What Happens to a Software License Agreement in Bankruptcy

When you receive a notice of bankrupcty you normally mentally right off the account. Not so fast if the bankruptcy involves a software license agreement. Unlike an unpaid invoice, a software license agreement has a special life in bankruptcy. The first move is get a bankruptcy attorney where the bankruptcy is filed. The reason is complex. There are technical issues under rules for executory or non executory contracts. This deals with whether a contract is completed or still has pending performance. A classic example is a real estate lease. Since leases have continuing performance, the contract falls under an area where the debtor can assume or reject the lease. 

This is quite frankly why many retailers file bankruptcy. They get rid of bad store leases. Under the Bankruptcy Code 11 USC 365 there are special for intellectual property license rights. The question is whether the debtor can keep its license rights as a licensee or a licensor. The good news is that when a debtor assumes the software license agreement, they have to bring it current. So, if your software is embedded in the company’s product and they are trying to reorganize under Chapter 11, they will have to continue the license to have a product. Under the assumption rules, they have to keep the license current to maintain the rights. It gets challenging in a chapter 7 if they are trying to sell your license. But that is why you should get a local bankruptcy attorney on board.

A last note: filing bankruptcy is not a default allowing the license to terminate. It is easier to leave the term in the standard agreements than explain why this is so. That means if you made a bad deal, you cannot terminate it just because the licensee filed for bankruptcy.