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Bankruptcy is a federal legal proceeding available to both individuals and organizations, which permit relief from or restructuring of debts under specific circumstances.
U.S. bankruptcy laws favor the debtor over creditors and others with whom the debtor has dealt. The debtor generally has the right to confirm, assign, or reject any executory contract. A contract is considered executory if the “obligations of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete the performance would constitute a material breach excusing the performance of the other.”
However, under 11 U.S.C. §365(n), if the bankruptcy trustee rejects a intellectual property or software license as executory, the licensee may either (i) treat the rejection as a termination and pursue whatever remedies are available for such rejection, or (ii) retain its rights under the license for the term of the license and any contractually permitted extensions by the licensee. If the licensee chooses to retain its rights under the license, the trustee must allow the licensee to exercise those rights, as long as the licensee makes all royalty payments as they become due and the licensee waives certain bankruptcy rights it otherwise would have.
The statute also imposes an obligation on the trustee to fulfill certain contractual rights between the licensee and the debtor on notice from the licensee and bars the trustee from blocking enforcement of contractual rights between the licensee and a third party (e.g., a software escrow company), which provide the licensee with access to and possession of those tangible things needed to exercise the license (e.g., the source code and documentation held in escrow).