Generally, unexpired license agreements are regarded as executory contracts, which may be assumed or rejected by the bankrupt debtor, as the licensor or licensee, under the U.S. Bankruptcy Code. This survey deals solely with insolvency law under the U.S. Bankruptcy Code, which is the federal law applicable to U.S. insolvency proceedings throughout the United States. It does not deal with the individual insolvency laws of the 50 states to the extent that a debtor decides to commence an insolvency proceeding under some applicable state law, for example, the laws of Delaware, rather than commencing a bankruptcy case governed by federal law under the U.S. Bankruptcy Code. While state insolvency law generally is similar to federal bankruptcy law, it typically is far less comprehensive, can vary from state to state, and often follows federal law on undecided issues under state law.

An executory contract is one under which the obligations of both the debtor 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 performance of the other. As a general rule, a debtor may exercise its own business judgment in determining whether to assume or reject an executory contract as part of its plan of reorganization. In addition, a debtor generally may assume an executory contract and then assign it to a third party as part of a sale of the debtor’s assets, even if there is an anti-assignment provision in the agreement. A debtor must cure pre-bankruptcy defaults before assuming any executory contract.  If a debtor rejects an executory contract, then the rejection is deemed a pre-bankruptcy material breach of the contract and the counterparty will have a general unsecured claim for damages, which is a claim of low priority in the bankruptcy case. These general rules do apply to IP licenses, with some notable exceptions in the form of protections for both licensor and licensee in special situations, as explained below.

When the bankrupt debtor is the licensee, the Bankruptcy Code offers some protection to the licensor by generally prohibiting the assumption or assignment of a license where applicable non-bankruptcy law permits the non-debtor party to refuse performance from third parties. Bankruptcy courts often distinguish between exclusive and non-exclusive IP licenses when the debtor is the licensee in these circumstances. Most courts have held that while a debtor-licensee can assume a non-exclusive license without consent of the licensor, the debtor-licensee cannot assign a non-exclusive license to a third party without consent. A notable minority of courts (particularly in California) have held that that the Bankruptcy Code prohibits a debtor-licensee’s assumption of a non-exclusive IP license without the consent of the licensor. Courts also generally prohibit the assignment of a trademark license or a patent license without consent of the licensor. Generally speaking, there are fewer restrictions on the assumption and assignment of exclusive licenses by a debtor-licensee.

When the bankrupt debtor is the licensor, the Bankruptcy Code provides special protection to non-debtor licensees of intellectual property. If a debtor-licensor rejects an IP license agreement, the Bankruptcy Code gives the non-debtor licensee the option to treat the agreement as rejected and file a claim for damages, or to retain and continue using its rights in the licensed intellectual property, including the right to enforce any exclusivity provision, during the remaining term of the license notwithstanding its rejection in bankruptcy, as long as the licensee continues to perform under the agreement (including the payment of any licensing fees). Under this circumstance, the debtor-licensor is not required to continue performing under any affirmative obligations in the license agreement.

A U.S. Bankruptcy debtor that is a licensor, or its trustee, is obligated to perform the debtor's obligations under the license agreement prior to assumption or rejection of the license agreement, and after assumption of the agreement. It is not required to perform after rejection of a license agreement.

A U.S. debtor that is a licensee, or its trustee, is required to perform all of its obligations under the license agreement, unless and until the license agreement is rejected by order of the bankruptcy court.