executory contract is an event separate and distinct from assigning the executory contract. It follows that the conditions of section 365(c) (1) must apply equally to both the assumption and assignment prongs. Accordingly, a debtor must reject the contract if applicable law forbids the debtor from assuming or assigning the contract. (242)

Applying the conditions of section 365(c)(1) to the assumption prong of section 365(c), the statute would read, "The trustee may not assume ... any executory contract or unexpired lease of the debtor ... if applicable law excuses a party ... from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession." (243)

In the context of patent licensing, the applicable law is the federal common law principle of patent nonassignability, which forbids the debtor from transferring the license without the licensor's explicit consent. (244) As courts have held, in order for a patent owner to exercise its right to exclude to the fullest extent, the patent owner must be able to control the identity of its licensees. (245) Because a patent license is merely a covenant not to sue for infringement, the patent owner cannot be forced to accept performance of the license from any party other than the one with whom it originally contracted. (246) If the patent owner were forced to accept performance from a different party, then the owner would effectively lose control of its monopolistic right to exclude others from practicing the patented invention. (247) Forcing the patent owner to accept performance from a third party would result in the patent owner forgoing its right to sue the third party for patent infringement. (248) Thus, because the "applicable law" of patent nonassignability prevents the patent owner from having to accept performance from a third-party entity (i.e., a party other than the debtor or debtor-in-possession), the debtor (i.e., the bankruptcy trustee or debtor-in-possession) cannot assume the patent license.

A patent owner is not required to accept performance of the license from an entity other than the entity with which it originally contracted. (249) In fact, because the debtor-in-possession is a separate legal entity from the original debtor, the patent owner can only accept performance from the postpetition debtor-in-possession if there is an implicit assumption and assignment of the license from the original debtor to the debtor-in-possession. (250) If section 365(c) (1) (A) did not contain the language "debtor or debtor in possession," it is likely that the federal common law principle of patent nonassignability would also forbid assumption of the license on the ground that the debtor is no longer the same legal entity as it was before it entered into bankruptcy. (251)

Having established that section 365 (c) prevents assumption of the patent license, I turn to whether assignment of the license would be permitted. (252) Applying the conditions of subsection (1) to the assignment prong, section 365(c) (1) (A) reads, "The trustee may not ... assign ... any executory contract or unexpired lease of the debtor ... if applicable law excuses a party ... from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession." (253)

The analysis set forth in the assumption prong also applies to the assignment prong. Under the patent nonassignability principle, the debtor-licensee does not have any property rights in the patent and, therefore, cannot assign the patent license to a third party without the licensor's explicit consent. (254) The identity of the third party--whether the third-party assignee is real or hypothetical--is irrelevant because in the absence of the licensor's explicit consent, the debtor-licensee simply cannot make an assignment. (255) Thus, the "applicable law" of patent nonassignability means the licensor does not have to accept performance from an entity other than the debtor or debtor-in-possession, thereby preventing the debtor from assigning the patent license.

Under a literal interpretation of the Code, section 365 (c) forbids the debtor from either assuming or assigning the patent license. This prohibition would apply even where the debtor-in-possession has no intention of assigning the contract in question to any real third party. (256)

B. The "or" as a Conjunctive "and"

Critics of the hypothetical test argue that the disjunctive "or" must be read as a conjunctive "and." (257) Although these critics acknowledge that section 365 (c) is, in fact, constructed in the disjunctive and by its plain language prohibits assumption or assignment, they maintain that the plain-meaning rule should not apply for three reasons: (1) the literal reading creates inconsistencies within the Code, (2) the literal reading is incompatible with the legislative history of section 365, and (3) the literal reading goes against sound bankruptcy policy. (258) Instead, they argue that the proper interpretation of section 365(c) requires a case-by-case inquiry into whether the nondebtor's contract will actually be assigned, or whether the nondebtor will actually be asked to accept performance from a third party other than the debtor or debtor-in-possession. (259) As will be discussed, however, these arguments do not justify departing from the plain-meaning rule, and the literal reading of section 365 (c) must prevail.

1. Does the Literal Reading Create Inconsistencies?

a. Section 365(c)'s Interaction with Section 365(f)(1)

Proponents of the actual test contend that a literal reading of section 365(c) would implicate the absurdity exception to the plain-meaning rule of statutory interpretation. (260) In order to achieve internal consistency, they argue, the court must interpret the statute so as to minimize discord among related provisions. (261) Specifically, they maintain that a literal reading of section 365(c) would render section 365 (f) (1) inoperative and superfluous. (262)

Subsection (f) (1) provides that executory contracts, once assumed, may be assigned notwithstanding any contrary provisions contained in the contract or applicable law:
   Except as provided in subsections (b) and (c) of this section,
   notwithstanding a provision in an executory contract or unexpired
   lease of the debtor, or in applicable law, that prohibits,
   restricts, or conditions the assignment of such contract or lease,
   the trustee may assign such contract or lease under paragraph (2)
   of this subsection. (263)


The conflict arises from subsections (c)(1) and (f)(1)'s treatment of "applicable law." The plain language of subsection (c)(1) bars assumption whenever "applicable law" would bar assignment. (264) Subsection (f) (1), however, states that executory contracts may be assigned, contrary provisions in applicable law notwithstanding. (265) But, in order for a contract to be assigned, the debtor must first assume it. (266) A literal reading of section 365(c) (1) would thus render section 365(f) (1) inoperative and superfluous. (267)

The Sixth Circuit, however, reconciled the two provisions in In re Magness, (268) noting that "each subsection recognizes an 'applicable law' of markedly different scope." (269) Subsection (f) (1) states the default rule by nullifying applicable law that "prohibits, restricts, or conditions the assignment of" an executory contract. (270) Subsection (c), however, functions as an exception to this default rule. (271) As noted by one circuit court, "Thus, the 'applicable law' to which subsection (c) refers must mean 'applicable law' other than general prohibitions barring assignment." (272) In fact, the exception under subsection (c) does not merely refer to law that generally bans assignment of executory contracts but instead that more specifically "excuses a party ... from accepting performance from or rendering performance to an entity" other than the one with whom it originally contracted. (273) The applicable law referred to in subsection (c) prevails over subsection (f) (1). (274) As a result, the two subsections do not conflict. Under the default rule defined in subsection (f) (1), "applicable law" is law that generally prohibits or restricts assignments, while the "applicable law" provision of subsection (c) refers to "legal excuses for refusing to render or accept performance, regardless of the contract's status as 'assignable.'" (275)

To determine whether subsection (f)(1) nullifies a law prohibiting assignments, a court must inquire into why "applicable law" prohibits the assignment. (276) Section 365 (c) provides an exception to the default rule only where the law prohibits assignment of the contract on the rationale that the identity of the contracting party is material to the agreement and is therefore "non-delegable." (277) The federal common law principle of patent nonassignability states that a patent owner is not required to accept performance of the license from an entity other than the entity with which it originally contracted. (278) This principle fits squarely within the exception given by section 365(c) because the identity of the debtor-licensee is, in fact, material to the underlying license. (279) Accordingly, reading section 365(c) to prevent the debtor-licensee from assuming or assigning the patent license without the patent owner's consent neither creates inconsistency with section 365(f) (1) nor renders subsection (f) (1) inoperative or superfluous. (280)

b. Section 365(c)'s Interaction with Section 365(e)

Proponents of the actual test also contend that a literal reading of section 365 (c) is incompatible with section 365 (e) of the Bankruptcy Code, which prohibits enforcement of ipso facto clauses in bankruptcy proceedings. (281) Section 365(e) (1) (B) states,
   Notwithstanding a provision in an executory contract or unexpired
   lease, or in applicable law, an executory contract or unexpired
   lease of the debtor may not be terminated or modified, and any
   right or obligation under such contract or lease may not be
   terminated or modified, at any time after the commencement of the
   case solely because of a provision in such contract or lease that
   is conditioned on ... the commencement of a case under this title.
   (282)


Section 365(e) provides an exception to the general anti-ipso facto rule in subsection (e) (2) (A): "Paragraph (1) of this subsection does not apply to an executory contract ... if (A) (i) applicable law excuses a party ... from accepting performance from or rendering performance to the trustee or to an assignee of such contract ... and (ii) such party does not consent to such assumption or assignment...." (283) Critics of the hypothetical test, which is premised on a literal reading, argue that the subsection (e)(2)(A) exception requires that the nondebtor party make an "actual showing--prior to any termination of the debtor's postpetition contract rights--that the nondebtor party ... would not be forced to accept performance under its executory contract from someone other than the debtor party with whom it originally contracted." (284) Thus, they argue that the hypothetical test is inappropriate because, unless the nondebtor party can make a showing of the debtor's actual intent to assign the contract, the subsection (e)(2)(A) exception cannot be triggered. (285) If the subsection (e) (2) (A) exception is not triggered, then the anti-ipso facto provision of subsection (e) (1) (A) will remain in effect, leaving the statute at odds with the antiassignment provision of subsection (c) (1) (A). (286)

Such an interpretation is premised on the notion that subsection (e) (2) (A) must be actually triggered. According to the statute, there are two situations in which the exception applies: (1) when applicable law excuses a party from accepting performance from or rendering performance to the trustee, and (2) when applicable law excuses a party from accepting performance from or rendering performance to an assignee of a contract. (287)

Supporters of the actual test argue that the subsection (e) (2) (A) exception does not apply in the context of patent licensing because "applicable law" does not excuse the nondebtor party from accepting performance from the trustee. (288) This, however, is a faulty assumption when the "applicable law" in question is the federal common law principle of patent nonassiguability. This principle protects a nondebtor licensor from having to accept performance of the license by an entity other than that with which it originally contracted. (289) The prebankruptcy debtor, however, is not the same legal entity as the debtor-inpossession or trustee. (290) Thus, the "applicable law" of patent nonassignability does, in fact, prevent a nondebtor licensor from having to accept performance from the debtor-in-possession or trustee. The nondebtor patent licensor, then, falls within the exception to the general prohibition on ipso facto clauses set forth in section 365(e) (2) (A).

Furthermore, the federal principle of patent nonassignability also implicates the second situation in which section 365 (e) (2) (A) applies. The principle forbids the assignment of patent licenses without the explicit consent of the patent owner. (291) Thus, the "applicable law" of patent nonassignability also protects the nondebtor licensor from having to accept performance from an assignee of the license, because the debtor-licensee cannot assign the patent license without the consent of the nondebtor licensor. (292) The identity of the third-party assignee--whether real or speculative--is irrelevant, because the debtor licensee simply cannot assign the license to a third-party assignee. (293) There is no need to require an actual showing that the debtor-licensee intends to transfer the license to a third-party assignee, because the debtor-licensee cannot act without the licensor's consent. Based upon this protection, the federal common law of patent nonassignability also falls within the second situation in which the exception under section 365(e)(2)(A) applies. (294) Accordingly, the anti-ipso facto provisions of section 365 (e) (1) are not implicated. (295)

When the federal common law principle of patent nonassignability constitutes "applicable law" under section 365 (e)(2)(A), both situations in which the exception to the general anti-ipso facto provision of section 365(e)(1) applies are met. The carve out in subsection (e) (2)(A) then protects the nondebtor party from having to accept performance from, or render performance to, a party with whom there was no original contract. (296) Similar to the so-called "conflict" between section 365 (e) and section 365 (f), when the identity of the party from whom the nondebtor party must accept or to whom the nondebtor party must render performance is material, "applicable law" will protect the nondebtor party from having to honor the contract when the party is no longer the originally contracted party. (297) As the courts have held, when "applicable law" serves to protect the nondebtor party in this specific manner, the provisions of section 365(c) will apply. (298)

Thus, there is no conflict between section 365(c), which prohibits the assignment of contracts, and section 365 (e), which nullifies ipso facto clauses. Instead, section 365 (c) operates in conjunction with section 365(e): when the section 365(e)(2)(A) exception is triggered, section 365(e) (1) no longer applies.

2. The Legislative History of Section 365

As a matter of statutory construction, when a statute is clear and unambiguous on its face, the Supreme Court has repeatedly stated that re. course to the statute's legislative history is inappropriate. (299) A court can only look beyond an unambiguous statute to consult legislative history if a literal reading of the statute produces an outcome that is "demonstrably at odds" with clearly expressed congressional intent or results in an absurd outcome--one that is "so gross as to shock the general moral or common sense." (300) Such instances, however, are exceptionally rare. (301) Generally, the courts have held that the intent of Congress as a whole is more apparent from the words of a statute itself than from a patchwork record of statements; there is a "strong presumption that Congress expresses its intent through the language it chooses." (302)

Proponents of the actual test argue that the literal reading of section 365(c) is at odds with the legislative history of the statute. (303) Section 365(c), as it presently reads, was added to the Bankruptcy Code in the Bankruptcy Amendments and Federal Judgeship Act of 1984 (1984 Act). (304) The 1984 Act was enacted primarily to rectify the constitutional crisis stemming from the Supreme Court's decision in Northern Pipeline Construction Co. v. Marathon Pipe Line Co. (305) It also served to address the Court's decision allowing bankruptcy trustees to reject collective bargaining agreements in NLRB v. Bildisco & Bildisco. (306) Congress simultaneously took the opportunity to incorporate several other acts involving the Bankruptcy Code, many of which had been pending in Congress. (307)

Section 362 (a) of the 1984 Act amended 11 U.S.C. [section] 365 (c) (1) (A) by substituting the phrase "an entity other than the debtor or the debtor in possession" for the words "the trustee." (308) There is, however, no legislative history for the 1984 Act relevant to section 365. (309) Given the urgency with which the 1984 Act was passed, its legislative "history" is comprised solely of statements inserted, rather than actually read, into the Congressional Record. (310) Likewise, there is no authoritative legislative history for the 1984 versions of its component acts. The 1984 Act originated in a 1980 House amendment to an earlier Senate bill that sought to "correct technical errors, clarify and make minor substantive changes" to the Bankruptcy Reform Act of 1978. (311) The 1980 House amendment was accompanied by "a relatively obscure committee report" (312) stating,
   This amendment makes it clear that the prohibition against a
   trustee's power to assume an executory contract does not apply
   where it is the debtor that is in possession and the performance to
   be given or received under a personal service contract will be the
   same as if no petition had been filed because of the personal
   service nature of the contract. (313)


Courts that adopt the actual test in favor of the hypothetical test tend to rely upon this 1980 report for support. (314) According to them, the statement clearly indicates that Congress did not intend section 365(c) (1) to preclude assumption of an otherwise nonassignable personal service contract if "the performance to be given or received ... will be the same as if no petition had been filed." (315) Rather, they maintain that "[section] 365(c)(1) provides that a debtor in possession can assume a personal service contract that is nonassignable ... as long as its performance [would] be the same as if no petition had been filed." (316)

Furthermore, these courts note that the actual language of subsection (c) (1) says "the debtor or the debtor in possession" and not simply "the debtor in possession." (317) To them, neither a debtor nor a debtor-in-possession is barred from assuming the underlying contract under section 365 (c). (318) Accordingly, in their view, the hypothetical test is inappropriate because the debtor should not be prohibited from simply assuming the contract when Congress clearly intended to allow such an assumption. (319)

A literal reading of the statute, however, does not produce an absurd outcome that is "demonstrably at odds" with its legislative history. The single statement made in the 1980 House amendment report is not enough to render the literal reading of section 365 (c) improper. (320) In general, a court should not look to the legislative history of a statute if there is no ambiguity in the statute's plain language. (321) A court may only depart from the plain-meaning rule where the legislative history clearly indicates that Congress intended something other than what the statute actually says. (322) Even if legislative history suggests an interpretation contrary to a statute's plain meaning, that is "not necessarily sufficient to override the Plain Meaning Rule." (323)

Here, there is only a single statement, made in a "relatively obscure committee report," (324) that suggests any intent contrary to the literal reading of section 365(c). Further, this committee report was part of the legislative history of the 1980 House amendment, not the actual 1984 Act passed by Congress. As the record reflects, there is remarkably little, if any, legislative history that would enable definitive statements regarding Congress's intent. Thus, though the committee report's statement is worthy of consideration, it is not the sort of conclusive legislative history that would trump the plain language of the statute. (325) There is no clear indication that Congress intended something other than the disjunctive "or" language of section 365 (c). Had Congress intended the "or" to be read as a conjunctive "and," it would have written or amended the statute to read "assume and assign." (326) Since Congress has not amended section 365(c) in this respect, a court is "not free to replace ... [a statute's plain meaning] with an unenacted legislative intent." (37) When the terms of a statute are clear and unambiguous, a court's inquiry ends, and it has the duty of enforcing the terms of the statute as Congress has drafted it." (328)

Furthermore, the literal reading of section 365 (c) hardly results in an outcome that can be characterized as "absurd"--an outcome that "shock[s] the general moral or common sense." (329) The statute limits the trustee's or debtor-in-possession's power to assume or assign a contract by confirming the nondebtor's rights under applicable nonbankruptcy law. (330) This limitation prevents the trustee from assuming or assigning the contract because, in either case, the nondebtor party would be forced to accept performance by "an entity other than the debtor or the debtor in possession." (331) Similarly, when the limitation is applied to the debtor party itself, the debtor-in-possession cannot assign the contract because the nondebtor party would still be forced to accept performance from a party with which it did not originally contract. (332) In the context of patent licensing, where the "applicable law" is the federal common law principle of patent nonassignability, these limitations are of particular importance due to the materiality of the licensee's identity. (333) Thus, the literal reading of section 365(c) does not result in an "absurd" outcome. Rather, the outcome protects the nondebtor party's ability to receive "the full benefit of [its] bargain" (334) were a third party to be substituted for the debtor from whom performance is sought.

As noted by several courts, the language of section 365 (c) is clear and unambiguous. (335) Nevertheless, even if the language left room for ambiguity such that a court should turn to the legislative history for guidance, there is little evidence to suggest that the court should depart from the default rule of applying the statute's plain meaning. The literal reading of section 365 (c) is neither at odds with its legislative history nor results in an "absurd" outcome that would "shock the general moral or common sense." (336) Thus, there is no reason for a court to depart from the plain-meaning rule when interpreting the statute. (337)

3. The Literal Reading and General Bankruptcy Policies

Proponents of the actual test also contend that "a literal reading of [section 365(c)] conflicts with general bankruptcy policy, implicating the absurdity and intent exceptions to the [plain-meaning rule]." (338) They maintain that the literal reading undermines "the general bankruptcy policy of fostering a successful reorganization and maximizing the value of the debtor's assets," because it undermines the debtor party's ability to restructure itself effectively. (339) The literal reading of section 365 (c) prevents a debtor party from assuming a patent license, even in situations where the debtor party has no intention of actually assigning the patent license to a real third party. Under the statute, the nondebtor licensor can compel rejection of the patent license. Without the ability to assume and continue using the license, the debtor loses a substantial asset that could seriously affect its ability to conduct business. (340)

Unsurprisingly, as the case law has demonstrated, bankruptcy courts tend to favor the actual test rather than a literal reading under the hypothetical test. (341) Nevertheless, even if there were merit to the public policy argument against enforcement of the statute, "such arguments must necessarily fail in the face of an unambiguous statute." (342) As noted by the Supreme Court, if poor policy choices produce undesirable results, it is up to Congress, not the courts, to amend the statute. (343) Only Congress can modify a statutory provision to achieve a preferable policy outcome. (344)

Under the advocated actual test, the disjunctive "or" of section 365(c) would be read as a conjunctive "and," thereby effectively reading the term "assume" out of the statute. (345) Such an interpretation results in "the statute only prohibit[ing] assumption and assignment, as opposed to assumption or assignment." (346) Reading the "or" as a conjunctive "and" creates a much narrower exception under section 365(c)(1). Accordingly, the actual test's interpretation affords the debtor party a much broader scope of protection than the literal reading of the statute provides. While this interpretation may be appealing from a bankruptcy policy perspective, a court "cannot adopt [such an interpretation] ... without trespassing on a function reserved for the legislative branch." (347) A federal court's function is limited to "determin[ing] the meaning of the statute passed by Congress, not whether wisdom or logic suggests that Congress could have done better." (348) Thus, even though a literal reading of the statute may not be fully aligned with the goals of Chapter 11, a court cannot depart from the plain, unambiguous language of the statute simply because it disagrees with the policy effects of such an interpretation.

V. THE LITERAL READING AS A CREDITOR-PROTECTION MEASURE

Though advocates of the actual test argue that the literal reading undermines the goals of bankruptcy, the statute's effect on the competing interest in federal patent law is equally important. The American bankruptcy system operates in a specialized court, with its own set of rules set forth in the Bankruptcy Code. (349) Because the umbrella of the Bankruptcy Code creates a unique relationship between debtors and creditors, the Code must focus on balancing the debtor's and creditor's interests. (350) The literal reading of section 365(c)(1)(A) ensures that the federal patent interest of nonassignability is not rendered inoperative by the competing free-assignability principle of bankruptcy law. (351) In fact, the limitation set forth in section 365(c) is a creditor's only protection against the powerful free-transferability principle of section 365(f), which seeks to maximize the debtor's estate and facilitate reorganization. (352)

Without section 365(c), a patent owner would have no protection against an infringer who obtained a patent license from a bankrupt debtor-licensee. Once the infringer has acquired a license for the patented invention, the nondebtor patent owner no longer has the power to sue for infringement. (353) Losing control over which entities it can sue effectively eliminates a patentee's right to exclude.

Within the context of section 365(c), the federal common law principle of nontransferability can be viewed as a creditor-protection measure. From an equitable perspective, a creditor patent owner should not be divested of its exclusive monopoly simply because its licensee, through no fault of the creditor patent owner, falls into bankruptcy. (354) Furthermore, a creditor patent owner has economic incentives for wanting its patented technology to be readily available to consumers via the debtor-licensee. (355) If the debtor-licensee can no longer meet this obligation, then the creditor patent owner should be free to reject the license and grant a new license to another entity that is better positioned to bring the end product to the market. (356) Further, this exercise of control is consistent with Congress's treatment of patent policy and its intent to encourage innovation in exchange for the right to exclude, a proposition that forms the backbone of the American patent system. (357) Under no circumstances should the creditor patent owner be compelled to allow a third party to use its license. Such compulsion would threaten to undermine the foundation of the entire patent system. (358)

A. Patents Are a Property Right

It has been settled for more than a century that the rights secured by a patent are property, and that patent property rights are no different in the eyes of the Constitution than any other property right. (359) As the Supreme Court held in Consolidated Fruit-Jar Co. v. Wright, "[a] patent for an invention is as much property as a patent for land. The right rests on the same foundation, and is surrounded and protected by the same sanctions." (360) For example, patent infringement constitutes a "taking" of patent property similar to a "taking" of real property. (361)

A strong analogy can be drawn between a patent license, granting a right to invade the exclusive possession of patent property, and an easement over a piece of real property, granting the right to commit trespass. (362) Since the essence of trespass is the invasion of a person's interest in the exclusive possession of land, (363) the landowner may not bring an action for trespass against the person who has acquired an easement over the land in question. (364) Similarly, a patent licensee can be viewed as one with an easement over the patent owner's patent rights. In granting the licensee the "easement," the patent owner forgoes the right to sue the licensee for patent infringement.

The holder of an easement, however, can commit an actionable trespass by exceeding its rights under the easement. (365) For example, if the easement holder misuses or deviates from the easement, this can constitute unauthorized use. (366) Likewise, if the easement is limited in scope or purpose, the easement holder can become a trespasser by exceeding the bounds of the easement. (367) Most important to the issue at hand, real property also recognizes that the existence of an easement does not justify an entry by a trespassing third party. (368)

Similar to an easement in real property, a patent license limits the scope and use of the licensee, and any deviation from the license constitutes an act of infringement. (369) Additionally, as with an easement, a patent owner is protected from unauthorized infringement by "a trespassing third party" through injunctive relief.

B. Patent Law's Injunctive Relief Against Infringers

The patent system's reward of injunctive relief against patent infringers further justifies allowing a creditor patent owner to compel the rejection of a license. Prior to the Supreme Court's decision in eBay Inc. v. MercExchange, L.L.C., (370) a patent owner was automatically granted an injunction preventing the infringer from continuing to make, use, or sell the patented technology upon a finding of infringement. (371) Even after eBay, although a permanent injunction does not automatically follow from a finding of infringement, a patent owner can still obtain a permanent injunction if it satisfies the four-factor test historically employed by courts of equity. (372) Thus, the creditor patent owner's right to prohibit assumption or assignment of the license is similar to a patent owner's right to obtain an injunction against infringers. Both remedies operate as an equitable form of protecting the fundamental right to exclude, which is embodied in the federal common law principle of patent nontransferability.

The development of patent law has a historical foundation in real property. Further, the Constitution recognizes the importance of strong patent protection in order to foster innovation and development for the public. (373) In a bankruptcy proceeding, however, this federal patent interest is weighed against the competing interests of general bankruptcy policies. Although those who criticize a literal reading of section 365(c) argue that such a reading undermines the general goals of bankruptcy, they overlook the importance of balancing the other federal interests at stake--namely, those of patent law. Thus, while a literal reading of the statute may not protect the debtor to the fullest extent possible, it best protects the creditor patent owner.

CONCLUSION

There is an inherent tension between the federal common law principle of patent nontransferability and the free-transferability principle codified in section 365 (f) of the Bankruptcy Code. Because the federal principle of patent nonassignability protects the nondebtor licensor from having to accept performance from, or render performance to, an entity other than that with which it originally contracted, it falls under the "applicable law" exception of section 365 (c). Courts have struggled to reconcile these two competing interests. Courts have developed two main tests in applying these provisions: the hypothetical test, which takes a literal reading of the statute, and the actual test, which overrides the literal reading of the statute in favor of the general goals of bankruptcy policy. Some members of the Supreme Court have recognized the need to reconcile these two competing approaches. (374) To date, however, the Court has not found a suitable case for addressing this question, leaving the issue to the lower courts for now. (375)

After In re Footstar, some courts have departed from the two traditional tests. These courts have instead taken a third view, opting to apply neither the hypothetical test nor the actual test but ultimately reaching the same outcome that would result under the actual test. Despite this, some commentators believe that In re Footstar and its progeny offer a middle ground between the hypothetical and actual tests. (376)

The courts that have adopted the actual test overlook the importance of the nondebtor's patent rights--rights that should be placed at the forefront as a protective measure against the debtor-friendly broad power of free transferability. In considering the justifications for adopting a particular interpretation of the statute, these courts should consider, in addition to the general goals of bankruptcy, the competing interests of federal patent law.

An examination of the plain language of the statute clearly indicates that the hypothetical test is the correct approach, even if it is not as favorable to the debtor-licensee. Furthermore, the legislative history of the statute does not justify departing from the plain-meaning interpretation of the statute. Finally, the hypothetical test better protects the patent interest of the nondebtor licensor by prohibiting assumption or assignment of the patent license.

(1) The terms "patent owner" and "licensor" are used interchangeably throughout this Comment.

(2) For the purposes of this Comment, the licensee will always be the debtor party filing for bankruptcy.

(3) Chapter 11 filings are typically used by businesses seeking reorganization. See 11 U.S.C. [section] 1101 (2006); WILLIAM D. WARREN & DANIEL J. BUSSEL, BANKRUPTCY 22 (8th ed. 2009) ("Chapter 11 may be used by both individuals and firms, but is designed primarily for business firms.").

(4) Section 1107 of the Bankruptcy Code provides that a debtor-in-possession has the rights, powers, and fiduciary obligations of a standard Chapter 11 trustee. See 11 U.S.C. [section] 1107. For a definition of a Chapter 11 trustee, see infra note 42 and accompanying text.

(5) In bankruptcy law, assumption and assignment of patent licenses are governed by 11 U.S.C. [section] 365 because patent licenses are considered "executory contracts." See infra Part I.

(6) 35 U.S.C. [section] 154(a)(1) (2006); DAVID A. BURGE, PATENT AND TRADEMARK: TACTICS AND PRACTICE [section] 11-7, at 124 (3d ed. 1999).

(7) See 3 RESTATEMENT (SECOND) OF CONTRACTS [section] 317(2) (1981) (allowing for the assignment of contractual fights except in specific cases such as illegality or undue hardship); see also Shaw Group, Inc. v. Bechtel Jacobs Co. (In re IT Group), 350 B.R. 166, 177 (Bankr. D. Del. 2006) ("The [Bankruptcy] Code generally favors free assignability as a means to maximize the value of the debtor's estate and, to that end, allows the [debtor] to assign notwithstanding a provision in the contract or lease, or applicable law, prohibiting, restricting, or conditioning assignment." (second alteration in original) (internal quotation marks omitted) (quoting L.R.S.C. Co. v. Rickel Home Ctrs., Inc. (In re Rickel Home Ctrs., Inc.), 209 F.3d 291, 299 (3d Cir. 2000))).

(8) See, e.g., United States v. Whiting Pools, Inc., 462 U.S. 198, 203 (1983) (discussing the principles behind the reorganization provisions of the Bankruptcy Code and how "Congress anticipated that the business would continue to provide jobs, to satisfy creditors' claims, and to produce a return for its owners").

(9) 11 U.S.C. [section] 541 (a).

(10) Id.

(11) See Whiting Pools, 462 U.S. at 203 (viewing section 541(a)(1) as "a definition of what is included in the estate, rather than as a limitation").

(12) See, e.g., Quarles House Apartments v. Plunkett (In re Plunkett), 23 B.R. 392, 394 (Bankr. E.D. Wis. 1982) (noting that courts have interpreted section 541 as "protect [ing] a debtor's contractual right as an asset of the estate").

(13) 11 U.S.C. [section] 541(a).

(14) An executory contract is "a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other." Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 MINN. L. REV. 439, 460 (1973); see also Sharon Steel Corp. v. Nat'l Fuel Gas Distribution Corp., 872 F.2d 36, 39 (3d Cir. 1989) (adopting Countryman's definition of "executory contract").

(15) See Unsecured Creditor's Comm. of Robert L. Helms Constr. & Dev. Co. v. Southmark Corp. (In re Robert L. Helms Constr. & Dev. Co.), 139 F.3d 702, 705 (9th Cir. 1998) (defining an "executory contract" as one where both parties continue to have obligations under the contract such that failure to perform an obligation would be a material breach that would justify the other's nonperformance).

(16) See, e.g., Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers, Inc.), 756 F.2d 1043, 1045 (4th Cir. 1985) (holding that a nonexclusive patent license was an executory contract based on the "unperformed, continuing core obligations of notice and forbearance in licensing").

(17) See David R. Kuney, Restructuring Dilemmas for the High Technology Licensee: Will "Plain Meaning" Bring Order to the Chaotic Bankruptcy Law for Assumption and Assignment of Technology Licenses?, 44 GONZ. L. REV. 123, 135 (2008) (noting that in bankruptcy, patent licenses "are almost uniformly regarded as executory contracts"); Ann Livingston & Leif M. Clark, Technology Transfers: What if the Other Party Files Bankruptcy?, 21 ST. MARY'S L.J. 173, 180-81 (1989) ("In the context of technology transfers, most agreements will include continuing rights and duties by both parties and will be considered executory."); Robert L. Tamietti, Technology Licenses Under the Bankruptcy Code: A Licensee's Mine Field, 62 AM. BANKR. L.J. 295, 301 (1988) ("[A] [patent] license must be executory throughout its term. Each day the licensee uses the licensor's technology, the licensor forebears its right to sue the licensee for conduct that 'but for the license, would be an infringement.'" (quoting United States v. Studiengesellschaft Kohle, m.b.H., 670 F.2d 1122, 1127 (D.C. Cir. 1981))); see also infra Part II.

(18) See 11 U.S.C. [section] 1123(b) (2) (declaring that a debtor's plan may, subject to section 365, "provide for the assumption, rejection, or assignment of any executory contract").

(19) Section 365(g) of the Bankruptcy Code governs the rejection of an executory contract. In order to reject an executory contract, the debtor must file a motion with the bankruptcy court. FED. R. BANKR. P. 9014(a); see also 11 U.S.C. [section] 365(d) (listing the timing requirements for such a motion). The court will consider the debtor's motion for authority to reject an executory contract using the "business judgment rule," which focuses on whether rejection of the executory contract would benefit the general unsecured creditors of the debtor's estate. See, e.g., Robertson v. Pierce (In re Chi-Feng Huang), 23 B.R. 798, 800-01 (B.A.P. 9th Cir. 1982) ("We believe rejection of the burdensome test in favor of the 'business judgment' rule is dictated by logic as much as precedent .... The primary issue is whether rejection would benefit the general unsecured creditors."). Under the business judgment rule, the court will give great deference to the debtor's decision to reject the contract and will not interfere with the decision unless there is a showing of bad faith or abuse of discretion. See Group of Institutional Investors v. Chi., Milwaukee, St. Paul & Pac. R.R., 318 U.S. 523, 550-51 (1943) (holding that the Court will not upset business judgment "except on a clear showing that the limits of discretion have been exceeded").

(20) The debtor-in-possession also has the ability to assume, reject, or assign an executory contract. See infra note 42 and accompanying text.

(21) 11 U.S.C. [section] 365(g).

(22) Id.; see also Agarwal v. Pomona Valley Med. Group, Inc. (In re Pomona Valley Med. Group, Inc.), 476 F.3d 665, 671 (9th Cir. 2007) (holding that the debtor's rejection of the executory contract "constituted a breach of that contract effective immediately before [the debtor] filed for bankruptcy").

(23) See In re EI Int'l, 123 B.R. 64, 66 (Bankr. D. Idaho 1991) ("The option consists of the licensee choosing either to terminate the agreement or to retain the rights to performance by the other party under the agreement."). Notably, Congress amended the Bankruptcy Code after the Fourth Circuit's decision in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers, Inc.), 756 F.2d 1043 (4th Cir. 1985). In Lubrizo, the court recognized the difficulties that a licensee would face if the debtor-licensor rejected (and thus terminated) the patent license, noting that the possibility of rejection could have a "chilling effect" on intellectual property licensing by companies that did not have the strongest financial position. Id. at 1048. Recognizing the importance of intellectual property licenses, Congress passed the Intellectual Property Bankruptcy Protection Act of 1988, which provides that licensees of "intellectual property" (as defined in the Code) have the option to retain certain fights under the license even in the face of the debtor-licensor's rejection. Pub. L. No. 100-506, sec. 1(b), [section] 365(n)(1), 102 Stat. 2538, 2538 (codified as amended at 11 U.S.C. [section] 365(n)). For a discussion of section 365(n) and the impact of a license rejection by a debtor-licensor, see SHARON K. SANDEEN, INTELLECTUAL PROPERTY DESKBOOK FOR THE BUSINESS LAWYER 179-81 (2d ed. 2009).

(24) 11 U.S.C. [section] 365(g).

(25) For a discussion of the choices a licensor and licensee have when a license is rejected, see Livingston & Clark, supra note 17, at 191, 207.

(26) See 11 U.S.C. [section] 365(f) (restricting the ability to modify any "contract, lease, right or obligation" due to its assumption or assignment).

(27) See Peter S. Menell, Bankruptcy Treatment of Intellectual Property Assets: An Economic Analysis, 22 BERKELEY TECH. L.J. 733, 737 (2007) (noting how the bankruptcy system "seeks to maximize the value of the remaining assets and capacities of the troubled entity" by "afford[ing] trustees and debtors substantial leeway to rescind contracts and reorder the affairs of the entity"); Madlyn Gleich Primoff & Erica G. Weinberger, E-Commerce and Dot-com Bankruptcies: Assumption, Assignment and Rejection of Executory Contracts, Including Intellectual Property Greements [sic], and Related Issues Under Sections 365(c), 365(e) and 365(n) of the Bankruptcy Code, 8 AM. BANKR. INST. L. REV. 307, 314 (2000) ("[T]he purpose of section 365 of the Bankruptcy Code is to permit the trustee to retain or assign valuable contracts and to abandon burdensome contracts....").

(28) Primoff & Weinberger, supra note 27, at 311; see also 11 U.S.C. [section] 365(b) (identifying the requirements that must be satisfied at the time of assumption).

(29) See S. PEP. NO. 95-989, at 59 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5845 ("If the trustee is to assume a contract ..., the court will have to insure that the trustee's performance under the contract ... gives the other contracting party the full benefit of his bargain.")

(30) United States v. Studiengesellschaft Kohle, m.b.H., 670 F.2d 1122, 1127 (D.C. Cir. 1981); see also Tamietti, supra note 17, at 301 (quoting Studiengesellschaft Kohle in explaining how a patent license constitutes an executory contract).

(31) See Clinton H. Neagley, Patent Licensing for Small Agricultural Biotechnology Companies (discussing commercialization milestones in negotiating patent licenses), in 2 INTELLECTUAL PROPERTY MANAGEMENT IN HEALTH AND AGRICULTURAL INNOVATION 1213, 1213-19 (Krattiger et al. eds., 2007). If the licensed invention is not practiced (i.e., through commercialization), the invention would be considered wasted. See Note, Rights of the Owner of an Idle Patent in Equity, 20 HARV. L. REV. 638, 638-39 (1907).

(32) See Tex. N. W. Ry. Co. v. Atchison, Topeka & Santa Fe Ry. Co. (In re Chi. Rock Island & Pac. R.R. Co.), 860 F.2d 267, 272 (7th Cir. 1988) (noting that a "trustee cannot accept the benefits of an executory contract without accepting the burdens as well" (quoting Schokbeton Indus., Inc. v. Schokbeton Prods. Corp., 466 F.2d 171, 175 (5th Cir. 1972))); Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1311 (5th Cir. 1985) ("[T]he often-repeated statement that the debtor must accept the contract as a whole means only that the debtor cannot choose to accept the benefits of the contract and reject its burdens to the detriment of the other party of the agreement."); Rockland Ctr. Assocs. v. TSW Stores of Nanuet, Inc. (In re TSW Stores of Nanuet, Inc.), 34 B.R. 299, 304 (Bankr. S.D.N.Y. 1983) (holding that executory contracts cannot be accepted or rejected in part).

(33) See In re Storage Tech. Corp., 53 B.R. 471, 475-76 (Bankr. D. Colo. 1985) ("[T]he Bankruptcy Code requires assumption of an entire agreement. Additionally, a debtor cannot avoid the effect of this rule by construing various parts of a transaction as separate agreements when they are clearly interdependent." (citation omitted)).

(34) See 11 U.S.C. [section] 365(b) (2006).

(35) In a bankruptcy proceeding, creditors are repaid based upon the priority of their claims. Thus, the nondebtor party's elevation in priority status is a significant byproduct of the debtor's assumption of the executory contract. See Michael T. Andrew, Executory Contracts in Bankruptcy: Understanding "Rejection, "59 U. COLO. L. REV. 845, 890 (1988) (stating that when a debtor assumes a contract, "the non-debtor party departs the ranks of ordinary creditors and becomes a priority claimant both for past-due and later-accruing amounts").

(36) Section 363 of the Bankruptcy Code states that "[t]he trustee, after notice and hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate." 11 U.S.C. [section] 363 (b). Normally, when a nondebtor has an interest in the same property, section 363(e) permits the trustee to sell, lease, or use the property after notice and hearing, provided that the nondebtor's interest is adequately protected. Id. [section] 363(e); see also id. [section] 361 (defining what constitutes "adequate protection" of an interest).

(37) See id. [section] 365(c), (f).

(38) 390 B.R. 762, 765 (Bankr. D. Conn. 2008).

(39) Id. at 765-69.

(40) Id. at 772.

(41) This "free assignability" principle is set forth in section 365 (f) of the Bankruptcy Code, which states, "Except as provided in subsections (b) and (c) of this section, not withstanding a provision in an executory contract ... of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract ..., the trustee may assign such contract ... under paragraph (2) of this subsection," 11 U.S.C. [section] 365(f).

(42) A trustee is an impartial person assigned by the court to oversee and administer the debtor's bankruptcy process. See id. [section][section] 701,704 (describing the role of a trustee in Chapter 7 bankruptcy filings). Most Chapter 11 bankruptcy cases, however, do not require appointment of a trustee. Instead, the business becomes a debtor-in-possession and continues to manage itself without an appointed trustee. See id. [section] 1107 (describing the rights and powers of a debtor-in-possession). In this Comment, I will use the terms "trustee" and "debtor-in-possession" interchangeably, unless otherwise explicitly noted.

(43) Assignments are governed by section 365(f) of the Bankruptcy Code. See id. [section] 365(f). Subsection (f) (1) "partially invalidates restrictions on assignment of contracts or leases by the trustee to a third party." H.R. REP. NO. 95-595, at 349 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6305; S. REP. NO. 95-989, at 59 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5845. Subsection (f)(3) "invalidates contractual provisions that permit termination or modification in the event of an assignment, as contrary to the policy of this subsection." H.R. REP. NO. 95-595, at 349, reprinted in 1978 U.S.C.C.A.N. 5963, 6305; S. REP. NO. 95-989, at 59, reprinted in 1978 U.S.C.C.A.N. 5787, 5845; see also 11 U.S.C. [section] 541(c) (codifying that despite a restriction on transfer or an ipso facto clause, "an interest of the debtor in property becomes property of the [debtor's] estate").

(44) 19 B.R. 537, 539 (Bankr. S.D.N.Y. 1982).

(45) Id.

(46) Id. at 544-45.

(47) This view is applied in what is known as the "hypothetical test." See infra subsection III.B.1.

(48) The Supreme Court has suggested that a debtor and its successor debtor-in possession should be treated as the same entity for purposes of applying the Bankruptcy Code. See NLRB v. Bildisco & Bildisco, 465 U.S. 513, 528 (1984) ("[I]t is sensible to view the debtor-in-possession as the same 'entity' which existed before the filing of the bankruptcy petition, but empowered by virtue of the Bankruptcy Code to deal with its contracts and property in a manner it could not have employed absent the bankruptcy filing."). Some courts, however, have read the Supreme Court's comment as being "necessary only for the purposes of that case," and have held that it "does not support in all cases the proposition that no assignment or transfer occurs as a matter of law between prepetition debtor and debtor in possession." Bonneville Power Admin. v. Mirant Corp. (In re Mirant), 440 F.3d 238, 254 n.21 (5th Cir. 2006). Unfortunately, "neither the Supreme Court nor this Circuit has resolved the argument ... that rights obtained in bankruptcy require that a debtor in possession be treated as a distinct legal entity from a prepetition debtor." Id.; see also infra notes 211-13 and accompanying text.

(49) U.S. CONST. art. I, [section] 8, cl. 8.

(50) The Patent Clause has been implemented through a series of acts that set out the conditions for obtaining a patent; these are now codified in Tire 35 of the U.S. Code. See Patent Act of 1952, ch. 950, 66 Stat. 792; Patent Act of 1922, ch. 58, 42 Stat. 389; Patent Act of 1836, ch. 357, 5 Stat. 117; Patent Act of 1793, ch. 11, 1 Stat. 318; Patent Act of 1790, ch. 7, 1 Stat. 109. In particular, 35 U.S.C. [section] 154(a) (2006) describes a patentee's exclusive rights to her invention.

(51) The word "patent" originates from the Latin patere, which means "to lay open" (for public inspection), and the term "letters patent," which originally denoted royal decrees granting exclusive rights to certain individuals or businesses. See Application of Bo Thuresson Af Ekenstam, 256 F.2d 321, 323 (C.C.P.A. 1958) (discussing the origin of the word "patent").

(52) Pub. L. No. 98-417, 98 Stat. 1585.

(53) See 130 CONG. REC. 23,764-65 (1984) (statement of Sen. Hatch).

(54) See Drug Price Competition and Patent Term Restoration Act of 1984, tit. I, 98 Stat. at 1585-97 (codified as amended at 21 U.S.C. [section] 355 (2006)) (discussing abbreviated new drug applications).

(55) See id. at tit. II, 98 Stat. at 1598-1603 (codified as amended in scattered sections of 35 U.S.C.).

(56) See id.

(57) See, e.g., Herman v. Youngstown Car Mfg. Co., 191 F. 579, 584-85 (6th Cir. 1911) ("A patent is not the grant of a right to make or use or sell. It does not, directly or indirectly, imply any such right. It grants only the right to exclude others.").

(58) See Petra Moser, How Do Patent Laws Influence Innovation? Evidence from Nineteenth-Century World's Fairs, 95 AM. ECON. REV. 1214, 1214-15 (2005) (arguing that innovation must respond to profit incentives in order for patent laws to influence innovation and referencing empirical studies that establish innovation's responsiveness to incentives); Joseph A. DiMasi & Henry G. Grabowski, Patents and R&D Incentives: Comments on the Hubbard and Love Trade Framework for Financing Pharmaceutical R&D 2 (June 25, 2004), http://www.who.int/intellectualproperty/ news/en/Submission3.pdf (questioning the ability of alternatives to patent protection to provide sufficient coverage of research and development costs and thus the incentive to innovate).

(59) See, e.g., Howard T. Markey, Special Problems in Patent Cases, 66 F.R.D. 529, 532 (1975) (noting that patents provide both "the incentive to risk the investment of the large sums and long years of effort required to bring the invention into the market-place at a reasonable price" and "the only deterrent to secrecy and the only marketplace for ideas we have").

(60) Although most small or solo inventors qualify for "small-entity" status, and there fore are entitled to pay reduced patent fees, other types of nonprofit organizations also fall under this umbrella, including universities. See 35 U.S.C. [section] 41 (h)(1) (2006) (reducing fees by fifty percent for small businesses, independent inventors, and nonprofits); 13 C.F.R. [section] 121.802(a) (2009) (providing that organizations with fewer than five hundred employees qualify for reduced patent fees). Note that small-entity status is lost when the patent is licensed, exclusively or nonexclusively, or assigned to an organization that would not qualify for small-entity status. 37 C.F.R. [section] 1.27(a) (2) (i) (2009).

(61) See RICHARD STIM, PROFIT FROM YOUR IDEA: HOW TO MAKE SMART LICENSING DECISIONS 4/10-4/12 (5th ed. 2006) (discussing "angel investors" who acquire equity in businesses rather than giving loans).

(62) As a matter of legal terminology, the term "assignment" has special meaning within both patent and bankruptcy law. For purposes of this Comment, an "assignment" is a bankruptcy assignment under section 365 of the Bankruptcy Code, and not a patent assignment of ownership of property. See infra note 66 for an explanation of patent assignments.

(63) One can also take an interest in a patent in the form of a lien. This occurs when the lienholder takes a security interest in the patent. See U.C.C. [section] 9-102(42) (2005) (defining "general intangibles" to include intellectual property by including personal property and software in the definition); see also Scott J. Lebson, Security Interests in Intellectual Property in the United States, at pt. VIII (2006), http://www.ladas.com/IPProperty/ ipprop_securityinterests.html (discussing how, historically, liens on patents have been perfected via U.S. Patent and Trademark Office filings).

(64) See Waterman v. Mackenzie, 138 U.S. 252, 256 (1891) ("Whether a transfer of a particular right or interest under a patent is an assignment or a license does not depend upon the name by which it calls itself, but upon the legal effect of its provisions.").

(65) See 35 U.S.C. [section] 261 (defining patent ownership and assignment).

(66) 138 U.S. at 255. The term "assignment" has a particular meaning in patent law, implying formal transfer of title. For example, if Inventor A assigns full rights of the patent to Company X, then Company X is the owner of the patent and has full fights, including the rights to enforce and license the patent. See 35 U.S.C. [section] 261; Vaupel Textilmaschinen KG v. Meccanica Euro Italia S.P.A., 944 F.2d 870, 875 (Fed. Cir. 1991) (holding that in patent law, an assignment constitutes "a formal transfer of title").

(67) Waterman, 138 U.S. at 255.

(68) See Spindelfabrik Suessen-Schurr Stahlecker & Grill GmbH v. Schubert & Salzer Maschinenfabrik Aktiengesellschaft, 829 F.2d 1075, 1081 (Fed. Cir. 1987) ("[A] patent license agreement is in essence nothing more than a promise by the licensor not to sue the licensee ... [e]ven if [the promise is] couched in terms of '[l]icensee is given the fight to make, use, or sell X ...'" (italics added) (citation omitted) (fourth alteration in original)); W. Elec. Co. v. Pacent Reproducer Corp., 42 F.2d 116, 118 (2d Cir. 1930) ("In its simplest form, a license means only leave to do a thing which the licensor would otherwise have a fight to prevent. Such a license grants to the licensee merely a privilege that protects him from a claim of infringement by the owner of the patent monopoly.").

(69) Patents are treated as personal property. See 35 U.S.C. [section] 261 ("Subject to the provisions of this title, patents shall have the attributes of personal property.").

(70) See Waterman, 138 U.S. at 255 (noting the differences between a patent assignment and a patent license); Everex Sys., Inc. v. Cadtrak Corp. (In re CFLC, Inc.), 89 F.3d 673, 679-80 (9th Cir. 1996) (concluding that nonexclusive patent licenses are considered to be personal rights that do not include any rights to assign or to sublicense unless expressly given by the licensor).

(71) See Tamietri, supra note 17, at 301 CA license simply insulates those who pay for use of proprietary technology from the costs of infringement litigation, and does not transfer rights of ownership in the subject technology." (footnote omitted)).

(72) See, e.g., Heaton-Peninsular Button-Fastener Co. v. Eureka Specialty Co., 77 F. 288, 290-92 (6th Cir. 1896) (discussing the extent of a patent licensee's interests and limitations).

(73) See 35 U.S.C. [section] 271 (a) ("[W]hoever without authority makes, uses, offers to sell, or sells any patented invention ... infringes the patent.").

(74) See, e.g., MICHAEL A. EPSTEIN, EPSTEIN ON INTELLECTUAL PROPERTY [section] 18.02[B] (5th ed. Supp. 2009) (discussing limitations that may be placed on grants of intellectual property licenses).

(75) See Int'l Gamco, Inc. v. Multimedia Games, Inc., 504 F.3d 1273, 1276-79 (Fed. Cir. 2007) (describing various types of exclusive patent licenses).

(76) See, e.g., Abbott Labs. v. Diamedix Corp., 47 F.3d 1128, 1131 (Fed. Cir. 1995) ("A licensee may obtain sufficient rights in the patent to be entitled to seek relief from infringement, but to do so, it ordinarily must join the patent owner.").

(77) Prima Tek II, L.L.C. v. A-Roo Co., 222 F.3d 1372, 1377 (Fed. Cir. 2000).

(78) Int'l Gamco, 504 F.3d at 1277-78.

(79) See Enzo APA & Son, Inc., v. Geapag A.G., 134 F.3d 1090, 1093 (Fed. Cir. 1998) ("[I]n certain limited circumstances, where all substantial rights under the patent have been transferred in the form of an exclusive license, ... the licensee [is] the virtual assignee."). Courts have held that "an assignee is the patentee and has standing to bring suit for infringement in its own name." Id.; see also 35 U.S.C. [section] 100(d) (2006) (defining the term "patentee" as including "not only the patentee to whom the patent was issued but also the successors in fide to the patentee"); 35 U.S.C. [section] 281 (providing that a "patentee" has a "remedy by civil action" for patent infringement); Arachnid, Inc. v. Merit Indus., Inc., 939 F.2d 1574, 1578-79 (Fed. Cir. 1991) (interpreting [section][section] 281 and 100(d) to require that a party holding legal rifle to the patent bring an infringement suit to vindicate its rights).

(80) HAROLD EINHORN & THOMAS J. PARKER, 1 PATENT LICENSING TRANSACTIONS [section] 1.0112] [c] (2007).

(81) W. Elec. Co. v. Pacent Reproducer Corp., 42 F.2d 116, 118 (2d Cir. 1930); see also id. at 118-19 (discussing the lack of a contract preventing others from practicing the invention).

(82) See id. at 118-19.

(83) Id. at 118.

(84) See id. ("[A] bare license to practice a patented invention gives the licensee no right to join as plaintiff in a suit against an infringer.").

(85) For a discussion of the United States' shift from an industrial-based economy to a knowledge-based economy and the use of intellectual property as a global currency, see Colleen Spring Zimmerman, Overview: Intellectual Property--the New Global Currency, in 1 INTELLECTUAL PROPERTY IN THE GLOBAL MARKETPLACE 0.1-0.40 (Melvin Simensky et al. eds., 2d ed. 1999).

(86) See JOHN BRAITHWAITE & PETER DRAHOS, GLOBAL BUSINESS REGULATION 56-57, 61-65 (2000) (tracing the evolution of international protections for intellectual property and examining how the United States made maximizing intellectual property privileges the number-one priority of trade policy); William Hennessey, Patent Protection and Its Role in Promoting Invention, Innovation, and Technological Development 3-4, 7-8 (June 1, 1999), http://www.piercelaw.edu/assets/ pdf/hennessey-patentprotection.and-its-role-in-promoting.pdf (discussing the benefits of stronger patent-protection rights arising out of TRIPS).

(87) See U.S. CONST. art. I, [section] 8, cl. 8.

(88) See discussion supra Section II.A.

(89) See Waterman v. Mackenzie, 138 U.S. 252, 255 (1891) (distinguishing between patent assignments and licenses).

(90) See, e.g., Tulip Computers Int'l B.V. v. Dell Computer Corp., 262 F. Supp. 2d 358, 364-65 (D. Del. 2003) (holding that the language of the license agreement, which defined the scope of the license, could not be ignored).

(91) See Gardner v. Nike, Inc., 279 F.3d 774, 780-81 (9th Cir. 2002) (explaining the "strong policy reasons [for placing] the burden on the licensee to get the licensor's explicit consent" before transferring a license to a third party); Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corp., 271 F.3d 1081, 1088 (Fed. Cir. 2001) (noting that "[a]llowing free assignability of patent licenses" would result in the patent holder losing "the very important ability to control the identity of the licensees"), vacated on other grounds en banc, 284 F.3d 1323 (Fed. Cir. 2002); Everex Sys., Inc. v. Cadtrak Corp. (In re CFLC, Inc.), 89 F.3d 673, 679-80 (9th Cir. 1996) (relying on the policy concern that the patent holder have the ability to control the identity of licensees and holding that nonexclusive patent licenses are not assignable); cf. Harris v. Emus Records Corp., 734 F.2d 1329, 1334 (9th Cir. 1984) (noting in the context of a copyright claim that the requirement that the licensee obtain explicit permission ensures that the licensor will be able to monitor the use of the property right).

(92) See 11 U.S.C. [section] 541(a) (2006).

(93) See also discussion supra note 48 (noting that the question of whether a legal transfer occurs between a debtor and its debtor-in-possession is still open).

(94) 304 U.S. 64, 78 (1938).

(95) Texas Indus., Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 640 (1981) (internal quotation marks omitted) (quoting Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 426 (1964)).

(96) O'Melveny & Myers v. FDIC, 512 U.S. 79, 87 (1994) (quoting Wallis v. Pan Am. Petroleum Corp., 384 U.S. 63, 68 (1966)).

(97) See Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 150-51 (1989) acknowledging that, to the extent state intellectual property regulation conflicts with federal regulation, it is preempted because national uniformity in the balance struck by patent protection is of the utmost importance); Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corp., 271 F.3d 1081, 1088-89 (Fed. Cir. 2001) (explaining the development and rationale of the federal common law principle governing patent licensing), vacated on other grounds en banc, 284 F.3d 1323 (Fed. Cir. 2002). Note, however, that scholars have debated whether a federal common law really exists. See, e.g., Marie T. Reilly, The Federal Interest in the Transfer of Patent License Rights in Bankruptcy, 10J. BANKR. L. & PRAC. 3, 15-23 (2001) (arguing that the "personal" nature of patent licensing amounts to a state law contract issue and, therefore, cannot amount to a federal common law with respect to patent-license transferability).

(98) See Gilson v. Republic of Ireland, 787 F.2d 655, 658 (D.C. Cir. 1986) ("It is well settled that a non-exclusive licensee of a patent has only a personal and not a property interest in the patent and that this personal right cannot be assigned unless the patent owner authorizes the assignment or the license itself permits assignment."). Other forms of intellectual property, such as copyright, also follow the same default rule. Under copyright law, "a non-exclusive licensee ... has only a personal and not a property interest in the [intellectual property]," which "cannot be assigned unless the [intellectual property] owner authorizes the assignment." In re Patient Educ. Media, Inc., 210 B.R. 237, 242-43 (Bankr. S.D.N.Y. 1997) (internal quotation marks omitted) (quoting Gilson, 787 F.2d at 658); see a/s0 3 MELVIN B. NIMMER & DAVID NIMMER, NIMMER ON COPYRIGHT [section] 10.02[A] (2009) (noting that the grant of a nonexclusive license is not a transfer of ownership).

(99) PPG Indus., Inc. v. Guardian Indus. Corp., 597 F.2d 1090, 1093 (6th Cir. 1979).

(100) See, e.g., Everex Sys., Inc. v. Cadtrak Corp. (In re CFLC, Inc.), 89 F.3d 673, 679-80 (9th Cir. 1996) (holding that "[b]ecause federal law governs the assignability of nonexclusive patent licenses, and because federal law makes such licenses personal and assignable only with the consent of the licensor, [a] license is not assumable and assignable in bankruptcy under 11 U.S.C. [section] 365(c)').

(101) 465 F.2d 1303, 1306 (7th Cir. 1972) (internal quotation marks omitted) (quoting Sola Elec. Co. v. Jefferson Co., 317 U.S. 173, 176 (1942)).

(102) See In re CFLC, 89 F.3d at 679 (noting that permitting states to provide for free assignability of nonexclusive patent licenses "would undermine the reward that encourages invention because a party seeking to use the patented invention could either seek a license from the patent holder or seek an assignment of an existing patent license from a licensee" (emphasis omitted)).

(103) See, e.g., Murray v. Franke-Misal Techs. Group, LLC (In re Supernatural Foods, LLC), 268 B.R. 759, 802 (Bankr. M.D. La. 2001) ("The rule, simply stated, is that while ownership of patent rights is assignable, the rights granted under a non-exclusive license cannot inure to a third party, unless the licensor consents to such assignment.").

(104) Id.

(105) See, e.g., In re CFLC, 89 F.3d at 680 (concluding that because the federal common law principle of nonassignability governs nonexclusive licenses, it is applicable under section 365 of the Bankruptcy Code); In re Supernatural Foods, 268 B.R. at 796 (asserting that section 365(c) (1) of the Bankruptcy Code enforces the common law of nonassignability).

(106) See 11 U.S.C. [section] 365(c) (2006) (proscribing assignment when "applicable law" prevents parties other than the debtor from accepting or rendering performance on a contract); id. [section] 365(f) (allowing a trustee to assign a debtor's contracts except as provided in subsection (c)).

(107) See, e.g., Superbrace, Inc. v. Tidwell, 21 Cal. Rptr. 3d 404, 414 (Ct. App. 2004) ("[W]e choose to stand steadfastly by our Supreme Court's 1957 ruling in Dopplmaier that state law, not federal common law, is to be applied when determining whether a patent license is assignable.").

(108) 308 P.2d 732, 739 (Cal. 1957) (stating that there is "no policy underlying the federal patent statutes that requires a uniform federal rule of construction of license contracts to determine their assignability").

(109) Id. at 738-40.

(110) See, e.g., Carole A. Quinn & R. Scott Weide, Violation of the Erie Doctrine: Application of a Rule of Federal Common Law to Issues of Patent License Transferability, 32 CREIGHTON L. REV. 1121, 1143-45 (1999) (providing hypothetical situations to which application of federal law is unjustified).

(111) Daniel A. Wilson, Patent License Assignment: Preemption, Gap Filling, and Default Rules, 77 B.U. L. REV. 895,911 (1997).

(112) Aaron Xavier Fellmeth, Control Without Interest: State Law of Assignment, Federal Preemption, and the Intellectual Property License, 6 VA. J.L. & TECH. 8, [paragraph] 81 (2001), http://vjolt.net/vol6/issue1/v6ila08-Fellmeth.html.

(113) See, e.g., Wilson, supra note 111, at 910-11 (arguing against federal patent policy preemption of state laws permitting assignment because such preemption prevents the maximization of license values).

(114) See id. (asserting that license assignment "allow[s] the parties to maximize the value of the licenses to themselves and to society").

(115) See Concrete Washout Sys., Inc. v. Washout Sys., LLC, No. 08-2214, 2008 WL 5411965, at *3 (E.D. Cal. Dec. 24, 2008) ("One of the fundamental and valuable aspects of a patent is the right to exclude others from using one's invention. In light of Plaintiffs likelihood of success on the merits, its inability to control the use of its invention will constitute irreparable injury." (citation omitted)).

(116) See supra Sections II.B-D.

(117) See 11 U.S.C. [section] 365(c)(1) (2006) (prohibiting a trustee from assuming or as signing debtor contracts when applicable law excuses a party to the contract, other than the debtor, from accepting or rendering performance); id. [section] 365(f) (allowing assignments except when prohibited by subsection (c)).

(118) See In re Access Beyond Techs., Inc., 237 B.R. 32, 44 (Bankr. D. Del. 1999) ("Unless the [license] conveys some or all of the right to exclude others from practicing the invention, it will not convey an interest in the patent, but is a mere license."). An exclusive license will convey an interest in the patent, but a nonexclusive license is still a mere license and is treated as an executory contract subject to the rules of assumption and assignment. See id. at 44-45 (holding that the license at issue was nonexclusive and was therefore an executory contract).

(119) See Kuney, supra note 17, at 142 (defining this as the "critical issue" that emerges once a license is found to be an executory contract for purposes of section 365).

(120) 71 B.R. 686, 690 (Bankr. W.D. Tenn. 1987) ("[N]otwithstanding subsection 365(f), both [federal common] law and equity pursuant to 11 U.S.C. [section] 365(c) 'excuse' the nondebtor party from accepting assignment...."). Although the debtor in Alltech filed for Chapter 7, the court's rationale is relevant and applicable to both Chapter 7 and 11 cases.

(121) Id. at 687.

(122) Id.

(123) Id.

(124) Id. at 687-88.

(125) See id. at 689 (noting that "It]he rights of the patent owner to license the use of his invention is a creature of federal common law as is the right of the licensee to have the license construed").

(126) Id.

(127) 89 F.3d 673 (9th Cir. 1996).

(128) Id. at 674-75.

(129) Id. at 675.

(130) Id. at 678 (alteration in original) (quoting Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938)).

(131) See id. at 679 ("In essence, every licensee would become a potential competitor with the licensor-patent holder in the market for licenses under the patents.").

(132) Id. at 679-80.

(133) See, e.g., RCI Tech. Corp. v. Sunterra Corp. (In re Sunterra Corp.), 361 F.3d 257, 271 (4th Cir. 2004) ("Without [the patent holder's] consent, [the debtor] was precluded from assuming the agreement."); Perlman v. Catapult Entm't, Inc. (In re Catapult Entm't, Inc.), 165 F.3d 747, 750 (9th Cir. 1999) ("[W]e are bound by the plain terms of the statute and ... adopt[] the 'hypothetical test.'"); City of Jamestown, Tenn. v. James Cable Partners, L.P. (In re James Cable Partners, L.P.), 27 F.3d 534, 537 (11th Cir. 1994) ("The first condition [of 11 U.S.C. [section]365(c)(1)] presents a hypothetical question...."); In re W. Elecs. Inc., 852 F.2d 79, 83 (3d Cir. 1988) (holding that the language of section 356 (c) (1) supports the use of the hypothetical test).

(134) See, e.g., United States v. TechDyn Sys. Corp. (In re TechDyn Sys. Corp.), 235 B.R. 857, 861 (Bankr. E.D. Va. 1999) (applying the hypothetical test but noting that "[the actual] test ... has been adopted by a clear majority of the lower courts").

(135) See Insfitut Pasteur v. Cambridge Biotech Corp., 104 F.3d 489, 493 (1st Cir. 1997) (declining to follow the hypothetical test); Summit Inv. & Dev. Corp. v. Leroux, 69 F.3d 608, 612 (1st Cir. 1995) (same).

(136) 852 F.2d at 83.

(137) Id. at 80.

(138) Id.

(139) Id.

(140) Id. at 80-81.

(141) Id.

(142) Id. at 81.

(143) Id. at 82-83.

(144) Id.

(145) Id.

(146) Id. at 83.

(147) Id.

(148) Id. The court also held that, based upon the literal meaning of the statute and Congress's intent, West as a debtor and West as a debtor-in-possession were "materially distinct entities." Id.

(149) City of Jamestown, Tenn. v. James Cable Partners, L.P. (In re James Cable Partners, L.P.), 27 F.3d 534, 537 & n.6 (11th Cir. 1994).

(150) Perlman v. Catapult Entm't, Inc. (In re Catapult Entm't, Inc.), 165 F.3d 747, 750 (9th Cir. 1999).

(151) Id. at 748.

(152) Id.

(153) Id. at 748-49.

(154) Id. at 749.

(155) Id.

(156) Id.

(157) Id. at 748.

(158) See id. at 754-55 (holding that "where applicable nonbankruptcy law makes an executory contract nonassignable because the identity of the nondebtor party is material, a debtor in possession may not assume the contract absent consent of the nondebtor party").

(159) Id. at 749. Although Perlman also contended that section 365(c) (1) prohibited the assignment of its licenses to the third parties involved in the reverse triangular merger, the court did not reach the issue of assignment because it barred Catapult from even assuming the Perlman licenses. Id. at 749 n.1.

(160) Id. at 750.

(161) Id. at 750-51 (italics omitted).

(162) See id.

(163) 361 F.3d 257 (4th Cir. 2004).

(164) Id. at 260. Although In re Sunterra dealt with software licensing rather than pa tent licensing, the same federal principle of common law patent nonassignability applies to copyright law, because copyrights--like patents--are a form of intellectual property governed by federal statute. See Menell, supra note 27, at 800-02 (discussing bankruptcy's treatment of copyright licenses and the relationship between copyright and patent law); supra note 98 and accompanying text.

(165) In re Sunterra Corp., 361 F.3d at 261.

(166) Id.

(167) The bankruptcy court adopted the actual test, see infra subsection III.B.2, which reads the disjunctive "or" in section 365(c) as a conjunctive "and." Id. at 263.

(168) Id. at 262-63.

(169) Id. at 263.

(170) Id.

(171) Id. at 267.

(172) Id.

(173) See id. at 262 n.7, 271.

(174) See Summit Inv. & Dev. Corp. v. Leroux, 69 F.3d 608, 612-14 (1st Cir. 1995) (developing the actual test); see also Institut Pasteur v. Cambridge Biotech Corp., 104 F.3d 489, 493 (1st Cir. 1997) (applying the actual test); cf. United States v. TechDyn Sys. Corp. (In re TechDyn Sys. Corp), 235 B.R. 857, 860-61 (Bankr. E.D. Va. 1999) (adopting the hypothetical test but noting that "[the actual] test ... has been adopted by a clear majority of lower courts").

(175) Leroux, 69 F.3d at 612.

(176) Id.

(177) See id.

(178) See id. at 612-14.

(179) Id. at 612-13.

(180) Id. at 613 (citing H.R. REP. NO. 96-1195, at 12 (1980)).

(181) Id.

(182) Id. (alteration in original).

(183) 104 F.3d 489 (1st Cir. 1997).

(184) Id. at 490.

(185) Id.

(186) Id.

(187) Id. at 490-91.

(188) Id. at 491.

(189) Id. at 493.

(190) Id.

(191) Id. (citing S. REP. NO. 95-989, at 59 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5845).

(192) Id. at 494-95.

(193) See id.

(194) Id.

(195) 440 F.3d 238 (5th Cir. 2006).

(196) Id. at 241.

(197) Id. at 24243. Termination upon bankruptcy provisions are often known as ipso facto clauses (the Latin phrase meaning "by the fact itself') because the language provides that the fact of bankruptcy itself is enough to trigger the termination of the agreement. Generally, ipso facto clauses are unenforceable in bankruptcy under sections 541 (c) and 365 (e) (1). See THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW 4043 (1986) (justifying bankruptcy law's disregard of ipso facto clauses); Yeon-Koo Che & Alan Schwartz, Section 365, Mandatory Bankruptcy Rules and Inefficient Continuance, 15 J.L. ECON. & ORG. 441, 441-46 (1999) (discussing ipso facto clauses under section 365 (e)).

(198) 440 F.3d at 245.

(199) Id. at 245-46.

(200) Id. at 246.

(201) Id. at 249-50 (emphasis added).

(202) Id. at 250.

(203) See id.

(204) 323 B.R. 566 (Bankr. S.D.N.Y. 2005).

(205) Id. at 568.

(206) Id.

(207) Id. at 569 n.1.

(208) Id. at 567.

(209) Id. at 570-71.

(210) Id. at 570.

(211) See id. at 570-71 ("To construe 'trustee' in Section 365(c) (1) to mean 'debtors' or 'debtors in possession' would defy the 'plain meaning' of the statute as written by Congress and could be characterized as the same sort of judicial legislation as Kmart condemns in the cases that apply the 'actual test' to construe 'or' as 'and.'").

(212) Id. at 571.

(213) Id.; see a/so 11 U.S.C. [section] 365(c) (1), (e) (1)-(2), (f) (2006) (identifying distinct roles for debtors and trustees).

(214) See In re Footstar, 323 B.R. at 573-74 ("The basic objective of Section 365 (c) (1)--to protect the contract counterparty from unlawful assignment of the contract--simply is not implicated when a debtor in possession itself seeks to assume, but not assign, the contract.").

(215) Id. at 573.

(216) Id. at 574.

(217) See, e.g., In re Adelphia Commc'ns Corp., 359 B.R. 65, 72 (Bankr. S.D.N.Y. 2007) (distinguishing between the assumption of a contract and the assignment of a contract).

(218) Id.

(219) Id. at 72 n.18.

(220) In re Aerobox Composite Structures, LLC, 373 B.R. 135 (Bankr. D.N.M. 2007).

(221) Id. at 137.

(222) Id. at 138.

(223) Id.

(224) Id. at 142 (quoting In re Footstar, Inc., 323 B.R. 566, 573 (Bankr. S.D.N.Y. 2005)).

(225) Id. at 141.

(226) 104 F.3d 489 (1st Cir. 1997).

(227) In re Aerobox, 373 B.R. at 141.

(228) Id. at 142.

(229) Id.; see also id. at 137 n.1 (providing the relevant provision of the license agreement).

(230) Id. at 142.

(231) No. 05-0305, 2006 WL 3386625 (Bankr. W.D. Pa. Nov. 22, 2006).

(232) 852 F.2d 79 (3d Cir. 1988).

(233) Cont'l Cas., 2006 WL 3386625, at "15.

(234) Id.; see also Biltmore Assoc., L.L.C. v. Twin City Fire Ins. Co., No. 05-4220, 2006 U.S. Dist. LEXIS 56034, at *13 n.4 (Bankr. D. Ariz. July 21, 2006) ("The distinction between a debtor and a debtor in possession is nuanced and unclear, and has yielded varying results in district courts, among the circuits, and within the Ninth Circuit."). But see 11 U.S.C. [section] 541(a) (2006) (recognizing that upon filing for bankruptcy, an estate is created with a different legal character than that of the prepetition debtor).

(235) Caminetti v. United States, 242 U.S. 470, 485 (1917); see also Hillman v. IRS, 263 F.3d 338, 342 (4th Cir. 2001) ("[U]nless there is some ambiguity in the language of a statute, a court's analysis must end with the statute's plain language....").

(236) 11 U.S.C. [section] 365(c) (emphasis added).

(237) See RCI Tech. Corp. v. Sunterra Corp. (In re Sunterra Corp.), 361 F.3d 257, 262 nn.8-9 (4th Cir. 2004) (explaining the difference between the hypothetical and actual tests).

(238) See id. at 262 n.8 (stating that the test construes the "or" "to mean what it says"); City of Jamestown, Tenn. v. James Cable Partners, L.P. (In re James Cable Partners, L.P.), 27 F.3d 534, 537 (11th Cir. 1994) (interpreting the statute as requiring the court to answer a "hypothetical question"); In re W. Elecs. Inc., 852 F.2d 79, 83 (3d Cir. 1988) ("11 U.S.C. [section] 361(c)(1) creates a hypothetical test--i.e., under the applicable law, could the government refuse performance from an entity other than the debtor or the debtor in possession."); In re Access Beyond Techs., Inc., 237 B.R. 32, 48-49 (Bankr. D. Del. 1999) (following the Third Circuit's adoption of the hypothetical test). Critics of the hypothetical test/literal-meaning reading concede that section 365(c) is written in the disjunctive and, therefore, by its plain language, would prohibit a debtor from "assuming or assigning." In re Sunterra, 361 F.3d at 265. They contend, however, that the plain-meaning rule does not apply to section 365(c) because it would create inconsistencies within the Code. See discussion infra subsection IV.B1.

(239) As noted before, the term "trustee" as used in the statute includes a Chapter 11 debtor-in-possession. In re Sunterra, 361 F.3d at 261 n.5; Perlman v. Catapult Entm't, Inc. (In re Catapult Entm't, Inc.), 165 F.3d 747, 750 (9th Cir. 1999); see also discussion supra note 42 (discussing the powers and rights of a bankruptcy trustee and a debtor-in-possession).

(240) 11 U.S.C. [section] 365(c) (1). Although section 365(c) provides three different conditions under which a trustee may not assume or assign an executory contract, this Comment is only concerned with the first condition, as it is the only condition relevant to patent licensing.

(241) See id. [section] 365(c) (1) (A); 1 DAVID G. EPSTEIN ET AL., BANKRUPTCY [section] 5-15, at 474 (1992) (noting that the plain language of section 365(c)(1) "link[s] nonassignability under 'applicable law' together with a prohibition on assumption in bankruptcy").

(242) See 11 U.S.C. [section] 365(c); In re Sunterra, 361 F.3d at 269 (holding that construing section 365 (c) to mean "assumption and assignment" would intrude on legislative function).

(243) Id. [section] 365(c) (1) (A).

(244) See Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corp., 271 F.3d 1081, 1088-89 (Fed. Cir. 2001) (discussing the principle of nontransferability of patents found in federal common law), vacated on other grounds en banc, 284 F.3d 1323 (Fed. Cir. 2002); cf. In re W. Elecs. Inc., 852 F.2d 79, 83 (3d Cir. 1988) (describing the nontransferability of government contracts).

(245) See supra note 91 and accompanying text.

(246) See Rhone-Poulenc Agro, 271 F.3d at 1088 (noting that allowing free assignability of patent licenses would result in the patent holder losing "the very important ability to control the identity of the licensees"); Everex Sys., Inc. v. Cadtrack Corp. (In re CFLC, Inc.), 89 F.3d 673, 679 (9th Cir. 1996) (relying on the federal patent policy concern that the patent holder have the ability to control the identity of licensees and holding that nonexclusive patent licenses are not assignable).

(247) See Rhone-Poulenc Agro, 271 F.3d at 1088 (noting that permitting free assignability would mean "every licensee would become a potential competitor with the licensor-patent holder in the market for the invention; and even if the patentee could control the number of licenses, he would lose the very important ability to control the identity of the licensees").

(248) See 35 U.S.C. [section] 271 (a) (2006) (stating that a party that "makes, uses, offers to sell, or sells any patented invention" without authority infringes the patent).

(249) See Rhone-Poulenc Agro, 271 F.3d at 1088 ("[P]atent licenses are ... non transferable in the absence of an agreement authorizing assignment...."); In re CFLC, 89 F.3d at 679 (stating that a nonexclusive patent license cannot be assigned without the authorization of the patent owner).

(250) See supra Section I.A.

(251) See Perlman v. Catapult Entre't, Inc. (In re Catapult Entm't, Inc.), 165 F.3d 747, 754-55 (9th Cir. 1999) (preventing the debtor from assuming the patent licenses); In re W. Elecs. Inc., 852 F.2d 79, 83 (3d Cir. 1988) ("[I]n the context of the assumption and assignment of executory contracts, a solvent contractor and an insolvent debtor in possession going through bankruptcy are materially distinct entities."). But see Bonneville Power Admin. v. Mirant Corp. (In re Mirant Corp.), 440 F.3d 238, 248 (5th Cir. 2006) (citing cases in which courts have held that the solvent contractor and insolvent debtor-in-possession going through bankruptcy are not different entities for purposes of the antiassignment principle).

(252) See, e.g., In re Catapult, 165 F.3d at 750 (noting that section 365(c)(1) "bars a debtor in possession from assuming an executory contract without the nondebtor's consent where applicable law precludes assignment of the contract to a third party").

(253) See 11 U.S.C. [section] 365(c) (1) (A) (2006).

(254) See supra note 98 and accompanying text.

(255) See RCI Tech. Corp. v. Sunterra Corp. (In re Sunterra Corp.), 361 F.3d 257, 266 (4th Cir. 2004) ("Subsection (c)(1) bars assumption (absent consent) when 'applicable law' would bar an assignment."); In re Catapult, 165 F.3d at 750 ("[T]he statute by its terms bars a debtor in possession from assuming an executory contract without the nondebtor's consent...."); In re W. Elecs. Inc., 852 F.2d at 83 ("[T]he debtor in possession was not entitled to assume the contract without the [licensor's] consent....").

(256) See In re Sunterra, 361 F.3d at 262 n.8 (finding the intent of the debtor-in-possession to assign to a third party irrelevant if the statute is read literally).

(257) See Bonneville Power Admin. v. Mirant Corp. (In re Mirant Corp.), 440 F.3d 238, 249 (5th Cir. 2006) (adopting the actual test); In re Sunterra, 361 F.3d at 265-68 (detailing the argument that certain conflicts within the statute preclude a plain-meaning reading of the statute); Summit Inv. & Dev. Corp. v. Leroux, 69 F.3d 608, 61213 (1st Cir. 1995) (preferring the actual test).

(258) See In re Catapult, 165 F.3d at 751 (detailing the debtor's arguments against the use of the plain-meaning rule); see also Institut Pasteur v. Cambridge Biotech Corp., 104 F.3d 489, 493 (1st Cir. 1997) (rejecting the hypothetical test in favor of a case-by-case approach); Sullivan v. CIA, 992 F.2d 1249, 1252 (1st Cir. 1993) (noting that "literal" interpretations that lead to absurd results should be avoided). But see Leroux, 69 F.3d at 610 ("Plain statutory language does not prompt recourse to countervailing legislative history.").

(259) See In re Mirant, 440 F.3d at 248 (emphasizing the importance of whether a con tract will actually be assigned or whether a nondebtor will actually be forced to accept performance from a third party); Leroux, 69 F.3d at 612-13 (interpreting the legislative history to require "a case-by-case inquiry into the actual consequences ... of permitting these executory contracts to be performed by the debtor party").

(260) See Sigmon Coal Co. v. Apfel, 226 F.3d 291,304 (4th Cir. 2000) (noting that an exception to application of a statute's plain language exists when "a literal reading of a statute ... results in an outcome that can truly be characterized as absurd, i.e., that is 'so gross as to shock the general moral or common sense'" (citation omitted) (quoting Md. State Dep't of Educ, v. U.S. Dep't of Veterans Affairs, 98 F.3d 165, 169 (4th Cir. 1996)).

(261) See 2A NORMAN J. SINGER & J.D. SHAMBIE SINGER, STATUTES AND STATUTORY CONSTRUCTION [section] 46:6 (7th ed. 2007) ("A statute should be construed so that effect is given to all its provisions, so that no part will be inoperative or superfluous, void or insignificant, and so that one section will not destroy another unless the provision is the result of obvious mistake or error." (footnotes omitted)).

(262) See In re Sunterra, 361 F.3d at 265-66 (discussing the "seemingly warring provisions of [section] 365(c) (1) and [section] 365(f) (1)"); In re Catapult, 165 F.3d at 751 (noting that "a literal reading of subsection (c)(1) appears to render subsection (f)(1) superfluous"); see also Breeden v. Catron (In re Catron), 158 B.R. 629, 636-37 (E.D. Va. 1993) (exploring the apparent conflict between subsections (c)(1) and (f)(1)); In re Cardinal Indus., Inc., 116 B.R. 964, 976-77 (Bankr. S.D. Ohio 1990) (examining the trustee's argument that (c) (1) and (f) (1) conflict).

(263) 11 U.S.C. [section] 365(f) (1) (2006).

(264) Id. [section] 365 (c) (1); see also discussion supra Section IV.A.

(265) 11 U.S.C. [section] 365(f) (1).

(266) See id. [section] 365(f) (2) (A) (providing that the trustee may assign an executory con tract if the trustee first assumes such a contract in accordance with the provisions of section 365).

(267) See In re Catron, 158 B.R. at 636 (concluding that the "[c]onflict between subsections (c) and (f) of [section] 365 is inescapable").

(268) Rieser v. Dayton Country Club Co. (In re Magness), 972 F.2d 689 (6th Cir. 1992).

(269) Id. at 695; see also City of Jamestown, Tenn. v. James Cable Partners, L.P. (In re James Cable Partners, L.P.), 27 F.3d 534, 537-38 (11th Cir. 1994) (noting that subsections (c) and (f) refer to different applicable law); In re Antonelli, 148 B.R. 443, 448 (D. Md. 1992) (stating that the distinction drawn in In re Magness is correct), aff'd, 4 F.3d 984 (4th Cir. 1993); In re Lil' Things, Inc., 220 B.R. 583, 590-91 (Bankr. N.D. Tex. 1998) (agreeing that (f) (1) states the general rule and that (c) (1) (A) is an exception to it).

(270) See In re Magness, 972 F.2d at 695 (acknowledging subsection (f) as the default); see also In re James Cable, 27 F.3d at 538 (same).

(271) See 11 U.S.C. [section] 365(f)(1) (applying the default rule "[e]xcept as provided in subsection[] ... (c) of this section").

(272) In re James Cable, 27 F.3d at 538.

(273) 11 U.S.C. [section] 365 (c) (1) (A); see also RCI Tech. Corp. v. Sunterra Corp. (In re Sunterra Corp.), 361 F.3d 257, 266-67 (4th Cir. 2004) (noting that subsection (c) recognizes a specific exception to the broad rule pronounced in subsection (f)); In re James Cable, 27 F.3d at 538 (holding that the applicable law referred to in subsection (c) does not include general prohibitions on assignments); In re Magness, 972 F.2d at 695 (asserting that subsection (c) refers to laws other than those generally prohibiting assignments).

(274) In re James Cable, 27 F.3d at 538 (noting that subsection (c) permits diminishing the trustee's power to assume or assign that is otherwise honored by subsection (f)).

(275) In re Magness, 972 F.2d at 699 (Guy, J., concurring).

(276) See Perlman v. Catapult Entm't, Inc. (In re Catapult Entm't, Inc,), 165 F.3d 747, 752 (9th Cir. 1999) ("[I]n determining whether an 'applicable law' stands or falls under [section] 365(f) (1), a court must ask why the 'applicable law' prohibits assignment."); In re Antonelli, 148 B.R. 443, 448 (Bankr. D. Md. 1992) (discussing why a provision in the Uniform Partnership Act prohibits assignment in order to determine which subsection to apply), aff'd, 4 F.3d 984 (4th Cir. 1993).

(277) See In re Magness, 972 F.2d at 700 (Guy, J., concurring) (arguing that section 365(c) sought to preserve contracts in which the identity of the original contracting party was material and there was a right of refusal); In re Antonelli, 148 B.R. at 448 (noting that section 365(c) applies "where contracts are held to be non-assignable because they impose upon the debtor duties which are said to be 'non-delegable'").

(278) See supra Section III.A (discussing the federal common law principle of patent nonassiguability).

(279) See supra note 91 and accompanying text (concluding that a patent owner's right to exclude includes the right to control its licensee's identity).

(280) See RCI Tech. Corp. v. Sunterra Corp. (In re Sunterra Corp.), 361 F.3d 257, 266-67 (4th Cir. 2004) (concluding that subsections (c) and (f) are not irreconcilable when applied to a software license agreement); In re Catapult, 165 F.3d at 752 (concluding that section 365 (c) is not at odds with section 365 (f)).

(281) See Summit Inv. & Dev. Corp. v. Leroux, 69 F.3d 608, 612 (1st Cir. 1995) (holding that "[a] proper construction of section 365(e)[] requires consideration of companion section 365(c)").

(282) 11 U.S.C. [section] 365(e)(1)(B) (2006).

(283) Id. [section] 365(e) (2) (A) (emphasis added).

(284) Leroux, 69 F.3d at 612.

(285) See id. (holding that the exception to the anti-ipso facto rule was only intended to prevent the nondebtor from being at the debtor's mercy "by what amounts to an actual 'assignment'").

(286) See id. at 613 (noting that if section 365(e)(2)(A) automatically terminated a debtor's executory contract rights, the exception would conflict with subsection (c)(1)); see also Bonneville Power Admin. v. Mirant Corp. (In re Mirant Corp.), 440 F.3d 238, 248-49 (5th Cir. 2006) (adopting the actual test because the alternative would create conflict with subsection (c) (1)).

(287) 11 U.S.C. [section] 365(e) (2) (A) (i).

(288) See In re Mirant Corp., 440 F.3d at 248-49.

(289) See supra note 91 and accompanying text (emphasizing that a patent owner's exclusive right to an invention necessarily provides control over the identity of the performing party of a license).

(290) See discussion supra Section II.D (recognizing that a prebankruptcy petition debtor is a different legal entity than a postbankruptcy petition debtor by reference to section 541(a)).

(291) See id. (describing the patent owner's exclusive right to determine who receives an assignment).

(292) See supra note 91 (listing cases that recognize that licensees must get the licensor's consent before assigning a license).

(293) See RCI Tech. Corp. v. Sunterra Corp. (In re Sunterra Corp.), 361 F.3d 257, 271 (4th Cir. 2004) (holding that the license owner had not consented to assumption by a third party and that assumption was therefore invalid); Perlman v. Catapult Entre't, Inc. (In re Catapult Entre't, Inc.), 165 F.3d 747, 750-51 (9th Cir. 1999) (emphasizing that without consent of the licensor, assignment to third party was invalid); In re W. Elecs. Inc., 852 F.2d 79, 83 (3d Cir. 1988) (noting a debtor's inability to assign licenses to third parties unilaterally).

(294) See 11 U.S.C. [section] 365(e) (2) (A) (2006).

(295) See id. [section] 365(e) (1).

(296) Cf. In re Sunterra, 361 F.3d at 262-63 (explaining that under one test but not the other, the licensor, would be held excused from its agreement to protect it from nonconsensual assignment to a third party); In re Catapult, 165 F.3d at 750 ("[T]he statute by its terms bars a debtor in possession from assuming an executory contract without the nondebtor's consent where applicable law precludes assignment of the contract to a third party."); In re W. Elecs., 852 F.2d at 83 (same).

(297) See Rieser v. Dayton Country Club Co. (In re Magness), 972 F.2d 689, 699-700 (6th Cir. 1992) (Guy, J., concurring) (finding that where the identity of the original contracting party was material, section 365(c) sought to preserve a right of refusal); In re Antonelli, 148 B.R. 443, 448 (D. Md. 1992) (noting that section 365(c) applies where contracts are held to be nonassignable because they impose upon the debtor duties which are said to be "non-delegable"), aff'd, 4 F.3d 984 (4th Cir. 1993).

(298) See In re Sunterra, 361 F.3d at 262; In re Catapult, 165 F.3d at 750; In re W. Elecs., 852 F.2d at 83.

(299) See, e.g., Toibb v. Radloff, 501 U.S. 157, 162 (1991) ("[T]his Court has repeated with some frequency: 'Where, as here, the resolution of a question of federal law turns on a statute and the intention of Congress, we look first to the statutory language and then to the legislative history if the statutory language is unclear.'" (quoting Blum v. Stenson, 465 U.S. 886, 896 (1984))).

(300) Crooks v. Harrelson, 282 U.S. 55, 59-60 (1930); see also United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242 (1989).

(301) See Tenn. Valley Auth. v. Hill, 437 U.S. 153, 187 n.33 (1978) (explaining that courts should look beyond the text only in exceptional cases).

(302) INS v. Cardoza-Fonseca, 480 U.S. 421,432 n.12 (1987).

(303) See, e.g., Bonneville Power Admin. v. Mirant Corp. (In re Mirant Corp.), 440 F.3d 238, 249-51 (5th Cir. 2006) (adopting the actual test based on an interpretation of Congress's intent and the legislative history of section 365(c)). Where a court has adopted the hypothetical test, litigants often advocate for adoption of the actual test following a similar line of reasoning as the Mirant court. See In re Sunterra, 361 F.3d at 269-70 (stating that the proponent of the actual test argued that it was "'far more harmonious' with bankruptcy policy" and Congress's intent); In re Catapult, 165 F.3d at 753 (recalling that the litigants argued that the "legislative history requires disregard of the plain language of [section] 365(c) (1)" and thus the court should adopt the actual test).

(304) Pub. L. No. 98-353, 98 Stat. 333.

(305) 458 U.S. 50 (1982).

(306) 465 U.S. 513 (1984).

(307) In re Cardinal Indus., Inc., 116 B.R. 964, 978-80 (Bankr. S.D. Ohio 1990) (recounting the legislative history of the 1984 Act).

(308) Compare 11 U.S.C. [section] 365(c)(1)(A) (1982), with Pub. L. No. 98-353, sec. 362(a), [section] 365(c) (1) (A), 98 Stat. at 362.

(309) See RCI Tech. Corp. v. Sunterra Corp. (In re Sunterra Corp.), 361 F.3d 257, 270 (4th Cir. 2004) (explaining that there is no legislative history relevant to the alterations made to section 365 in the 1984 Act).

(310) 130 CONG. REC. 20,206-34 (1984); 130 CONG. REC. 20,080-94 (1984), reprinted in COLLIER ON BANKRUPTCY app. 4, pt. xx (Lawrence P. King ed., 15th ed. 1996).

(311) H.R. REP. NO. 96-1195, at 1 (1980).

(312) EPSTEIN ET AL., supra note 241, [section] 5-15, at 475.

(313) H.R. REP. NO. 96-1195, at 12.

(314) See, e.g., Summit Inv. & Dev. Corp. v. Leroux, 69 F.3d 608, 613 (1st Cir. 1995).

(315) Id. at 613 (quoting H.R. REP. NO. 96-1195, at 12).

(316) In re Cardinal Indus., Inc., 116 B.R. 964, 979 (S.D. Ohio 1990).

(317) See 11 U.S.C. [section] 365(c) (1) (A) (2006).

(318) See Leroux, 69 F.3d at 613.

(319) See id.

(320) See In re Cardinal, 116 B.R. at 979 (acknowledging that "[s]ection 365(c) continues to bar the trustee from assuming a contract in those cases where applicable law excuses the nondebtor from accepting performance from the trustee").

(321) See, e.g., Davis v. Mich. Dep't of Treasury, 489 U.S. 803, 809 n.3 (1989) ("Legislative history is irrelevant to the interpretation of an unambiguous statute.").

(322) See City of Auburn v. United States, 154 F.3d 1025, 1029 (9th Cir. 1998) (ad dressing the near-total exclusivity of unambiguous statutory language); California v. Montrose Chem. Corp. of Cal., 104 F.3d 1507, 1515 (9th Cir. 1997) ("Because we conclude that the language of these sections is not ambiguous, we must follow the plain language of these sections unless the legislative history clearly indicates that Congress intended otherwise."); cf Rust v. Sullivan, 500 U.S. 173, 184 (1991) (holding that an administrative agency's construction of a statute "may not be disturbed as an abuse of discretion if it reflects a plausible construction of the plain language of the statute and does not otherwise conflict with Congress' expressed intent"); Edward J. DeBartolo Corp. v. Fla. Gulf Coast Bldg. & Constr. Trades Council, 485 U.S. 568, 575 (1988) (concluding that "where an otherwise acceptable construction of a statute would raise serious constitutional problems, the Court will construe the statute to avoid such problems unless such construction is plainly contrary to the intent of Congress").

(323) RCI Tech. Corp. v. Sunterra Corp. (In re Sunterra Corp.), 361 F.3d 257, 270 (4th Cir. 2004); see also Sigmon Coal Co. v. Apfel, 226 F.3d 291,306 (4th Cir. 2000) (declining to rely on legislative history to displace the plain meaning of a statute, particularly because such history consisted of only a statement made by a single member of Congress), aff'd sub nom. Barnhart v. Sigmon Coal Co., 534 U.S. 438 (2002).

(324) EPSTEIN ET AL., supra note 241, [section] 5-15, at 475.

(325) See Garcia v. United States, 469 U.S. 70, 76-78 (1984) (declining to allow "snip pet[s]" of legislative history to undermine the statute's plain language); U.S. Dep't of State v. Wash. Post Co., 456 U.S. 595, 600 (1982) ("Passing references and isolated phrases are not controlling when analyzing a legislative history.").

(326) See Russello v. United States, 464 U.S. 16, 23 (1983) ("[W]here Congress includes particular language in one section of a statute but omits it in another ... it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion." (alteration in original) (quoting United States v. Wong Kim Bo, 472 F.2d 720, 722 (5th Cir. 1972))).

(327) United States v. Morison, 844 F.2d 1057, 1064 (4th Cir. 1988) (quoting INS v. Cardoza-Fonseca, 480 U.S. 421,453 (1987) (Scalia, J., concurring)).

(328) See, e.g., Lamie v. U.S. Tr., 540 U.S. 526, 534 (2004) ("[W]hen the statute's language is plain, the sole function of the courts--at least where the disposition required by the text is not absurd--is to enforce it according to its terms." (internal quotation marks omitted) (quoting Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000))); Caminetti v. United States, 242 U.S. 470, 485 (1917) ("IT]he sole function of the courts is to enforce [the statute] according to its terms.").

(329) Crooks v. Harrelson, 282 U.S. 55, 59-60 (1930); see also United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242 (1989) ("The plain meaning of legislation should be conclusive, except in the 'rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.'" (alteration in original) (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571 (1982))).

(330) See RCI Tech. Corp. v. Sunterra Corp. (In re Sunterra Corp.), 361 F.3d 257, 269 70 (4th Cir. 2004) (holding that the language of section 365(c) should be interpreted by literally reading its text because the legislative history does not conclusively indicate contrary intent).

(331) 11 U.S.C. [section] 365(c) (1)(A) (2006).

(332) See id. (preventing a trustee from assuming or assigning an executory contract if "applicable law excuses a party ... from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession").

(333) For a discussion of the rationale behind the bar on assigning patents, see supra note 91 and accompanying text.

(334) S. REP. NO. 95-989, at 59 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5845.

(335) See, e.g., In re Sunterra, 361 F.3d at 265 (acknowledging that both parties agreed that a literal reading of the statute prohibits "assuming or assigning" an agreement); Perlman v. Catapult Entm't, Inc. (In re Catapult Entm't, Inc.), 165 F.3d 747, 751 (9th Cir. 1999) ("Catapult urges us to abandon the literal language of [section] 365(c)(1) in favor of an alternative approach....").

(336) Crooks v. Harrelson, 282 U.S. 55, 59-60 (1930).

(337) See In re Sunterra, 361 F.3d at 268 (noting that "[i]n assessing whether a plain reading of a statute implicates the absurdity exception, however, the issue is not whether the result would be 'unreasonable,' or even 'quite unreasonable,' but whether the result would be absurd").

(338) Id. at 267-68; see also In re Cardinal Indus., Inc., 116 B.R. 964, 976 (Bankr. S.D. Ohio 1990) ("The literal application of these provisions, argues the Trustee, makes no sense. Therefore, the [Trustee argues that the] Court must look to the legislative history and ascertain the intent of Congress."); 3 COLLIER ON BANKRUPTCY [paragraph] 365.06[1] [d] [iii] (Alan N. Resnick & Henry J. Summer eds., 15th rev. ed. 2009) (arguing that sound bankruptcy policy supports the actual test).

(339) In re Sunterra, 361 F.3d at 268; see also supra notes 7-8 and accompanying text.

(340) See, e.g., Institut Pasteur v. Cambridge Biotech Corp., 104 F.3d 489, 490-91 (1st Cir. 1997) (describing how the patent licenses in question were essential to the debtor's line of business).

(341) See, e.g., Bonneville Power Admin. v. Mirant Corp. (In re Mirant Corp.), 440 F.3d 238, 254-55 (5th Cir. 2006) (upholding the bankruptcy court's application of the actual test); In re Sunterra, 361 F.3d at 261-63 (noting that the bankruptcy court and district court chose to apply the actual test instead of the hypothetical test); In re Catapult, 165 F.3d at 755 (concluding that the bankruptcy court and district court erred in allowing the debtor-in-possession to assume the patent licenses in question); Institut Pasteur, 104 F.3d at 495 (affirming the bankruptcy court's confirmation of a Chapter 11 reorganization plan which allowed the debtor-in-possession to assume the patent licenses in question).

(342) Nelson v. George Wong Pension Trust (In re Nelson) 391 B.R. 4372 452 (B.A.P. 9th Cir. 2008).

(343) See Lamie v. U.S. Tr., 540 U.S. 526, 542 (2004) ("If Congress enacted into law something different from what it intended, then it should amend the statute to conform it to its intent."); Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 13-14 (2000) ("Achieving a better policy outcome ... is a task for Congress, not the courts.").

(344) See United States v. Noland, 517 U.S. 535, 542 n.3 (1996) ("[I]t is up to Congress, not this Court, to revise the [policy] if it so chooses."); Union Bank v. Wolas, 502 U.S. 151,162 (1991) ("Whether Congress has wisely balanced ... sometimes conflicting policies ... is not a question that we are authorized to decide.").

(345) See In re Catapult, 165 F.3d at 754 (holding that the actual test "effectively en grafts a narrow exception onto [section] 365(c)(1)" and pointing out that it "reads the word 'assume' out of subsection (c) with respect to debtors in possession" (citing In re Fastrax, Inc., 129 B.R. 274, 277 (Bankr. M.D. Fla. 1991))).

(346) Id.

(347) Sigmon Coal Co. v. Apfel, 226 F.3d 291,308 (4th Cir. 2000).

(348) Id.

(349) These rules are codified in Tire 11 of the United States Code. Congress passed the Bankruptcy Code under its Constitutional grant of authority to "establish ... uniform Laws on the subject of Bankruptcies throughout the United States." U.S. CONST. art. I, [section] 8, cl. 4.

(350) For further discussion of these interests, see supra Section I.B.

(351) For a discussion of the factors that led to the inclusion of the patent clause in the U.S. Constitution, see Craig Allen Nard & Andrew P. Morriss, Constitutionalizing Patents: From Venice to Philadelphia, 2 REV. L. & ECON. 223, 299-304 (2006), available at http://www.bepress.com/rle/vol2/iss2/art4.

(352) See 11 U.S.C. [section] 365(c), (f) (2006).

(353) See supra Section II.B (explaining that a patent license is merely a promise not to sue for infringement).

(354) See Waterman v. Mackenzie, 138 U.S. 252, 255 (1891) ("In equity, as at law, when the transfer amounts to a license only, the tide remains in the owner of the patent....").

(355) For example, the creditor patent holder may wish to receive royalties or trade secrets based upon research, sale, or development of the patented invention.

(356) Some critics argue that the literal reading of section 365(c) would provide a windfall for the nondebtor: if the debtor is outside of bankruptcy, then the nondebtor does not have the option to reject the license; if, however, the debtor files for bankruptcy, then the nondebtor can reclaim the license and potentially resell it at a higher market rate. See N.C.P. Mktg. Group, Inc. v. BG Star Prods., Inc., 129 S. Ct. 1577, 1578 (2000) (denying petition for certiorari) (statement of Kennedy, J.) (discussing this possible windfall, along with competing concerns about the actual test, but concluding that this "is not the most suitable case for [the Court's] resolution of the conflict").

(357) See supra Part II.

(358) For example, in Institut Pasteur v. Cambridge Biotech Corp., the circuit court allowed the sale of the debtor's stock to a competitor of the creditor but refused to allow the creditor-licensor to reject the patent license. 104 F.3d 489, 493-94 (1st Cir. 1997). Effectively, this enabled the competitor to gain use of the licensor's patented technology when the creditor would never have offered such a license in the first instance. See id. at 493 (noting plaintiff's argument that "in substance" this was a cross-license to a "complete stranger").

(359) Mach. Co. v. Murphy, 97 U.S. 120, 121 (1877) ("Rights secured to an inventor by letters-patent are property...."); Ethicon, Inc. v. U.S. Surgical Corp., 135 F.3d 1456, 1470 (Fed. Cir. 1998) (Newman, J., dissenting) ("The law of patent ownership has its roots in the common law of property....").

(360) 94 U.S. 92, 96 (1876).

(361) See Dowagiac Mfg. Co. v. Minn. Moline Plow Co., 235 U.S. 641,648 (1915) (stating that "the exclusive right conferred by the patent [is] property and the infringement [is] a tortious taking of a part of that property").

(362) "A 'trespass' occurs when there is an actionable interference with possession of land." Phillips v. Rathbone, 93 P.3d 835, 839 (Or. Ct. App. 2004) (citing Smejkal v. Empire Lite-Rock, Inc., 547 P.2d 1363 (Or. 1976)),

(363) See, e.g., Poff v. Hayes, 763 So. 2d 234, 240 (Ala. 2000) (clarifying that trespass "is a wrong against the right of possession" (quoting Jefferies v. Bush, 608 So. 2d 361, 362 (Ala. 1992))); Munsey v. Hanly, 67 A. 217, 217 (Me. 1907) ("The gist of the action of trespass ... is the disturbance of the possession."); Lane v. Mims, 70 S.F.2d 244, 246 (S.C. 1952) (noting that "the action of trespass ... is founded upon possession"); Austin v. Hallstrom, 86 A.2d 549, 549 (Vt. 1952) ("The gist of the action of trespass upon the freehold is the injury to the possession.").

(364) See, e.g., Sirncox v. Hunt, 874 So. 2d 1010, 1018-19 (Miss. Ct. App. 2004) (explaining that easements confer a fight of use and trespass requires entrance without a right).

(365) See, e.g., Tice v. Herring, 717 So. 2d 181,182 (Fla. Dist. Ct. App. 1998) (explaining that the "burden of [an] easement ... may not ordinarily extend beyond that which was reasonably contemplated with the creation of the easement"), Schadewald v. Brule, 570 N.W.2d 788, 795 (Mich. Ct. App. 1997) (noting that a party cannot unilaterally increase the burden of an easement); Reinbott v. Tidwell, 191 S.W.3d 102, 109 (Mo. Ct. App. 2006) (explaining that if an easement holder exceeds his fight of use "he is guilty of trespass" (quoting Smith v. Woodard, 15 S.W.3d 768, 773 (Mo. Ct. App. 2000))).

(366) See, e.g., Apel v. Katz, 697 N.E.2d 600, 607 (Ohio 1998) (affirming a jury verdict that a person who had a roadway easement across adjacent property, but had used a portion of the property outside the easement, had trespassed).

(367) See, e.g., Conner v. Lucas, 920 P.2d 171,175 (Or. Ct. App. 1996) (finding that planting trees on a roadway easement was a trespass because this use was inconsistent with the use of the property as a roadway).

(368) See, e.g., Tusa v. Cablevision, 691 N.Y.S.2d 105, 106 (App. Div. 1999) (holding that where a utility easement was for the benefit of homeowners in a subdivision, the installation of a line for the benefit of an owner outside the subdivision was a trespass).

(369) Cf Conner, 920 P.2d at 175 (finding the defendant liable for misuse of an easement).

(370) 547 U.S. 388 (2006).

(371) See MercExchange, L.L.C.v. eBay, Inc., 401 F.3d 1323, 1339 (Fed. Cir. 2005) (noting the "general rule that courts will issue permanent injunctions against patent infringement absent exceptional circumstances"), vacated, 547 U.S. 388.

(372) See eBay, 547 U.S. at 391 (detailing the four-factor test). A recent study published in IPToday.com found that, post-eBay, district courts were still granting injunctive relief over seventy percent of the time. See Ernest Grumbles, III, Rachel C. Hughey & Susan Perera, The Three Year Anniversary of eBay v. MercExchange: A Statistical Analysis of Permanent Injunctions, INTELL. PROP. TODAY, Nov. 2009, available at http://www.iptoday.com/issues/2009/11/articles/ three-year-anniversary-eBay-MercExchange'asP (finding that out of 67 district court injunction decisions, 48 (72%) granted relief while 19 (28%) denied relief).

(373) See U.S. CONST. art. I, [section] 8, cl. 8; supra Part II.

(374) See N.C.P. Mktg. Group, Inc. v. BG Star Prods., Inc., 129 S. Ct. 1577 (2009) (denying petition for certiorari) (statement of Kennedy, J.).

(375) Justice Kennedy recognized the importance of finding a suitable case:
   The division in the courts over the meaning of [section] 365(c)(1)
   is an important one to resolve for Bankruptcy Courts and for
   businesses that seek reorganization. This petition for certiorari,
   however, is not the most suitable case for our resolution of the
   conflict.... In a different case the Court should consider granting
   certiorari on this significant question.


Id. at 1578.

(376) See, e.g., Kuney, supra note 17, at 154 ("It may ... strike the correct balance between the needs of owners and licensees.").

JENNIFER YING, J.D. Candidate, 2010, University of Pennsylvania Law School; B.S., 2005, Massachusetts Institute of Technology. I would like to thank Patrick Lewis for inspiring the topic; Professor David Skeel for his guidance, insights, and feedback on various drafts of this Comment; the members of the University of Pennsylvania Law Review for their expert editing and thoughtful suggestions; and my parents and Paul Saindon for their endless support.
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