PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 12-1802
MICHAEL JAFFÉ, Insolvency Administrator,
Plaintiff - Appellant,
v.
SAMSUNG ELECTRONICS COMPANY, LIMITED; INFINEON TECHNOLOGIES
AG; INTERNATIONAL BUSINESS MACHINES CORPORATION; HYNIX
SEMICONDUCTOR, INC.; INTEL CORPORATION; NANYA TECHNOLOGY
CORPORATION; MICRON TECHNOLOGY,
Defendants - Appellees.
------------------------------
UNITED STATES OF AMERICA,
Amicus Curiae,
VERBAND INSOLVENZVERWALTER DEUTSCHLANDS E.V.,
Amicus Supporting Appellant,
THE FEDERATION OF GERMAN INDUSTRIES, a/k/a Bundesverband der
Deutschen Industrie; INTELLECTUAL PROPERTY OWNERS
ASSOCIATION; SEMICONDUCTOR INDUSTRY ASSOCIATION; CHAMBER OF
COMMERCE OF THE UNITED STATES OF AMERICA; NATIONAL
ASSOCIATION OF MANUFACTURERS; BUSINESS SOFTWARE ALLIANCE,
Amici Supporting Appellees.
Appeal from the United States Bankruptcy Court for the Eastern
District of Virginia, at Alexandria. Stephen S. Mitchell,
Bankruptcy Judge. (09-14766-RGM)
Argued: September 17, 2013 Decided: December 3, 2013
Before NIEMEYER, WYNN, and FLOYD, Circuit Judges.
Affirmed by published opinion. Judge Niemeyer wrote the
opinion, in which Judge Floyd joined. Judge Wynn wrote a
separate opinion concurring in Parts I, II, and III and the
judgment.
ARGUED: Jeffrey A. Lamken, MOLOLAMKEN LLP, Washington, D.C.,
for Appellant. William H. Pratt, KIRKLAND & ELLIS LLP, New
York, New York, for Appellees. Mark R. Freeman, UNITED STATES
DEPARTMENT OF JUSTICE, Washington, D.C., for Amicus Curiae the
United States of America. ON BRIEF: Robert K. Kry, MOLOLAMKEN
LLP, Washington, D.C., for Appellant. Jennifer M. Selendy, John
P. Del Monaco, New York, New York, Timothy Muris, Daniel A.
Bress, Washington, D.C., William E. Devitt, Dennis J. Abdelnour,
KIRKLAND & ELLIS LLP, Chicago, Illinois; Stephen E. Leach, LEACH
TRAVELL BRITT, P.C., Tysons Corner, Virginia, for Appellees
Infineon Technologies AG, Samsung Electronics Company, Limited,
and International Business Machines Corporation. Lawrence A.
Katz, LEACH TRAVELL BRITT, P.C., Tysons Corner, Virginia;
Theodore G. Brown, III, KILPATRICK TOWNSEND & STOCKTON LLP,
Menlo Park, California, for Appellee Hynix Semiconductor, Inc.
Joseph E. Mais, Timothy J. Franks, Phoenix, Arizona, John K.
Roche, Washington, D.C., Alan D. Smith, PERKINS COIE LLP,
Seattle, Washington, for Appellee Intel Corporation. Marc
Palay, Geneva, Switzerland, Jonathan Cohn, SIDLEY AUSTIN LLP,
Washington, D.C., for Appellee Nanya Technology Corporation.
Maurice Horwitz, New York, New York, M. Jarrad Wright, Adam P.
Strochak, Washington, D.C., Alfredo R. Perez, Houston, Texas,
Jared Bobrow, WEIL, GOTSHAL & MANGES LLP, Redwood Shores,
California, for Appellee Micron Technology. Christopher J.
Wright, Timothy J. Simeone, WILTSHIRE & GRANNIS, LLP,
Washington, D.C., for Amicus Verband Insolvenzverwalter
Deutschlands E.V. Neil H. MacBride, United States Attorney,
OFFICE OF THE UNITED STATES ATTORNEY, Alexandria, Virginia;
Stuart F. Delery, Acting Assistant Attorney General, Robert M.
Loeb, Civil Division, UNITED STATES DEPARTMENT OF JUSTICE,
Washington, D.C., for Amicus Curiae the United States of
America. Richard F. Phillips, Kevin H. Rhodes, INTELLECTUAL
PROPERTY OWNERS ASSOCIATION, Washington, D.C.; Jeffrey K.
Sherwood, Gary M. Hoffman, Megan S. Woodworth, DICKSTEIN SHAPIRO
LLP, Washington, D.C., for Amicus Intellectual Property Owners
2
Association. Timothy J. Coleman, FRESHFIELDS BRUCKHAUS DERINGER
LLP, Washington, D.C., for Amicus Federation of German
Industries. David Isaacs, SEMICONDUCTOR INDUSTRY ASSOCIATION,
Washington, D.C., for Amicus Semiconductor Industry Association;
Paul D. Clement, D. Zachary Hudson, BANCROFT PLLC, Washington,
D.C., for Amici Semiconductor Industry Association, Chamber of
Commerce of the United States of America, National Association
of Manufacturers, and Business Software Alliance; Robin S.
Conrad, NATIONAL CHAMBER LITIGATION CENTER, Washington, D.C.,
for Amicus Chamber of Commerce of the United States of America;
Quentin Riegel, NATIONAL ASSOCIATION OF MANUFACTURERS,
Washington, D.C., for Amicus National Association of
Manufacturers; Timothy A. Molino, BSA/THE SOFTWARE ALLIANCE,
Washington, D.C., for Amicus Business Software Alliance.
3
NIEMEYER, Circuit Judge:
This appeal presents the significant question under Chapter
15 of the U.S. Bankruptcy Code of how to mediate between the
United States’ interests in recognizing and cooperating with a
foreign insolvency proceeding and its interests in protecting
creditors of the foreign debtor with respect to U.S. assets, as
provided in 11 U.S.C. §§ 1521 and 1522.
Qimonda AG, a German corporation that manufactured
semiconductor devices and was, for a brief time, one of the
world’s largest manufacturers of dynamic random access memory
(“DRAM”), filed for insolvency in Munich, Germany, in January
2009. The principal assets of Qimonda’s estate consisted of
some 10,000 patents, about 4,000 of which were U.S. patents.
These patents were subject to cross-license agreements with
Qimonda’s competitors, as was common in the semiconductor
industry to avoid infringement risks caused by the “patent
thicket” resulting from the overlapping patent rights of some
420,000 patents in the semiconductor industry.
Ancillary to the German insolvency proceeding, Dr. Michael
Jaffé, the insolvency administrator appointed by the Munich
court, filed an application in the Bankruptcy Court for the
Eastern District of Virginia under Chapter 15 of the U.S.
Bankruptcy Code, petitioning the U.S. court to recognize the
German insolvency proceeding as a “foreign main proceeding” in
4
order to obtain an array of privileges available under Chapter
15. Among other relief, Jaffé specifically requested that the
bankruptcy court entrust to him, pursuant to 11 U.S.C. §
1521(a)(5), the administration of all of Qimonda’s assets within
the territorial jurisdiction of the United States, which largely
consisted of the 4,000 U.S. patents.
Contemporaneously with the Chapter 15 proceeding, Jaffé
sent letters to licensees of Qimonda’s patents under its cross-
license agreements, declaring that, under § 103 of the German
Insolvency Code, the licenses granted under Qimonda patents “are
no longer enforceable,” including the licenses under the
company’s 4,000 U.S. patents. As Jaffé later indicated to the
bankruptcy court, he intended to re-license Qimonda’s patents
for the benefit of Qimonda’s creditors, replacing licenses paid
for in-kind with cross-licenses with licenses paid for with cash
through royalties.
The bankruptcy court entered an order recognizing the
German insolvency proceeding as a foreign main proceeding and a
separate order granting Jaffé the discretionary relief he
requested under § 1521(a)(5). But, following a four-day
evidentiary hearing, it conditioned the § 1521 relief with the
requirement that Jaffé afford the licensees of Qimonda’s U.S.
patents the treatment they would have received in the United
States under 11 U.S.C. § 365(n), which limits a trustee’s
5
ability to reject unilaterally licenses to the debtor’s
intellectual property by giving licensees the option to retain
their rights under the licenses. After balancing the interests
of Qimonda’s estate with the interests of the licensees of its
U.S. patents, the bankruptcy court concluded that the
application of § 365(n) was necessary to ensure, as required by
§ 1522(a), that the licensees were “sufficiently protected,”
even though it would adversely affect Qimonda’s estate. The
bankruptcy court also concluded, pursuant to 11 U.S.C. § 1506,
that allowing Jaffé to cancel unilaterally Qimonda’s licenses of
U.S. patents “would be manifestly contrary to the public policy
of the United States,” recognizing “a fundamental U.S. public
policy promoting technological innovation,” which would be
undermined if it failed to apply § 365(n) to the licenses under
Qimonda’s U.S. patents.
In this direct appeal from the bankruptcy court, Jaffé
challenges both of these conclusions, arguing that the court
erred in its construction of Chapter 15 and abused its
discretion in applying it.
We conclude that the bankruptcy court properly recognized
that Jaffé’s request for discretionary relief under § 1521(a)
required it to consider “the interests of the creditors and
other interested entities, including the debtor” under § 1522(a)
and that it properly construed § 1522(a) as requiring the
6
application of a balancing test. Moreover, relying on the
particular facts of this case and the extensive record developed
during the four-day evidentiary hearing, we also conclude that
the bankruptcy court reasonably exercised its discretion in
balancing the interests of the licensees against the interests
of the debtor and finding that application of § 365(n) was
necessary to ensure the licensees under Qimonda’s U.S. patents
were sufficiently protected. Accordingly, we affirm.
I
The German insolvency proceeding
Qimonda AG filed an application to open a preliminary
insolvency proceeding in the Munich Insolvency Court on January
23, 2009, which was converted to a final proceeding on April 1,
2009. Upon converting the proceeding to a final one, the court
appointed Dr. Michael Jaffé to serve as the estate’s insolvency
administrator, a position akin to a bankruptcy trustee under
U.S. law. Subsequently, Qimonda ceased all manufacturing
operations and began to liquidate its estate. The principal
assets of the estate consisted of its approximately 10,000
patents, including about 4,000 U.S. patents. Most of these
patents covered products or processes related to DRAM, but some
covered other types of semiconductor technology.
7
The “patent thicket” and the practice of cross-licensing
At the time Qimonda opened its insolvency proceeding, its
patents were subject to numerous cross-license agreements with
other semiconductor manufacturers, including Infineon
Technologies AG (from which Qimonda had spun off in 2006),
Samsung Electronics Company, International Business Machines
Corporation (“IBM”), Intel Corporation, Hynix Semiconductor,
Inc., Nanya Technology Corporation, and Micron Technology, Inc.
While some of these cross-license agreements were designed to
facilitate specific joint ventures, most simply reflected the
strategy widely adopted in the semiconductor industry in
response to infringement risks arising from the industry’s
“patent thicket” -- a term used to describe “a dense web of
overlapping intellectual property rights.” Carl Shapiro,
Navigating the Patent Thicket: Cross Licenses, Patent Pools, and
Standard Setting, in 1 Innovation Policy and the Economy 119,
120 (Adam B. Jaffe et al. eds., 2001). As the bankruptcy court
in this case aptly explained and all parties agreed, there are
so many patents implicated by any new semiconductor product that
“it would be all but impossible to design around each and every”
one. In re Qimonda AG, 462 B.R. 165, 175 (Bankr. E.D. Va.
2011). “Indeed, such is the number of potentially applicable
patents that it is not always possible to identify which ones
might cover a new product . . . .” Id.
8
The problem of the patent thicket is exacerbated by the
enormous costs incurred to bring a new semiconductor product to
market. According to one expert, the price of building a new
semiconductor fabrication facility can now exceed $5 billion.
These sunk costs could create a classic “holdup” problem if a
new product were ultimately found to infringe someone else’s
patent, with the patent’s owner being able to extract a
substantially higher royalty after the investment had been made
than if a license had been negotiated beforehand. Thus, to
avoid this holdup premium and enhance their design freedom,
competitors in the semiconductor industry have routinely entered
into broad, non-exclusive cross-license agreements with each
other, “sometimes with the addition of equalizing payments
(either up-front payments or so-called running royalties) to
account for differences in the size and breadth of the
respective patent portfolios.” In re Qimonda AG, 462 B.R. at
175.
Consistent with this industry practice, Qimonda had patent
cross-license agreements with nearly every other major
semiconductor manufacturer at the time it opened its insolvency
proceeding.
9
The Chapter 15 proceeding
Jaffé commenced this Chapter 15 proceeding on June 15,
2009, for recognition of the German insolvency proceeding as a
“foreign main proceeding” under 11 U.S.C. § 1517. Jaffé’s
petition identified Qimonda’s known assets in the United States
as including its “active patents and patent applications filed
with the United States Patent and Trademark Office,” and it
sought relief designed to “give effect to the German Proceedings
in the U.S., protect the U.S. Assets, and to prevent creditors
in the U.S. from taking actions that [might] frustrate the
German Proceedings.” Jaffé also sought an order entrusting to
him, under § 1521(a)(5), “[t]he administration or realization of
all or part of the assets of [Qimonda] within the territorial
jurisdiction of the United States” and further declaring that
the “German Proceedings . . . be granted comity and [be] given
full force and effect” in the United States.
The bankruptcy court granted the relief Jaffé requested,
entering an order granting recognition of the German insolvency
proceeding as a “foreign main proceeding” under § 1517. At the
same time, it also entered a separate Supplemental Order
“grant[ing] further relief under 11 U.S.C. § 1521.” The
Supplemental Order made Jaffé “the sole and exclusive
representative of Qimonda AG in the United States” and, as
requested, specifically gave him the power to “administer the
10
assets of Qimonda AG within the territorial jurisdiction of the
United States.” It authorized Jaffé “to examine witnesses, take
evidence, seek production of documents, and deliver information”
concerning Qimonda. Finally, it specified that, “in addition to
those sections [of the Bankruptcy Code] made applicable pursuant
to § 1520,” a number of other provisions of the Bankruptcy Code
would be “applicable in this proceeding,” including 11 U.S.C. §
365. That provision gives a bankruptcy trustee power to assume
or reject any of the debtor’s executory contracts. But one
subsection, § 365(n), limits the trustee’s ability to
unilaterally reject licenses to the debtor’s intellectual
property, reserving to the licensees the option to elect to
retain their rights under the licenses.
Shortly after the bankruptcy court entered its Supplemental
Order, Jaffé began sending letters to companies that had cross-
license agreements with Qimonda, invoking § 103 of the German
Insolvency Code and declaring that the licenses under Qimonda’s
patents were “no longer enforceable.” Section 103 of the German
Insolvency Code, much like § 365 of the U.S. Bankruptcy Code,
permits an insolvency administrator to decide whether to
continue to perform the debtor’s executory contracts. But,
unlike § 365, which includes the § 365(n) exception, § 103 does
not specifically address intellectual property licenses. In
Jaffé’s view, however, the licenses under Qimonda’s patents fell
11
within the scope of § 103, and it was his duty, as insolvency
administrator, not to recognize them since they provided no
useful compensation to Qimonda’s estate.
After receiving these letters, Samsung and Elpida Memory,
Inc., responded with letters, taking the position that 11 U.S.C.
§ 365(n) protected their licenses under Qimonda’s U.S. patents
and announcing that they were electing to retain their rights
under the licenses.
The letters from Samsung and Elpida prompted Jaffé to move
to amend the bankruptcy court’s July 22, 2009 Supplemental Order
to delete entirely its reference to § 365. Alternatively, Jaffé
asked the court to add a proviso to the Supplemental Order
specifying that “Section 365(n) applies only if the Foreign
Representative rejects an executory contract pursuant to Section
365 (rather than simply exercising the rights granted to the
Foreign Representative pursuant to the German Insolvency Code).”
Several companies that had licenses under Qimonda’s U.S. patents
through cross-license agreements -- namely, Infineon, Samsung,
Micron, Nanya, IBM, Intel, and Hynix (hereafter, the
“Licensees”) -- opposed Jaffé’s motion to amend the Supplemental
Order. 1
1
Infineon, Samsung, Micron, Nanya, and Elpida originally
objected to the motion, while IBM, Intel, and Hynix were later
allowed to intervene as objectors. Elpida, which also had
12
By an opinion dated November 19, 2009, the bankruptcy court
granted Jaffé’s motion, stating that its inclusion of § 365 was
“improvident.” The court explained that consistent with Chapter
15’s goal of “providing a systematic and consistent resolution
to cross-border insolvencies,” the fate of the patent cross-
license agreements should be decided in the German insolvency
proceeding by applying German law. The court accordingly
amended its Supplemental Order to include the alternative
proviso that Jaffé had requested as an amendment.
The appeal to the district court and its remand order
The Licensees appealed the bankruptcy court’s amended order
to the district court, which thereafter remanded the case back
to the bankruptcy court to consider 11 U.S.C. § 1522(a)’s
requirement that the bankruptcy court ensure that “the interests
of the creditors and other interested entities, including the
debtor, [were] sufficiently protected.” The district court
explained that § 1522(a) required the bankruptcy court “to
balance the relief granted to the foreign representative and the
interests of those affected by such relief, without unduly
favoring one group of creditors over another.” In re Qimonda AG
elected to enforce its licenses from Qimonda under § 365(n),
subsequently reached a settlement with Jaffé and therefore is
not an objecting Licensee.
13
Bankr. Litig., 433 B.R. 547, 557 (E.D. Va. 2010) (emphasis
omitted) (quoting In re Tri-Cont’l Exch. Ltd., 349 B.R. 627, 637
(Bankr. E.D. Cal. 2006)). The court found it “unclear on [the]
somewhat anemic record whether the Bankruptcy Court adequately
balanced the parties’ interests, as required by § 1522,” noting
that the bankruptcy court had not adequately explained why the
application of § 365(n) would unduly prejudice Jaffé or,
conversely, fully considered “whether cancellation of licenses
for [Qimonda’s U.S. patents] would put at risk [the Licensees’]
investments in manufacturing or sales facilities in this country
for products covered by the U.S. patents.” Id. at 558.
As a separate basis for remand, the district court also
found that the bankruptcy court had failed to consider “whether
§ 365(n) embodies the fundamental public policy of the United
States, such that subordinating § 365(n) to German Insolvency
Code § 103 is an action ‘manifestly contrary to the public
policy of the United States,’” under 11 U.S.C. § 1506. 433 B.R.
at 565. The district court concluded that there were two
primary circumstances in which a bankruptcy court should invoke
§ 1506: first, when “the foreign proceeding was procedurally
unfair;” and second, when “the application of foreign law or the
recognition of a foreign main proceeding under Chapter 15 would
severely impinge the value and import of a U.S. statutory or
constitutional right, such that granting comity would severely
14
hinder United States bankruptcy courts’ abilities to carry out .
. . the most fundamental policies and purposes of these rights.”
Id. at 568-69 (internal quotation marks omitted). Finding the
application of that standard “unclear on [the] record,” the
court also directed the bankruptcy court on remand to consider
“whether conditioning the applicability of § 365(n) was a
prohibited action ‘manifestly contrary to the public policy of
the United States’ under § 1506.” Id. at 570-71.
On remand to the bankruptcy court
On remand, Jaffé filed papers in the bankruptcy court in
which he committed to re-license Qimonda’s patent portfolio to
the Licensees at a reasonable and nondiscriminatory (“RAND”)
royalty. He stated that he was prepared to “enter into good
faith negotiations” with the Licensees to set the royalty rates
and, if necessary, to submit the rate amounts to arbitration
before the World Intellectual Property Organization (“WIPO”). 2
2
RAND royalties are relatively common in high-tech
industries because of the role played by standard-setting
organizations, which help ensure the interoperability of
products, among other functions. To avoid the holdup problem in
this context, standard-setting organizations typically require
their members to agree in advance to license any patent
identified as necessary to a standard at RAND terms. Both
Qimonda and the Licensees belong to such an organization.
Nonetheless, the Federal Trade Commission has observed that
“there is much debate over whether such RAND . . . commitments
can effectively prevent patent owners from imposing excessive
royalty obligations on licensees,” noting complaints by industry
15
In March 2011, the bankruptcy court held a four-day
evidentiary hearing, receiving testimony regarding the likely
effects of applying § 365(n) to licenses under Qimonda’s U.S.
patents. Jaffé testified at the hearing that a ruling applying
§ 365(n) would render “the central assets of [Qimonda’s] estate,
that is [its] U.S. patents . . . largely worthless.” He also
said that such a ruling would “violate the principle of equal
treatment of creditors under German law” by giving the Licensees
preferential treatment over Qimonda’s other creditors.
Jaffé also presented the expert testimony of Dr. William
Kerr, an economist, who concluded that based on his review of
existing licenses and licensing practices in the semiconductor
industry, Qimonda’s estate would receive approximately $47
million per year if Jaffé were allowed to re-license Qimonda’s
U.S. patents covering DRAM products at RAND terms. Observing
that $47 million would represent a small fraction of what the
Licensees spend on research and development every year, Kerr
gave his opinion that “discontinuance of the cross-licenses at
issue [and subsequent re-licensing at a RAND rate] would not
representatives that the term RAND is “vague and ill-defined --
particularly with regard to what royalty rate is ‘reasonable.’”
Fed. Trade Comm’n, The Evolving IP Marketplace: Aligning Patent
Notice and Remedies with Competition 192-93 (2011).
16
unduly impair the function of the semiconductor industry or the
[Licensees].”
By contrast, the Licensees’ witnesses testified to the harm
that would befall the Licensees, as well as the semiconductor
industry as a whole, if the reference to § 365(n) were removed
from the Supplemental Order. For example, Dr. Jerry Hausman,
the Licensees’ economist, gave his opinion that “[b]y
destabilizing the system of licensing that has enabled the
extraordinary success of the semiconductor industry and other
industries, failure to apply Section 365(n) would reduce
investment, innovation, and competition, which would harm U.S.
productivity growth and U.S. consumers as well as worldwide
productivity and consumers.” Hausman also disputed Kerr’s
calculation of the likely RAND royalty rates, forecasting
significantly higher sums and arguing that the holdup threat
could not be eliminated. Moreover, in Hausman’s view, Jaffé’s
offer to re-license the U.S. patents at RAND terms could not
“provide adequate protection for the interests of the
[Licensees],” in part because of the danger that Jaffé would
subsequently sell the patent portfolio to an entity that might
itself file for bankruptcy, thus “extinguish[ing] the
[Licensees’] licenses once again.”
17
The bankruptcy court’s decision on remand
At the conclusion of the hearing, the bankruptcy court
issued a memorandum opinion denying Jaffé’s motion to amend the
Supplemental Order and confirming “that § 365(n) applies with
respect to Qimonda’s U.S. patents.” In re Qimonda AG, 462 B.R.
at 185. The court assumed for the purpose of its analysis that
Jaffe’s interpretation of German law was correct and that § 103
of the German Insolvency Code would authorize him to terminate
the Licensees’ right to practice Qimonda’s patents. With that
assumption, the court concluded that “the balancing of debtor
and creditor interests required by § 1522(a) . . . weighs in
favor of making § 365(n) applicable to Dr. Jaffé’s
administration of Qimonda’s U.S. patents.” Id. at 182.
Explaining its balancing analysis, the bankruptcy court
recognized that its ruling would “result in less value . . .
being realized by the Qimonda estate” but noted that Qimonda’s
patents would “by no means be rendered worthless.” 462 B.R. at
182. On the other hand, the court found that a contrary ruling
would create a “very real” “risk to the very substantial
investment the [Licensees] . . . [had] collectively made in
research and manufacturing facilities in the United States in
reliance on the design freedom provided by the cross-license
agreements.” Id. at 182-83. The court acknowledged that
Jaffé’s offer to re-license Qimonda’s patents on RAND terms
18
would lessen the holdup risk, but observed that, because of the
Licensees’ “sunk costs, [they would] not have the option of
avoiding royalties altogether by designing around the patent.”
Id. at 181-82.
As an independent ground for its decision, the bankruptcy
court also concluded, under 11 U.S.C. § 1506, that “deferring to
German law, to the extent it allows cancellation of the U.S.
patent licenses, would be manifestly contrary to U.S. public
policy.” 462 B.R. at 185. Referencing the legislative history
of Congress’s enactment of the Intellectual Property Licenses in
Bankruptcy Act, Pub. L. No. 100-506, 102 Stat. 2538 (1988), the
court noted that § 365(n) resulted from Congress’s determination
“that allowing patent licenses to be terminated in bankruptcy
would ‘impose[] a burden on American technological
development.’” In re Qimonda AG, 462 B.R. at 184 (quoting S.
Rep. No. 100-505, at 1 (1988), reprinted in 1988 U.S.C.C.A.N.
3200, 3200). Informed by this congressional policy choice, the
court reasoned that “[a]lthough innovation would obviously not
come to a grinding halt if licenses to U.S. patents could be
cancelled in a foreign insolvency proceeding, the court is
persuaded by Professor Hausman’s testimony that the resulting
uncertainty would nevertheless slow the pace of innovation, to
the detriment of the U.S. economy.” Id. at 185. On this basis,
the court concluded that “failure to apply § 365(n) under the
19
circumstances of this case and this industry would ‘severely
impinge’ an important statutory protection accorded licensees of
U.S. patents and thereby undermine a fundamental U.S. public
policy promoting technological innovation.” Id.
The bankruptcy court thus held that “public policy, as well
as the economic harm that would otherwise result to the
[L]icensees, require[d] that the protections of § 365(n) apply
to Qimonda’s U.S. patents.” 462 B.R. at 167-68.
The direct appeal to the court of appeals
Jaffé appealed the bankruptcy court’s ruling and sought
from the district court a certification under 28 U.S.C. §
158(d)(2) for a direct appeal to this court. The district court
concluded that the bankruptcy court’s order qualified for
certification, and, by order dated June 28, 2012, we authorized
the direct appeal. See 28 U.S.C. § 158(d)(2).
II
Congress enacted Chapter 15 of the Bankruptcy Code in 2005
as part of the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23, stating
that its purpose was “to incorporate the Model Law on Cross-
Border Insolvency,” which had been developed in 1997 by the
United Nations Commission on International Trade Law
(“UNCITRAL”), “so as to provide effective mechanisms for dealing
20
with cases of cross-border insolvency.” 11 U.S.C. § 1501(a);
see also H.R. Rep. No. 109-31, pt. 1, at 105 (2005), reprinted
in 2005 U.S.C.C.A.N. 88, 169. In this respect, Chapter 15
replaced former 11 U.S.C. § 304, which authorized bankruptcy
courts to award appropriate relief in a case ancillary to a
foreign proceeding but which was largely discretionary. See 11
U.S.C. § 304(c) (2000). Chapter 15 lists five specific
objectives: (1) to encourage cooperation with “the courts and
other competent authorities of foreign countries involved in
cross-border cases;” (2) to increase “legal certainty for trade
and investment;” (3) to promote the “fair and efficient
administration of cross-border insolvencies” so as to “protect[]
the interests of all creditors, and other interested entities,
including the debtor;” (4) to protect and maximize “the value of
the debtor’s assets;” and (5) to facilitate “the rescue of
financially troubled businesses.” 11 U.S.C. § 1501(a); see also
H.R. Rep. No. 109-31, pt. 1, at 105.
To further these stated objectives, Chapter 15 authorizes
the representative of a foreign insolvency proceeding to
commence a case in a U.S. bankruptcy court by filing a petition
for recognition of the foreign proceeding. 11 U.S.C. §§ 1504,
1509(a), 1515. If the petition meets the requirements listed in
§ 1517, the court must enter an order granting recognition of
the foreign proceeding. And if that foreign proceeding “is
21
pending in the country where the debtor has the center of its
main interests,” it is recognized as a “foreign main
proceeding.” 11 U.S.C. § 1517(b)(1); see also id. § 1502(4).
With the entry of an order recognizing a foreign main
proceeding, the foreign representative of the proceeding
automatically receives relief as stated in § 1520, including the
automatic stay created by § 362 with respect to the debtor and
its property within the United States and the ability to operate
the debtor’s business within the United States under § 363, as
well as the right to sue and be sued and the right to “intervene
in any proceedings in a State or Federal court in the United
States in which the debtor is a party.” Id. §§ 1520(a),
1509(b)(1), 1524. Moreover, the statute provides that following
entry of a recognition order, “a court in the United States
shall grant comity or cooperation to the foreign
representative,” thereby implementing a principal purpose of
Chapter 15. Id. § 1509(b)(3).
Even before entry of the order granting recognition, § 1519
authorizes the bankruptcy court, on the foreign representative’s
request, to grant preliminary relief when “urgently needed to
protect the assets of the debtor or the interests of the
creditors.” 11 U.S.C. § 1519.
In addition to the automatic relief that comes with the
entry of an order granting recognition of a foreign main
22
proceeding, § 1521 authorizes the bankruptcy court to grant
discretionary relief. Specifically, § 1521 provides that “where
necessary to effectuate the purpose of this chapter and to
protect the assets of the debtor or the interests of the
creditors, the court may, at the request of the foreign
representative, grant any appropriate relief.” 11 U.S.C. §
1521(a). This discretionary relief may include “entrusting the
administration or realization of all or part of the debtor’s
assets within the territorial jurisdiction of the United States
to the foreign representative,” id. § 1521(a)(5), as well as
“entrust[ing] the distribution of all or part of the debtor’s
assets located in the United States to the foreign
representative,” id. § 1521(b). The bankruptcy court, however,
may only grant discretionary relief under § 1521 if it
determines that “the interests of the creditors and other
interested entities, including the debtor, are sufficiently
protected.” Id. § 1522(a). It may also subject the
discretionary relief it grants under § 1521 “to conditions it
considers appropriate, including the giving of security or the
filing of a bond.” Id. § 1522(b).
Finally, all of the actions authorized in Chapter 15 are
subject to § 1506, which provides that “[n]othing in this
chapter prevents the court from refusing to take an action
governed by this chapter if the action would be manifestly
23
contrary to the public policy of the United States.” 11 U.S.C.
§ 1506.
Chapter 15 thus authorizes an “ancillary” proceeding in a
United States bankruptcy court that is largely designed to
complement and assist a foreign insolvency proceeding by, among
other things, “bring[ing] people and property beyond the foreign
main proceeding’s jurisdiction into the foreign main proceeding
through the exercise of the United States’ jurisdiction.” In re
ABC Learning Centres Ltd., 728 F.3d 301, 307 (3d Cir. 2013); see
also H.R. Rep. No. 109-31, pt. 1, at 106 (“Cases brought under
chapter 15 are intended to be ancillary to cases brought in a
debtor’s home country . . .”). This structure reflects “the
United States policy in favor of a general rule that countries
other than the home country of the debtor, where a main
proceeding would be brought, should usually act through
ancillary proceedings in aid of the main proceedings, in
preference to a system of full bankruptcies (often called
‘secondary’ proceedings) in each state where assets are found.”
H.R. Rep. No. 109-31, pt. 1, at 108. Notwithstanding this
general policy, Chapter 15 also expressly contemplates that
“[a]fter recognition of a foreign main proceeding, a case under
another chapter of [the Bankruptcy Code] may be commenced . . .
if the debtor has assets in the United States.” 11 U.S.C.
§ 1528.
24
Thus, taken as a whole, Chapter 15 -- like the Model Law on
which it was based -- takes “several modest but significant”
steps toward implementing “a modern, harmonized and fair
framework to address more effectively instances of cross-border
insolvency.” UNCITRAL, Guide to Enactment of the UNCITRAL Model
Law on Cross-Border Insolvency, in Legislative Guide on
Insolvency Law 307, 307 (2005) (hereinafter, “Guide to
Enactment”).
III
Jaffé contends that the bankruptcy court erred by employing
§ 1522(a)’s sufficient protection requirement to subject his
“right to administer [Qimonda’s] U.S. patents . . . to the
constraints imposed by § 365(n),” thus allowing the Licensees to
elect to retain their license rights under Qimonda’s U.S.
patents, contrary to German law as he understands it. In re
Qimonda AG, 462 B.R. at 183. The bankruptcy court limited the
authority it conferred on Jaffé under § 1521(a)(5) by balancing
the interests of the Licensees with the interests of Qimonda’s
estate under § 1522(a) and concluding that the Licensees should
receive the protection of § 365(n). Id. at 180-83. In support
of his challenge, Jaffé makes essentially three arguments: (1)
that the district court and the bankruptcy court erred in even
considering § 1522(a), because that section applies only to
25
relief granted under § 1521, that the relief granted under §
1521 may be requested only by the foreign representative, and
that he, as the foreign representative, never requested the
inclusion of § 365(n) as part of the § 1521 relief; (2) that the
bankruptcy court misunderstood the type of protection afforded
by § 1522(a) by applying a test that balanced the debtor’s
interests and the creditors’ interests instead of a test that
placed all creditors on an equal footing; and (3) that in
balancing the competing interests, the bankruptcy court
overstated the risks to the Licensees, especially in view of
Jaffé’s offer to re-license Qimonda’s patents to them, and
failed to treat all creditors’ interests equally. We address
these points in order. 3
3
We note as well that the United States has appeared as
amicus curiae to express its concern that the bankruptcy court
overstepped its authority below. Specifically, it criticizes
the bankruptcy court as “approach[ing] this case as though it
were empowered to decide whether the Foreign Administrator
should be permitted to reject appellees’ license agreements”
based on an erroneous assumption that it could “superimpose
Section 365(n) on the operation of German insolvency law in a
German proceeding.” The United States therefore urges us to
“reverse[] on the threshold ground that Section 365(n) cannot
constrain the operation of German insolvency law in Germany.”
As already made clear, however, we take a different view of
the scope of the bankruptcy court’s holding. Rather than
purporting to “constrain the operation of German insolvency law
in Germany,” the bankruptcy court conditioned its grant of power
to Jaffé to “administer the assets of Qimonda AG within the
territorial jurisdiction of the United States” with the
limitation that he was taking the company’s U.S. patents subject
26
A
First, Jaffé argues that both the bankruptcy court and the
district court erred in even considering § 1522’s sufficient
protection requirement because § 1522(a) applies to relief that
may be granted under § 1521, and § 1521(a), in turn, provides
that “the court may, at the request of the foreign
representative, grant any appropriate relief.” (Emphasis
added). He asserts that he “never asked the bankruptcy court to
include § 365 in its Supplemental Order or sought other relief
relating to § 365(n)” such that the Licensees would have the
option to retain their licenses under Qimonda’s U.S. patents.
Thus, according to Jaffé, because application of § 365 was not
specifically requested by him, the bankruptcy court’s sua sponte
inclusion of § 365 was legal error, the correction of which must
precede any consideration of § 1522(a)’s sufficient protection
requirement.
We believe that Jaffé’s view of the relationship between §
1521(a) and § 1522(a) is too myopic. While it is true that
to the preexisting licenses, which he was obliged to treat in a
manner consistent with § 365(n). As a result, Jaffé is
precluded from rejecting the U.S. patent licenses as a matter of
U.S. law. Although this limitation may have indirect effects in
the German proceeding, it does not represent an impermissible
application of U.S. law extraterritorially, which we understand
to be the main concern animating the United States’ position in
this case.
27
Jaffé “never affirmatively requested rejection authority under §
365,” he did request several forms of discretionary relief under
§ 1521, among which was the privilege, pursuant to § 1521(a)(5),
to have the bankruptcy court entrust him with “[t]he
administration or realization of all or part of the assets of
[Qimonda] within the territorial jurisdiction of the United
States,” specifically identifying the company’s U.S. patents as
among the U.S. assets he sought to control. And, as a
prerequisite to awarding any § 1521 relief, the court was
required to ensure sufficient protection of the creditors and
the debtor. Section 1522(a) states this explicitly, providing
in relevant part, “The court may grant relief under section . .
. 1521 . . . only if the interests of the creditors and other
interested entities, including the debtor, are sufficiently
protected.” 11 U.S.C. § 1522(a) (emphasis added).
Additionally, the court was authorized to “subject” any § 1521
relief “to conditions it considers appropriate.” Id. § 1522(b);
see also H.R. Rep. No. 109-31, pt. 1, at 116 (describing § 1522
as “giv[ing] the bankruptcy court broad latitude to mold relief
to meet specific circumstances, including appropriate responses
if it is shown that the foreign proceeding is seriously and
unjustifiably injuring United States creditors”).
This is precisely what the bankruptcy court did here. It
granted discretionary relief under § 1521 and, as mandated,
28
considered the question of sufficient protection under §
1522(a). Upon such consideration, it conditioned its § 1521
relief on application of § 365(n), finding that such protection
was appropriate in the circumstances presented.
To be sure, the bankruptcy court did not frame its initial
inclusion of § 365 in the Supplemental Order as a condition on
the authority it was granting Jaffé under § 1521. Indeed, when
initially faced with Jaffé’s motion to amend, the court
described the inclusion of § 365 as “improvident.” But on the
Licensees’ appeal, the district court correctly recognized that
it was incumbent on the bankruptcy court, on remand, to consider
whether “the interests of the creditors and other interested
entities, including the debtor, [would be] sufficiently
protected” under § 1522(a) were the court to modify its earlier
order so as to grant Jaffé control over the administration of
Qimonda’s U.S. patents without providing for the application of
§ 365(n) to the licenses on those patents. See In re Qimonda AG
Bankr. Litig., 433 B.R. at 557-58.
The bankruptcy court’s consideration of § 1522(a) was thus
undoubtedly appropriate when authorizing relief under § 1521.
B
Jaffé next contends that even if the bankruptcy court was
correct to consider § 1522’s sufficient protection requirement
29
in granting § 1521 relief, the court nonetheless employed the
wrong test in applying § 1522(a). He maintains that the
bankruptcy court’s “ruling fundamentally misunderst[ood] the
‘interests’ § 1522(a) protects” by failing to recognize that §
1522(a) is merely a procedural protection “designed to ensure
that all creditors [could] participate in the bankruptcy
distribution on an equal footing” and thus should not be used to
protect parties from the substantive bankruptcy law that would
otherwise apply in the foreign main proceeding. (Emphasis
added). He asserts that “[d]isregarding foreign law based on an
open-ended balancing test under § 1522(a) is contrary to Chapter
15’s basic design,” which, according to Jaffé, requires U.S.
courts to defer to foreign substantive law except only as
allowed under § 1506, which provides a narrow exception when the
court’s action would otherwise violate “the most fundamental
policies of the United States.” H.R. Rep. No. 109-31, pt. 1, at
109. In sum, he argues (1) that the bankruptcy court erred by
interpreting § 1522’s sufficient protection requirement as
incorporating a balancing test that could achieve a result that
treated creditors differently and that would therefore be in
tension with German law, and (2) that, to the extent § 1522(a)
was implicated at all, the bankruptcy court should have limited
its analysis to ensuring that the doors of the German insolvency
30
proceeding would be open to the Licensees on equal footing with
Qimonda’s other creditors.
Jaffé’s theory of how the sufficient protection requirement
of § 1522(a) operates is not illogical. The text of the statute
is broad and somewhat ambiguous regarding the test that courts
should employ to determine “if the interests of the creditors
and other interested entities, including the debtor, are
sufficiently protected.” 11 U.S.C. § 1522(a). But we are not
convinced that Jaffé’s theory can fully be squared with the text
or with Congress’s intent in enacting the text.
Section 1522(a) requires the bankruptcy court to ensure the
protection of both the creditors and the debtor. 11 U.S.C. §
1522(a). The provision thus requires the court to ensure that
the relief a foreign representative requests under § 1521 does
not impinge excessively on any one entity’s interests, implying
that each entity must receive at least some protection. And
because the interests of the creditors and the interests of the
debtor are often antagonistic, as they are here, providing
protection to one side might well come at some expense to the
other. The analysis required by § 1522(a) is therefore
logically best done by balancing the respective interests based
on the relative harms and benefits in light of the circumstances
presented, thus inherently calling for application of a
balancing test.
31
We also find support for this interpretation in the Model
Law on Cross-Border Insolvency, on which Chapter 15 was based.
In enacting Chapter 15, Congress stated that it intended to
codify the Model Law. See 11 U.S.C. § 1501(a). And, in doing
so, it also indicated strongly that the Model Law, and the
accompanying Guide to Enactment issued by UNCITRAL in
conjunction with its adoption of the Model Law, should inform
our interpretation of Chapter 15’s provisions. Indeed, Chapter
15 provides that “[i]n interpreting this chapter, the court
shall consider its international origin, and the need to promote
an application of this chapter that is consistent with the
application of similar statutes adopted by foreign
jurisdictions.” Id. § 1508; see also H.R. Rep. No. 109-31, pt.
1, at 109-10 (“Interpretation of this chapter on a uniform basis
will be aided by reference to the Guide and the Reports cited
therein, which explain the reasons for the terms used and often
cite their origins as well. . . . To the extent that the United
States courts rely on these sources, their decisions will more
likely be regarded as persuasive elsewhere” (emphasis added)).
Thus, the Model Law and its Guide to Enactment also provide
relevant guidance in determining the appropriate meaning of
Chapter 15’s provisions.
The Guide to Enactment contains a number of paragraphs that
bear directly on the question of how a court should assess the
32
interests of others and protect them prior to granting the
discretionary relief sought by a foreign representative. For
example, the Guide acknowledges that the representative of a
foreign main proceeding will “normally seek[] to gain control
over all assets of the insolvent debtor.” Guide to Enactment
¶ 158, at 347. But it stresses that the Model Law makes “[t]he
‘turnover’ of assets to the foreign representative . . .
discretionary,” adding that “the Model Law contains several
safeguards designed to ensure the protection of local interests
before assets are turned over to the foreign representative.”
Id. ¶ 157, at 347 (emphasis added). Chief among those
“safeguards” is Article 22 of the Model Law, which is largely
codified as § 1522. 4 According to the Guide, “The idea
4
Article 22 of the Model Law provides in full:
1. In granting or denying relief under article 19 or
21, or in modifying or terminating relief under
paragraph 3 of this article, the court must be
satisfied that the interests of the creditors and
other interested persons, including the debtor, are
adequately protected.
2. The court may subject relief granted under article 19 or
21 to conditions it considers appropriate.
3. The court may, at the request of the foreign
representative or a person affected by relief granted
under article 19 or 21, or at its own motion, modify
or terminate such relief.
Comparing Article 22 and § 1522 reveals that Congress
relied heavily on the language of the Model Law. One of the few
33
underlying [A]rticle 22 is that there should be a balance
between relief that may be granted to the foreign representative
and the interests of the persons that may be affected by such
relief. This balance is essential to achieve the objectives of
cross-border insolvency legislation.” Id. ¶ 161, at 348
(emphasis added). The Guide to Enactment separately indicates
that Article 22 is designed to “protect the interests of the
creditors (in particular local creditors), the debtor and other
affected persons.” Id. ¶ 35, at 314. Finally, the Guide
states, “[i]n addition to [Article 22’s] specific provisions,”
Article 6 of the Model Law “in a general way provides that the
court may refuse to take an action governed by the Model Law if
the action would be manifestly contrary to the public policy of
the enacting State.” Id. ¶ 36, at 314 (emphasis added).
Informed by the Guide to Enactment’s description of the
relationship between Articles 22 and 6 of the Model Law (§§ 1522
and 1506 in the U.S. Bankruptcy Code), we do not share Jaffé’s
view that § 1506’s public policy exception forecloses use of a
balancing analysis under § 1522. Contrary to Jaffé’s position,
alterations that Congress made was to change “adequately” in
Article 22(1) to “sufficiently” in § 1522(a) -- a modification
that the legislative history indicates was made in order “to
avoid confusion with . . . ‘adequate protection,’” “a very
specialized legal term in United States bankruptcy.” H.R. Rep.
No. 109-31, pt. 1, at 115.
34
Chapter 15 does not require a U.S. bankruptcy court, in
considering a foreign representative’s request for discretionary
relief under § 1521, to blind itself to the costs that awarding
such relief would impose on others under the rule provided by
the substantive law of the State where the foreign insolvency
proceeding is pending. Instead, Chapter 15, like the Model Law,
anticipates the provision of particularized protection, as
stated in § 1522(a).
We therefore conclude, through interpretation of
§ 1522(a)’s text and consideration of Chapter 15’s international
origin, that the district court correctly interpreted
§ 1522(a)’s sufficient protection requirement as requiring a
particularized balancing analysis that considers the “interests
of the creditors and other interested entities, including the
debtor,” 11 U.S.C. § 1522(a), and, in this case in particular, a
weighing of the interests of the foreign representative (the
debtor) in receiving the requested relief against the competing
interests of those who would be adversely affected by the grant
of such relief (here, the Licensees). And we also agree that
§ 1506 is an additional, more general protection of U.S.
interests that may be evaluated apart from the particularized
analysis of § 1522(a).
In reaching this conclusion, we join the Fifth Circuit,
which interpreted § 1522(a) similarly, based largely on the
35
language in the Guide to Enactment. See In re Vitro S.A.B. de
C.V., 701 F.3d 1031, 1060, 1067 n.42 (5th Cir. 2012); see also
In re Int’l Banking Corp. B.S.C., 439 B.R. 614, 626-27 (Bankr.
S.D.N.Y. 2010); In re Tri-Cont’l Exch. Ltd., 349 B.R. 627, 637
(Bankr. E.D. Cal. 2006).
C
Finally, Jaffé contends that the bankruptcy court’s
balancing analysis, even if assumed appropriate, was flawed in
implementation. He argues that the court dramatically
overstated the risk to the Licensees’ investments made in
reliance on the cross-license agreements, especially in light of
his offer to re-license Qimonda’s U.S. patents to the Licensees
at a RAND royalty rate. In this regard, he maintains that the
court’s balancing analysis failed to recognize that “§ 1522(a)
requires courts to protect the interests of all ‘creditors and
other interested entities, including the debtor’ -- not just one
set of contracting parties.”
The Licensees respond, arguing that “the bankruptcy court
properly recognized that Dr. Jaffé’s offer to relicense did not
change the balance of harms” and that the bankruptcy court
correctly “concluded that, without § 365(n) protection, the
Licensees would face both the immediate harm of a hold-up and
the future . . . destabilization of the licensing regime in the
36
semiconductor industry.” They maintain that in light of the
bankruptcy court’s detailed findings and careful reasoning,
Jaffé simply “cannot meet his heavy burden to demonstrate that
the bankruptcy court abused its discretion in its application of
§ 1522.”
It should be noted that after hearing four days of
evidence, the bankruptcy court considered the outcome of its
balancing analysis to be a close one. But in the end it
concluded, reasonably we believe, “that the balancing of debtor
and creditor interests required by § 1522(a), Bankruptcy Code,
weigh[ed] in favor of making § 365(n) applicable to Dr. Jaffé’s
administration of Qimonda’s U.S. patents.” In re Qimonda AG,
462 B.R. at 182. The court recognized Jaffé’s claim that the
“application of § 365(n) [would] result in less value . . .
being realized by the Qimonda estate.” Id. But it noted that
“Qimonda’s patent portfolio [would] by no means be rendered
worthless” because the “U.S. patents [could] still be licensed
to parties that [did] not already have a license, and Dr. Jaffé,
to the extent permitted by German law, [would] be able to fully
monetize the non-U.S. patents.” Id. Additionally, the
bankruptcy court found it significant that “[a]pplication of
§ 365(n) . . . [would impose] no affirmative burden on Dr.
Jaffé,” id., but instead would merely limit his ability -- and,
importantly, the ability of the patents’ subsequent owners -- to
37
bring infringement actions against the very entities that
Qimonda had previously promised not to sue. See Imation Corp.
v. Koninklijke Philips Elecs. N.V., 586 F.3d 980, 987 (Fed. Cir.
2009) (characterizing a patent cross-license agreement as
essentially “a promise by the licensor not to sue the licensee”
for infringement (citation omitted)).
In considering and weighing the Licensees’ interests, the
bankruptcy court largely credited their evidence indicating that
entrusting Jaffé with the right to administer Qimonda’s U.S.
patents without making § 365(n) applicable to the preexisting
licenses under those patents would have broad-ranging ill
effects. It explained that “the risk to the very substantial
investment the [Licensees] -- particularly IBM, Micron, Intel,
and Samsung -- [had] collectively made in research and
manufacturing facilities in the United States in reliance on the
design freedom provided by the cross-license agreements, though
not easily quantifiable, [was] nevertheless very real.” In re
Qimonda AG, 462 B.R. at 182-83. While the bankruptcy court
acknowledged that the Licensees had been unable “to identify
specific Qimonda patents implicated by the products they
manufacture[d] and s[old],” it noted that the lack of such
evidence was “not at all surprising, since the whole point of
portfolio cross-licenses [was] to eliminate the necessity (and
in some cases impossibility) of individually analyzing each and
38
every patent that might possibly apply to determine if a new
design infringe[d] on it.” Id. at 181. Thus, although the
bankruptcy court could not, in the course of its balancing
analysis, make “a finding that cancellation of the [Licensees’]
right to use Qimonda’s U.S. patents would have a specific dollar
impact on them,” it did find that it “create[d] a substantial
risk of harm,” adding that “the threat of infringement
litigation can be as damaging as an actual finding of
infringement.” Id.
We find the bankruptcy court’s thorough examination of the
parties’ competing interests to have been both comprehensive and
eminently reasonable.
Jaffé relies heavily on the mitigation that would result
from his commitment to re-license Qimonda’s patents to the
Licensees on RAND terms, arguing that it would provide
sufficient protection for their interests. Of course, his
proposal -- first mentioned after the district court’s remand --
does weigh in his favor by decreasing the Licensees’ holdup
risks. But just because the RAND proposal would reduce the
Licensees’ risks does not mean that their interests would be
sufficiently protected by Jaffé’s promise to re-license. The
bankruptcy court expressly recognized this, explaining that “the
hold-up risk is lessened by Dr. Jaffé’s offer to re-license the
patents on RAND terms,” but emphasizing that “even if the WIPO
39
expert determination process were to arrive at the same figure
that would have been agreed to in an ‘ex ante’ scenario, the
[Licensees], because of their sunk costs, [would] not have the
option of avoiding royalties altogether by designing around the
patent.” In re Qimonda AG, 462 B.R. at 181-82. We conclude
that the bankruptcy court’s findings in this regard are not
unreasonable and that the bankruptcy court was justified in its
skepticism of Jaffé’s claim that the Licensees’ interests would
now be “sufficiently protected” by his commitment not to charge
them an exorbitant rate during their re-licensing negotiations.
Moreover, the bankruptcy court also noted that it remained
an “open question” whether any new license issued by Jaffé on
RAND terms would itself be secure, expressing its concern that
Dr. Jaffé could still sell the underlying patents to a
purchaser -- whether a practicing entity or a ‘troll’
-- that might itself file for insolvency under German
law or transfer the patent to a special purpose entity
for the purpose of having it file for insolvency under
German law.
Id. at 181-82 n.13. The court’s recognition of this concern was
also reasonable, as it is far from clear whether, having once
facilitated the termination of license rights in a foreign
insolvency proceeding, the genie could ever be put back into the
bottle. Rather, as indicated by expert testimony that the
bankruptcy court credited, it would seem all too likely that
such a result would introduce a dangerous degree of uncertainty
40
to a licensing system that plays a critically important role in
the semiconductor industry, as well as other high-tech sectors
of the global economy.
At bottom, we affirm the decision of the bankruptcy court,
finding reasonable its exercise of discretion in conducting the
balancing analysis under § 1522(a) and concluding that attaching
the protection of § 365(n) was necessary when granting Jaffé the
power to administer Qimonda’s U.S. patents. See In re Vitro
S.A.B. de C.V., 701 F.3d at 1069 (noting in the course of
affirming a bankruptcy court’s decision not to enforce the
reorganization plan adopted in a foreign main proceeding that
“[i]t is not our role to determine whether the above-summarized
evidence would lead us to the same conclusion” and adding that
“[o]ur only task is to determine whether the bankruptcy court’s
decision was reasonable” (emphasis added)).
IV
It is important, we think, to recognize, as Jaffé would
have us do, the importance of Chapter 15 to a global economy, in
which businesses needing bankruptcy protection increasingly have
assets in various countries. In mimicking the U.N.’s Model Law
on Cross-Border Insolvencies, Chapter 15 furthers a policy of
the United States of cooperating with other countries in
providing fair and efficient insolvency proceedings for such
41
international businesses. Consistent with its stated purposes,
Chapter 15 provides for the ready recognition of foreign
insolvency proceedings, see 11 U.S.C. § 1517, and grants
automatic relief to protect U.S. assets upon entry of an order
granting recognition, see id. § 1520. It also provides for a
broad range of discretionary relief under § 1521. Thus, it
represents a full commitment of the United States to cooperate
with foreign insolvency proceedings, as called for by the U.N.’s
Model Law on Cross-Border Insolvency. And at bottom, such
cooperation will provide greater legal certainty for trade and
business to the benefit of the global economy.
But the United States’ commitment is not untempered, as is
manifested in both Chapter 15 and the Model Law on which it was
based. Thus, § 1522(a) requires that a bankruptcy court, when
granting the discretionary relief authorized by § 1521, ensure
sufficient protection of creditors, as well as the debtor. And
at a more general level, § 1506, which covers any action under
Chapter 15, authorizes a bankruptcy court to refuse to take an
action that would be manifestly contrary to U.S. public policy.
In this case, it is sufficient for us to affirm the
bankruptcy court, based on its application of § 1522(a). But in
doing so, we understand that, by affirming the bankruptcy
court’s application of § 365(n) following its balancing analysis
under § 1522(a), we also indirectly further the public policy
42
that underlies § 365(n). The Senate Report accompanying the
bill that became § 365(n) explicitly recognized that licensees
have a strong interest in maintaining their right to use
intellectual property following the licensor’s bankruptcy and
that to deny them that right would “impose[] a burden on
American technological development that was never intended by
Congress.” S. Rep. No. 100-505, at 1. The Report added that
“[t]he adoption of this bill will immediately remove that burden
and its attendant threat to the development of American
Technology.” Id. at 2.
In this case, the bankruptcy court, in weighing the
respective interests of the Licensees and the debtor under §
1522(a), found that without the protection of 365(n), the risk
of harm to the Licensees would be very real, impairing the
“design freedom provided [them] by the cross-license
agreements.” In re Qimonda AG, 462 B.R. at 183. And as the
bankruptcy court otherwise found, this potential harm to the
Licensees would, in turn, threaten to “slow the pace of
innovation” in the United States, to the detriment of the U.S.
economy. Id. at 185. Thus, the court’s findings, which were,
to be sure, focused on the Licensees’ interests, nonetheless
necessarily furthered the public policy underlying § 365(n).
We thus recognize that by affirming the bankruptcy court,
even though on its § 1522(a) analysis, we too necessarily
43
further the public policy inherent in and manifested by
§ 365(n).
The judgment of the bankruptcy court is accordingly
AFFIRMED.
44
WYNN, Circuit Judge, concurring in the judgment:
The only question we need to address in this appeal
concerns the bankruptcy court’s discretion in ensuring that “the
interests of the creditors and other interested entities,
including the debtor, are sufficiently protected” under Chapter
15 of the Bankruptcy Code, 11 U.S.C. § 1522, and whether the
bankruptcy court abused that discretion here. I agree with the
majority opinion that in reviewing this issue, we look not to
whether the record evidence “would lead us to the same
conclusion” but that “[o]ur only task is to determine whether
the bankruptcy court’s decision was reasonable.” In re Vitro
S.A.B. de C.V., 701 F.3d 1031, 1069 (5th Cir. 2012).
Accordingly, I am happy to concur in the language in Parts I,
II, and III of the majority opinion that analyzes and addresses
only this issue. I do not join in Part IV because it is
unnecessary dictum.
45
Michael Jaffe v. Samsung Electronics Company
Court: Court of Appeals for the Fourth Circuit
Date filed: 2013-12-03
Citations: 737 F.3d 14
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