When Your Licensor Goes Bankrupt: Protecting Your IP Rights Under Section 365(n)

Here is a scenario that keeps founders up at night once they understand it: your business depends on technology or a brand you license from another company, and that company files for bankruptcy. Can the bankruptcy wipe out your right to keep using the IP you built your product on? The answer is governed largely by Section 365(n) of the US Bankruptcy Code — and the details are not intuitive.

This guide explains what happens to a license when the licensor goes bankrupt, why trademarks are treated differently from patents and copyrights, and the concrete steps both licensees and licensors should take now — before anyone files anything. Distress is up across several sectors, which makes this a timely thing to get right.

The core problem: rejection of executory contracts

In bankruptcy, a debtor (in a Chapter 11 reorganization) or a trustee (in a Chapter 7 liquidation) generally has the power, with court approval, to reject executory contracts. A contract is executory, broadly, when meaningful performance is still owed on both sides. A typical IP license qualifies: the licensor keeps granting rights and providing associated support during the term, and the licensee keeps paying royalties or fees. Because performance is due from both sides until the end, the license is executory.

If the debtor licensor rejects the license, the licensee could — absent a protective rule — be left without the very IP its business runs on. That is the danger Section 365(n) was written to address. It is worth understanding that rejection is not the same as termination: rejection operates as a breach of the contract, not a magic erasure of everything the contract granted. That distinction turns out to be central.

What Section 365(n) protects

In practice, the licensee facing rejection has two paths. It can treat the license as terminated by the rejection and assert a claim for damages for breach. Or it can elect to retain its rights and continue using the IP for the remaining term, including any applicable extensions, while continuing to pay the royalties due under the license. For a company whose product depends on the license, retaining rights is usually the entire point.

The categories Section 365(n) covers are specific: patents, copyrights, trade secrets, and certain other listed forms. Two limits matter. First, you retain rights as they existed immediately before the filing — you get no rights to IP the licensor develops after filing. Second, the licensor is largely relieved of affirmative future obligations; you keep the right to use what you had, including enforcement of an exclusivity provision, but you generally cannot force ongoing performance such as new development or support.

The trademark trap

This is the part that surprises people, and it is the single most important thing to understand. The Bankruptcy Code’s definition of intellectual property does not include trademarks. Congress left them out deliberately, in part because trademarks depend on the licensor exercising ongoing quality control over the branded goods — an obligation that sits awkwardly with a debtor trying to shed burdens. For years, that omission left trademark licensees in genuine doubt about whether they had any protection at all, and courts split on the question.

The Supreme Court resolved much of that uncertainty in Mission Product Holdings v. Tempnology (2019). The Court held that a debtor’s rejection of a trademark license operates as a breach, not a rescission — meaning the rejection does not vaporize the rights the license already granted. The licensee can generally continue using the marks for the remaining term. That is a significant protection.

But note the mechanism: trademark licensees get there through general breach doctrine rather than the tidy, explicit Section 365(n) framework that governs patents and copyrights. That makes the contours more fact-specific and more dependent on how your agreement is drafted. Do not assume a brand license carries the same automatic, well-defined protections as a patent or copyright license.

A quick worked example

Imagine a hardware startup that licenses a patented sensor technology and an associated brand from a mid-size supplier. The supplier files Chapter 11 and moves to reject both licenses. For the patent license, Section 365(n) gives the startup a clean election: keep using the patented technology as licensed, pay the royalties, and carry on — the framework is explicit. For the trademark license, the startup relies on the Mission Product breach analysis to keep using the brand for the remaining term, but the strength of that position depends heavily on the license terms and the facts. Same bankruptcy, two different legal tracks — which is exactly why knowing what you hold matters before the filing, not after.

If you are the LICENSEE: steps to take

1. Know your license type. Identify whether each critical license covers patents, copyrights, trade secrets, trademarks, or a mix — the bankruptcy treatment differs by type.
2. Confirm the license is executory and in writing, with clear terms on scope, exclusivity, term, extensions, and what survives termination.
3. Negotiate protective provisions up front — Section 365(n) acknowledgements, source-code or brand-asset escrow where appropriate, and royalty terms that make an election to retain rights actually workable.
4. Monitor your key licensors’ financial health. The worst time to learn your licensor is distressed is the day it files.
5. Have a rights-retention plan ready. If a licensor files, you often must act promptly to elect to retain your rights — know in advance what you would do and who would execute it.

If you are the LICENSOR: steps to take

1. Understand what your licensees can retain if you ever restructure — it affects the value of the estate and the leverage of your counterparties in a workout.
2. Draft license terms with bankruptcy in mind, including precise definitions of the licensed IP and the effect of rejection versus termination.
3. Keep clean records of ownership and quality control, especially for trademarks, where control obligations are central to the mark’s validity.
4. Engage IP-specialist counsel to review agreements before they become a problem, not after the petition is filed.

The takeaway

Section 365(n) is one of the few places in IP where a provision most people have never heard of can decide whether a business survives a partner’s collapse. The protections are real — but they are strongest and clearest for patents, copyrights, and trade secrets, more nuanced for trademarks, and most effective when the license was drafted with this scenario in view from the start. If your business runs on licensed IP, or you license your IP to others, this is worth a focused review with counsel long before anyone is in distress. We help clients on both sides of that equation build licenses that hold up when it counts.

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Disclaimer: This article provides general information about IP strategy and should not be relied upon as legal advice. IP laws vary significantly by jurisdiction and every business situation is unique. Consult qualified counsel about your specific circumstances.