Tech Bankruptcy

Chapter 11 Trustee appointed in SCO Bankruptcy

noreply@blogger.com (Warren Agin) — Tue, 25 Aug 2009 06:54:00 +0000

Every now and then I'm reminded that the SCO bankruptcy remains pending. You might recall SCO as the company that sued Novell and a number of other companies claiming that it owned copyrights to code found in the LINUX open source operating system. Almost two years ago, SCO filed a Chapter 11 petition in order to protect the company while the litigation continued. SCO is represented by Laura Davis Jones of Puchulski Stang Ziehl & Jones, LLP.

In May, the U.S. Trustee's Office in Delaware filed a motion to convert the long-standing Chapter 11 case to Chapter 7. Declining to institute such a drastic remedy, Judge Gross instead ordered a Chapter 11 bankruptcy trustee appointed. More detailed information about the decision can be found here on Groklaw. Although the order has not been appealled, a trustee has not yet been appointed.

Meanwhile, Steven Vaughan-Nichols' blog in Computerworld reports that SCO actually won a minor victory of sorts in its litigation with Novell, as the Court of Appeals reverses a prior summary judgment decision against SCO.

Supreme Court Denies Cert in NCP Marketing Case - Kennedy and Breyer Signal Preference for Actual Test

noreply@blogger.com (Warren Agin) — Sun, 19 Apr 2009 17:42:00 +0000

About a month ago the U.S. Supreme Court denied certiorari in the NCP Marketing Case. A link to the denial is here. Robert Eisenbach provides a detailed analysis of why this is significant in a March 26, 2009, post on his In the Red Blog.

In a nutshell, the NCP Marketing case dealt with the ability of a debtor to assume a trademark license. The bankruptcy court held that the license had been terminated pre-petition, and therefore could not be assumed. It also stated, in dicta, (and in my opinion incorrectly) that the trademark license was not assignable as a matter of common law and therefore, under applicable law in the 9th circuit, not assumable. Appeals ensued and the decision was affirmed at each step.

What makes the denial of certiorari in this case interesting is that two justices, Kennedy and Breyer, felt the need to issue a statement on the matter. While they agreed that denial of certiorari was appropriate in this particular case, they welcomed the opportunity to hear a case on the issue of whether the actual test or the hypothetical test is the correct test for analyzing section 365(c). And, from Judge Kennedy's comments, it seemed likely that they would support adoption of the actual test.

I would note that these are only two justices and they are among those more likely to support the policy driven reasons for adopting the actual test as opposed to the strict statutory construction theories behind the hypothetical test. On the other hand, only four Justices are needed to grant certiorary and it seems likely that Kennedy and Breyer would not have signaled their interest in taking a case on this issue if they expected the outcome to go against their viewpoints.

Article on IP Licenses and Bankruptcy

noreply@blogger.com (Warren Agin) — Fri, 10 Apr 2009 17:59:00 +0000

Two Seattle bankruptcy lawyers, Marc Barreca of K&LGates and John Knapp of Cairncross & Hemplemann, recently teamed up to author a useful article on the current state of intellectual property licenses and bankruptcy.

The article provides an introduction to the basic legal issues. With each topic, the article lists a number of useful practice tips. The practice tips might be the best part of the article, since they are easy to understand (even when the underlying legal concepts are not), and provide practical, not legalistic, advice. Some of these tips address issues relevant to the initial license negotiations, while others focus on what to do when the other party to the license actually files a bankruptcy petition.

Charter Communications

noreply@blogger.com (Warren Agin) — Tue, 31 Mar 2009 22:41:00 +0000

Cable giant Charter Communications, Inc. filed a chapter 11 petition on Friday in the Southern District of New York. According to the firm's press release, the company has already negotiated a restructuring plan, which it filed along with its other first day motions.

Moving out: Azteca Mobile; Skyward Mobile; North American Scientific; Progressive Games

noreply@blogger.com (Warren Agin) — Sat, 21 Mar 2009 10:43:00 +0000

Mobile virtual network operator Azteca Mobile filed a Chapter 7 petition in Kansas City at the beginning of the month. Azteca sold prepaid phone cards for the Sprint Nextel network, and focused on the US to Mexico market.

Closer to my home, Skyward Mobile, LLC filed a chapter 7 petition in Massachusetts. Skyward built mobile applications, including games, for use on cell phones.

Yesterday, Reuters reported that Progressive Gaming International Corp., which makes technology products for the casino industry, filed a chapter 7 petition. The petition was filed in the District of Nevada. The bulk of its assets were apparently foreclosed on in January.

Are you seeing a trend here? For all you real bankruptcy lawyers, all is not lost.

According to the Associate Press, North American Scientific, Inc., a provider of products and services for cancer treatment, filed a chapter 11 petition in the Central District of California on March 12. The company plans to reorganize.

Can't Gamble With Your Domain Names!

noreply@blogger.com (Warren Agin) — Sun, 15 Mar 2009 14:36:00 +0000

In October I reported on a rather unusual decision by a Kentucky Judge holding that domain names were "gambling devices" under Kentucky law. In the case, Kentucky v. 141 Internet Domain Names, Judge Wingate considered a request by the Commonwealth of Kentucky that he order in rem seizure of several domain names under a state statute allowing seizure of gambling devices. Judge Wingate granted the request, finding that the domain names (which led to on-line gambling websites) were gambling devices, and that the state had in rem jurisdiction over the names despite the fact that the defendants, registrars and registries were all located outside the state. He ordered the relevant registries (most of the registrars being located outside the United States) to turn control of the domain names over to the Commonwealth of Kentucky.

If you like to play poker online, you can now breath easy. On January 20, 2009, an appellate panel held in a four to one opinion that "it stretches credulity to conclude that" a domain name could be a gambling device under the state's statutory definition. Thus, the lower court lacked in rem jurisdiction over the domain names. Interactive Media Entertainment v. Wingate, 2009 WL 142995 (Ky App. 2009). One judge, more credulous that the others, disagreed, stating that the entire compilation of the gambler's computer, gambling site's computers, software and domain name constituted a gambling device and the court could exercise jurisdiction over just the domain name portion of the "device."

The conclusion was clear enough though. You can't gamble with your domain name.

Customer data just goes out the door at bankruptcy auctions.

noreply@blogger.com (Warren Agin) — Tue, 03 Mar 2009 12:51:00 +0000

CIO Magazine recently published an interesting article about the sometimes loose treatment of business and customer data in liquidations. It talks about improper disposition of sensitive customer data and the habit of trustees and liquidators of auctioning off computers without first scrubbing them of data.

This kind of problem certainly exists. I'm personally aware of one case where a weight-loss franchisee's employee threw customer records in the trash without shredding them first, and a reporter found them. This resulted in an investigation by the state attorney general's office. In another case, the data back-up disks for the debtor's on-line website were in a cardboard box, in a corner, and disappeared during the course of the furniture and equipment auction.

With a failing business, data controls are fairly important. One of the items on the checklist definitely has to be identifying both sensitive data (such as payroll information and consumer information) and key data (such as financial information and asset related data) and developing a plan to ensure such data is properly preserved or disposed of, as needed.

The article includes a quote by Michael Fleming, a friend of mine who practices technology law in Minneapolis. Way to go Mike.

Failing Chip Makers and Others: Spansion, Visteon, Dynogen Pharmaceuticals

noreply@blogger.com (Warren Agin) — Mon, 02 Mar 2009 14:17:00 +0000

On Sunday, chip maker Spansion, Inc. filed a chapter 11 petition in the District of Delaware, case number 09-10690. I haven't heard of them, but this is a big one - more than a billion in assets. Spansion is the world's largest manufacturer of flash memory solutions, particularly for cell phones. According to the AP story, Spansion's problems are related to the decline in demand for consumer electronics.

Crain's Detroit Business predicts that Visteon will file for bankruptcy sometime before the end of April. Visteon provides technology and electronics systems for the automotive industry, so no great surprise there.

Last Monday, Dynogen Pharmaceuticals filed a chapter 7 petition in Massachusetts. Among the creditors, about six law firms owed more than $250,000. Debtor's counsel received payments for about the same sum prior to filing the petition. Nice work for a chapter 7 case.

More: Qimonda again,BroadRamp

noreply@blogger.com (Warren Agin) — Mon, 23 Feb 2009 14:23:00 +0000

About February 20, 2009, Qimonda Richmond, LLC, and its parent, Qimonda North America Corp., filed chapter 11 petitions in Delaware. The docket number is 09-10589. I wrote about Qimonda previously.

Online video delivery company, BroadRamp, Inc., filed a Chapter 7 bankruptcy recently, according to My San Antonio. I notice the website is still up and running. I also notice that they stopped issuing press releases back in April 2008. When a tech start-up stops issuing press releases it is usually a pretty clear sign that something is amiss with the cash flow.

Midway Games files Chapter 11

noreply@blogger.com (Warren Agin) — Fri, 13 Feb 2009 13:59:00 +0000

As predicted back in December, Midway Games, Inc. filed its Chapter 11 petition on February 12, 2009, in Delaware. The case number is 09-10465. A maker of computer games available through retail outlets and on-line, Midway Games claims in its press release that its fundamental business is stable, but that obligations related to stock repurchase agreements forced it to seek Chapter 11. European operations will not be affected.

A number of its titles, such as Mortal Kombat v. DC Universe depend on licensing deals and it will be interesting to see if Midway runs into problems assuming those licenses.

Some Recent Thoughts on Selling Patents

noreply@blogger.com (Warren Agin) — Wed, 11 Feb 2009 01:04:00 +0000

Yesterday, I received the following e-mail from John Lynn, the president of a patent incubator of sorts called Discovery Alliance:

Do you have any patents or patent applications that you are interested in liquidating?

I am writing to you as a Chapter 7 trustee. If any of your Chapter 7 clients have intellectual property you need to liquidate, we can help. Discovery Alliance is purchasing patents and patent applications.

We are a subsidiary of Capital Southwest, a well respected, publicly traded investment company (NASDAQ; CSWC) and we are experts on patents. Accordingly, we can quickly make a decision on the potential value of your patents or patent applications

I have to admit that in my role as a chapter 7 trustee, good patents don't come across my desk all that often. Occasionally, I get a gig liquidating one for some other trustee. I have marketed and sold a couple over the years, and finding buyers can be tough. More and more though, I am hearing about this kind of buyer - the company that for profit or otherwise is interested in picking up patents for speculative or other reasons.

There are a few patent exchanges out there. Tynax and Ocean Tomo come to mind. Neither seems quite suitable for use by the chapter 7 trustee trying to liquidate a relatively valueless patent owned by some small start-up or investor.

Patent trolls exist, but the patent better have some serious value to interest them. They have no use for the patent unless it provides the prospect for at least a few million in licensing fees. Similarly, the consortiums developed to keep key patents away from the trolls (such as RPX Rational Patent and Allied Security Trust) are only interested in the key patents.

Discovery Alliance seems a little different. According to a September 2008 press release, the company plans to identify and invest in IP for the purpose of commercializing the technology. It will focus primarily on patents that fit the existing business plans of its parent's affiliates. And, reaching out to chapter 7 trustees seems a little entrepreneurial, so perhaps they will find a role acting as a stalking horse bidder.

Other failed tech: Qimonda, FakeTown, Charter Communications, Brighter Minds Media

noreply@blogger.com (Warren Agin) — Thu, 05 Feb 2009 19:48:00 +0000

According to the Yrsys Technology Blog, Qimonda, a chipmaker based in Germany who had a 10% share of the DRAM (those things in your computer that remember everything) market in Q3 2008 became the first major memory chip maker to file for bankruptcy following the rapid dive in memory chip prices. Doesn't say where.

Does it seem sometimes that the whole world is heading for insolvency? In the case of Faketown, a virtual world, that's exactly what happened. Faketown shut down in July due to financial troubles according to an article I recently came across in Virtual Worlds News. Looks like it was a Chapter 7 case.

Reuters reports that cable company, Charter Communications is preparing a bankruptcy petition.

If that wouldn't create a sticky mess, how about the fact that Brighter Minds Media, the publisher of software title "World of Goo," filed a Chapter 11 petition on January 28, 2009.

Incentra Solutions files Ch 11

noreply@blogger.com (Warren Agin) — Thu, 05 Feb 2009 13:27:00 +0000

IT outsourcing and datacenter firm, Incentra Solutions, Inc., filed a Chapter 11 petition in Delaware yesterday. The lead case is named In re Managed Storage International, Inc., case no. 09-10368. According to the company press release, they have DIP funding and a buyer already lined up.

Tech in BR: UIQ Technology, nTag, Motorola(?)

noreply@blogger.com (Warren Agin) — Sat, 17 Jan 2009 16:43:00 +0000

Mobile UI developer UIQ Technology, recently filed for insolvency relief in Sweden.

nTag Interactive Corp. filed a chapter 7 petition in Massachusetts at the end of December, according to an article in the Boston Business Journal. nTag sold systems that allowed vendors at trade shows to better interact with attendees through the use of electronic name tags.

Here is one man's opinion that Motorola may soon follow Nortel. The product cycle for communications hardware is both maturing and morphing at the same time. The hardware market was mostly finding expansion through overseas markets, particularly in the far east. This market is going to stop growing for a while. At the same time, the technologies are changing - telephony, television, internet access - the methods by which we receive these content forms are changing. Hardware manufacturers that can't adopt are going to fall by the wayside.

Tech disasters: Nortel Networks

noreply@blogger.com (Warren Agin) — Wed, 14 Jan 2009 14:00:00 +0000

I've probably missed a few recent tech failures since I've been too busy the last few weeks to track this stuff, but this one is too big to ignore.

Nortel Networks, Inc. filed a chapter 11 petition this morning in the District of Delaware. The main case number is 09-10138. I suspect there is also a related Canadian proceeding of parent company Nortel Networks Corporation. Cleary Gottlieb is lead counsel.

Tech in Trouble: Nortel Networks; Midway Games; eToys

noreply@blogger.com (Warren Agin) — Wed, 31 Dec 2008 17:37:00 +0000

FierceWireless reports: "Nortel Networks, despite having $2.6 billion in cash, is contemplating bankruptcy because of uncertainty about some of its long-term financial problems as well the future market for its voice-only wireless equipment, which has seen a steep drop in demand recently."

According to Gamasutra, Midway Games, the maker of Mortal Kombat, is facing a potential chapter 11 bankruptcy filing and NYSE delisting.

Word on The Street is that the parent of eToys.com, Parent Company (clever, huh?) filed a Chapter 11 petition in Delaware two days ago. The original Etoys filed for Chapter 11 in 2001, and was sold to KB Toys, which recently filed its own Chapter 11 petition.

Have a good New Year everyone.

Tech Filings: NetVersant, Hawaii Telecom, Charter Comm.

noreply@blogger.com (Warren Agin) — Thu, 18 Dec 2008 13:39:00 +0000

According to the Houston Business Journal:

"NetVersant Solutions Inc., once a high-flying player in the wireless network infrastructure industry, has filed for Chapter 11 bankruptcy protection and is planning to sell off its assets to New York-based Patriarch Partners LLC, its largest lender."

Hawaii Telecom filed a Chapter 11 bankruptcy petition in the District of Delaware on December 1, 2008. More information is available at its webpage. According to the Communications Technology Blog, Hawaii Telecom is now trying to move the case's venue to the District of Hawaii. Hopefully, in time for February school vacation week.

According to Moody's, Charter Communications is likely to file for bankruptcy in 2009.

Recent Tech Filings: Neonode, Nortel, Equity Media Holdings

noreply@blogger.com (Warren Agin) — Fri, 12 Dec 2008 14:13:00 +0000

Neonode, Inc.'s Swedish subsidiary, Neonode AB, filed a petition for bankruptcy in compliance with the Swedish Bankruptcy Act (1987:672) December 9, 2008. Neonode is a cell phone manufacturer, with patented touch screen technology according to this article posted at IntoMobile.

Nortel Networks Corp. is exploring the possibility of a bankruptcy filing, according to the Associated Press and the Wall Street Journal.

Equity Media Holdings, Corp. filed a chapter 11 petition December 8, 2008, in the United States Bankruptcy Court for the Eastern District of Arkansas. The case is In re Equity Media Holdings Corp, 4:08-bk-17646, U.S. Bankruptcy Court, Eastern District of Arkansas (Little Rock). According to the company's press release, "Equity Media's proprietary Centralized Automated Satellite Hub (C.A.S.H.) system provides centralized content distribution services which Equity Media believes are unique within the media industry."

Where to sell your patents.

noreply@blogger.com (Warren Agin) — Mon, 24 Nov 2008 14:42:00 +0000

According to the Seattle TechFlash, RPX Corp. is launching a "defensive patent aggregation." This is essentially a capital pool used for purchasing patents from bankrupt companies to keep them out of the hands of patent trolls. Supported by large companies like IBM and Cisco, and venture capital firms like Charles River Ventures, RPX Corp. hopes to reduce the impact of patent trolls by limiting their access to loose patents.

Predicting bankruptcies by examining patent portfolios

noreply@blogger.com (Warren Agin) — Fri, 21 Nov 2008 14:04:00 +0000

In a recent academic paper out of the University of Connecticut School of Business, professors Assaf Eisdorfer and Po-Hsuan Hsu argue that patent competition is a strong predictor of future insolvency. From the abstract:

This paper establishes a strong relationship between technology competition and corporate bankruptcy. Using a new dataset of firm-level patent applications and issues we show that (i) the competitiveness in patent-intensive industries predicts future bankruptcies better than well-used measures such as Z-score and credit rating; (ii) patent-driven bankruptcies are less related to the business cycle and industry success; and (iii) bankruptcies are significantly more costly if driven by patent competition.

Co-owned Patent Fools Mammoth Mart

noreply@blogger.com (Warren Agin) — Sun, 16 Nov 2008 14:32:00 +0000

I'm a little late in writing about an interesting decision from my home court, In re Diomed, Inc., 394 B.R. 260 (Bankr. D. Mass. 2008), which shows how a debtor's clever use of co-owned patent rights helped it get past Mammoth Mart.

The Diomed case deals with a rather unusual fact pattern - one that Judge Rosenthal described as "a scenario caused by the intersection of bankruptcy and patent law not addressed in any published decision." While you are not likely to see this particular pattern again, the decision illuminates an important patent law rule and, for this reason alone, is worth reading.

The debtor, Diomed, had an exclusive patent license from Endolaser Associates, LLC related to the manufacture of a medical laser. The license was exclusive, allowed sublicenses, and gave Diomed the right to bring actions to enforce the patent against infringers. The license required Diomed to pay Endolaser periodic royalties, including a percentage of any recovery from enforcement actions. The twist, however, was that Endolaser apparently did not own the entire patent. It had co-owned the patent with an inventor, Dr. Robert Min. Diomed had purchased this co-owner interest from the inventor.

So, at the time of its bankruptcy filing, Diomed held an exclusive license from Endolaser, but also owned a partial interest in the patent by virtue of the assignment from Dr. Min. The decision does not say how Endolaser was able to grant an exclusive licence when it did not own the entire patent. It also doesn't talk about how Diomed acquired its ownership interest from Dr. Min. I suspect Diomed may have purchased Dr. Min's interest in order to resolve an ownership dispute of some kind. But, that is purely speculation.

Diomed had also brought two infringement lawsuits against two companies, AngioDynamics and Vascular Solutions, Inc., and obtained large multi-million dollar judgments against them.

In March 2008, Diomed filed its chapter 11 petition. I'll leave out some of the procedural history - you can read the decision yourself. Just say that in the end Diomed settled the two infringement actions for multi-million dollar sums and, as part of the settlement, granted a non-exclusive patent license to AngioDynamics. But, first, it rejected its license with Endolaser under 11 USC 365.

Endolaser filed a motion for allowance of an administrative expense. It asked for payment of (a) royalties for the pre-rejection period, (b) royalties payments due as a result of Diomed's sale of equipment during the case, (c) the 25% of patent infringement settlement proceeds due it under the license terms, and (d) some other item not really relevant to this blog.

How, you might ask, could Diomed both reject the up-stream license and still grant a down-stream license? How could it avoid payment of royalties as an administrave expense? It relied on the interest in the patent it had purchased from Dr. Min.

Judge Rosenthal allowed the administrative expense claim for the royalties due pre-rejection. But, he declined to allow as an administrative expense claim the royalty claims arising from the equipment sale and the patent infringement settlement. Why? Because the exclusive license had been rejected by the debtor prior to those events. Thus, the particular benefit to the estate did not arise from the license agreement.

Judge Rosenthal's decision was based on the relatively unknown rules governing the rights of parties who co-own a patent. When parties co-own a patent, either party can make use of the patent without the consent of and without accounting to the other owners. 11 USC 262. This allows a co-owner to grant a non-exclusive license of the entire patent regardless of the co-owner's rights. Thus, once Diomed rejected its license agreement with Endolaser, it became just a co-owner of the patent. Its ability to use, license, and enforce the patent remained - because of its co-ownership position. And, as Judge Rosenthal noted, its generation of proceeds arose not because of the rejected license, but because of its rights as a co-owner of the patent. As a result, the elements of Mammoth Mart were not met and Endolaser was not entitled to payment of an administrative expense claim.

The parties subsequently settled the case. Diomed agreed to pay Endolaser about $700,000 and transfer to Endolaser the patent rights held by Diomed.

Bankruptcy fraud doesn't pay (again)

noreply@blogger.com (Warren Agin) — Fri, 14 Nov 2008 14:07:00 +0000

Intellectual property attorney Pamela Chestek posted a blog entitled "You Still Have to Own the Copyright" about a painter whose copyright infringement case was dismissed because she had transferred her copyrights to family members prior to filing a 1997 Chapter 7 bankruptcy petition.

In Giddings v. Vision House Production, Inc., 2008 WL 4700903 (D. Ariz. 2008), Giddings accused the defendants of violating her copyrights in several paintings by making and distributing prints without a license. In their defense, the defendants produced evidence that Giddings had, in 1996, executed written assignments of the copyrights in the paintings to various relatives just prior to filing her Chapter 7 bankruptcy petition in 1997. The copyrights were not assigned back to Giddings until February 2008 (more than two years after Giddings filed the infringement complaint.) Because Giddings did not hold the copyrights at the time of the claimed infringement, the District Court ruled that she lacked standing to bring the infringement action and dismissed the case on the defendants' motion for summary judgment.

In their pleadings, the defendants claimed Giddings "transferred all her copyrights to keep them out of bankruptcy proceedings and away from her creditors." While Giddings disputed this characterization, she did not dispute the fact that her 1997 bankruptcy schedules did not include any interest in intellectual property, and failed to disclose all but one of the transfers. Since Giddings apparently felt, when she brought the complaint in 2005, that she owned the copyrights even though they had never been reassigned to her, an observer could wonder whether the prior assignments were in fact a sham designed to conceal her assets from her bankruptcy trustee.

If so, she certainly got what she deserved.

Who owns a trademark?

noreply@blogger.com (Warren Agin) — Wed, 12 Nov 2008 13:38:00 +0000

Who really owns a trademark? The company that holds the registration or the company that uses the trademark?

That's going to be the issue in In re Goen Technologies, Inc., the bankruptcy case for the distributor of the TrimSpa diet pill. Originally filed in New Jersey as a Chapter 11 case, the case converted to Chapter 7 in September. Now, according to a news story in NJ.com, the Chapter 7 trustee has a million dollar offer to purchase the TrimSpa mark. There is a catch however. The mark itself is registered to an affiliated company, Nutrimerica, which is not in bankruptcy.

The chapter 7 trustee has filed a complaint with the New Jersey bankruptcy court asking the Court to determine that the bankruptcy estate, which used the mark, is the proper owner of the mark. Since trademark rights are acquired through use, its possible that under the right set of facts the trustee may have something to sell.

Free CLE on Bankruptcy and Intellectual Property [humorous]

noreply@blogger.com (Warren Agin) — Mon, 10 Nov 2008 18:17:00 +0000

The blog for the Bankruptcy Bill comic strip, promises a free (I assume) "...CLE course on the intersection of bankruptcy and intellectual property laws" for those who post the latest Bankruptcy Bill comic strip without proper attribution. But, be warned: they claim the course will be "...so painfully dull as to violate several major provisions of the Geneva Convention."

I've given a few talks like that.

Footstar shuts down

noreply@blogger.com (Warren Agin) — Wed, 05 Nov 2008 22:39:00 +0000

According to an article in the NJ Biz Journal, Footstar, Inc. is going to shut down at the end of the month.

Footstar filed a chapter 11 petition in 2004, in the Southern District of New York, and reached some level of fame resulting from that court's 2005 decision allowing the debtor to assume its operational leases with Kmart over Kmart's objection. That decision defined the now somewhat popular "Footstar Test."

The contracts with Kmart run out at the end of of this year, and they will not be renewed. According to the article, Kmart will pay $13 million for Footstar's intellectual property, buy its inventory, and employ some of its employees.