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Intellectual Property Law Committee
Spring 2002
Committee News
TORT AND INSURANCE PRACTICE
Is Your Company
Committing
Software Piracy?
by Daniel J. Glivar
Before you answer “of
course not,” chances are
approximately 25% that the
business-related software appli-
cations and programs your
company installed during 2000
and uses in its day-to-day oper-
ations are pirated and subject
your company to copyright
infringement claims.
According to the International
Planning and Research
Corporation’s 2000 Global
Software Piracy Report, one in
four business software applica-
tions installed in North America
(the United States and Canada)
in 2000 has been illegally
installed and/or used.
What Is Software Piracy?
Stated simply, software “pira-
cy” is the unauthorized copy-
ing (and/or use) of a software
product. In legal terms, soft-
ware piracy constitutes copy-
right infringement. Perhaps the
UNDERSTANDING CERTAIN BANKRUPTCY
HURDLES FOR TECHNOLOGY COMPANIES
by Risa Lynn Wolf-Smith and Erin Connor
Continued on page 4
Technology companies typi-
cally own or license essential
intellectual property. Through
various contracts such as license
agreements, cross-license agree-
ments, website design and devel-
opment agreements, software
development agreements, web
page linking agreements, tech-
nology sharing agreements, joint
ventures for sharing intellectual
property rights, and other agree-
ments, technology companies
operate their businesses using
valuable patents, copyrights, and
trademarks. These contracts are
generally deemed “executory
contracts” in bankruptcy and are
often the most valuable “assets”
an e-commerce or dotcom debtor
possesses. However, a bankrupt-
cy filing may strip the value of
such executory contracts and
cripple a company’s efforts to
reorganize. This article will
explore certain bankruptcy rules
that pertain to executory con-
tracts of intellectual property and
suggest practical methods for
maintaining their value in bank-
ruptcy.
Section 365 of the
Bankruptcy Code offers special
treatment for executory con-
tracts involving intellectual
property. Under the
“Countryman definition,” con-
tracts under which performance
remains due on both sides are
Continued on page 6
IN THIS ISSUE:
Understanding Certain Bankruptcy Hurdles for Technology Companies..1
Is Your Company Committing Software Piracy ..........................................................1
Letter From The Chair...................................................................................................3
Committee Updates.........................................................................................................7
Alert: Applied E-risk Management Program.............................................................11
Calendar...........................................................................................................12
Intellectual Property Law Committee Newsletter Spring 2002
2
©2002 American Bar Association, Tort and Insurance Practice Section, 750 North Lake Shore Drive, Chicago, Illinois 60611; (312) 988-5607. All rights reserved.
The opinions herein are the authors’ and do not necessarily represent the views or policies of the ABA, TIPS or the Intellectual Property Law Committee. Articles should
not be reproduced without written permission from the Tort and Insurance Practice Section.
Editorial Policy: This Newsletter publishes information of interest to members of the Intellectual Property Law Committee of the Tort and Insurance Practice Section of the
American Bar Association — including reports, personal opinions, practice news, developing law and practice tips by the membership, as well as contributions of interest
by nonmembers. Neither the ABA, the Section, the Committee, nor the Editors endorse the content or accuracy of any specific legal, personal, or other opinion, proposal
or authority.
Copies may be requested by contacting the ABA at the address and telephone number listed above.
Chair
Kari Jo Wangensteen
Dell Computer Corporation
Legal Department
PO Box 149280
Round Rock, TX
(512) 728-1304
Fax: (512) 728-1881
Chair-Elect
Charles J Morton, Jr
Venable Baetjer & Howard
2 Hopkins Plz, Ste 1800
Baltimore, MD
(410) 244-7716
Fax: (910) 659-1350
Council Representative
G Glennon Troublefield
Carella Byrne et al
6 Becker Farm Rd, Ste 3
Roseland, NJ
(973) 994-1700
Fax: (973) 994-1744
Last Retiring Chair
Jeffrey M Thompson
4200 Multifoods Twr
33 S 6th St
Minneapolis, MN
(612) 371-1306
Fax: (612) 338-8384
jthompson@meagher.com
Newsletter Editor
Kristine Mary Miller
Holland & Hart LLP
1050 Walnut St, Ste 500
Boulder, CO
(303) 473-2726
Fax: (303) 473-2720
Web Site Coordinator
Jonathan E Lass
National Instrument Corp
6207 Turtle Point Dr
Austin, TX
(512) 683-6915
Fax: (512) 683-6913
Vice-Chairs
Debra A Chong
Virtual Boardwalk
5059 Geary Blvd
San Francisco, CA
(415) 876-0800
Fax: (415) 876-0850
Eric S Henshaw
239 Water St
Boyertown, PA
Law Student Vice-Chair
Michael J Polelle
John Marshall Law School
315 S Plymouth Ct, Ste 426
Chicago, IL
(312) 987-1440
Fax: (312) 427-9974
Carolyn M Sandberg
Schwegman Lundberg et al
TCF Tower
121 S Eighth St, Ste 1600
Minneapolis, MN
(612) 373-6900
Fax: (612) 339-3061
Christopher John Schulte
Meagher & Geer PLLP
4200 Multifoods Twr
33 S 6th St
Minneapolis, MN
(612) 371-1314
Fax: (612) 338-8384
cschulte@meagher.com
William Carl Steffin
Squire Sanders & Dempsey LLP
801 S Figueroa, Fl 14
Los Angeles, CA
(213) 689-5130
Fax: (213) 623-4581
VISIT OUR WEBSITE AT:
WWW.ABANET.ORG/TIPS
Intellectual Property Law Committee Newsletter Spring 2002
3
Letter from the Chair
To many practitioners, Intellectual Property is esoteric and academic. Such practition-
ers mistakenly believe that there is limited application to their “real world” practices. The
articles in this edition of the Committee News for the Intellectual Property Committee
illustrates how shortsighted such thinking can be.
The collapse of Enron is certainly the biggest bankruptcy news in recent memory, but
it is hardly the only one. There were over 39 bankruptcies of billion dollar companies in
the last year. Bankruptcy filings are on the rise and technology companies are partici-
pants--some as debtors and others as creditors. IP rights can be a key asset that the debtor
should be protecting and the creditors should not unknowingly disregard. The article by Risa Lynn Wolf-
Smith and Erin Connor highlights how to protect licenses in a bankruptcy filing no matter which side one
is on. In these current economic times, such guidance is practical for any practitioner.
Enron’s collapse has lead to a new awareness of the ethical responsibilities professionals must main-
tain even when dealing with a large and influential client. One ethic obligation is not to assist or counsel
a client to engage in conduct that the lawyer knows is criminal or fraudulent. Daniel Glivar’s article on
software piracy reminds us all of the need to help prevent our clients from committing copyright infringe-
ment in their software dependent work environments.
IP does not stand for an “intellectual pursuit.” Intellectual Property is relevant to virtually every com-
mercial lawyers practice and the everyday world. It is important for this Committee to help demystify the
IP practice.
Kari Jo Wangensteen, Dell Computer Corporation, Legal Department, PO Box 149280, Round Rock,
-WANTED-
Project Out-Reach, the ABA Section Officers Meritorious Award recipient, is a co-spon-
sored high school peer mediation project of the ABA Tort and Insurance Practice Section,
the ABA Dispute Resolution and the ABA Young Lawyers Division.
Project Out-Reach is looking to expand its program to include six new high schools.
Criteria - School officials will need to commit their schools and volunteers for individual
high school peer mediation programs.
Teams of three attorneys trained in mediation techniques will assist school administrators
with implementation decisions, conduct training and follow-up meetings; working with
new or existing school-based mediation programs. For more information, please contact
Sonia Schroeder, ABA Tort and Insurance Practice Section, 312/988-6229 or schroed-
ers@staff.abanet.org.
Intellectual Property Law Committee Newsletter Spring 2002
4
most important (and misunder-
stood) element of copyright
infringement is that it occurs
upon copying (which includes
installation), and NOT upon
actual use. For example, if a
computer program is installed
(copied) onto a personal com-
puter workstation or a network
server, copyright infringement
may have occurred regardless of
whether such program actually
is ever used.
Who Owns The Software?
The media containing a software
program (usually a disk) is sold
to the user, but the actual soft-
ware program contained on the
media generally is provided
under a limited use license. The
user is deemed to have agreed to
such license upon opening,
installing and/or using the soft-
ware program. The most com-
mon forms of license agree-
ments between the software
provider and user are (1) a
“shrink-wrap” license (a written
license packaged with the disk
inside a plastic shrink-wrap,
which usually becomes effective
upon opening), (2) a “click”
license (which becomes effec-
tive after the user accepts by
clicking at various prompts dur-
ing installation), or (3) a formal
written license agreement exe-
cuted by the provider and user
(generally for network-installed
software). Failure to comply
with the terms and conditions of
the applicable license may con-
stitute a breach of contract and
subject the user to civil and/or
criminal penalties.
How Does Software Piracy
Happen? Software piracy hap-
pens every day in various forms,
including copying workplace
software for use on a home com-
puter, failing to obtain (and
maintain) the proper number of
user licenses, or simply “shar-
ing” a floppy disk with a friend
or co-worker. In the case of a
company or organization, how-
ever, software piracy generally
is the unintended result of one
or more of the following cir-
cumstances: (1) software previ-
ously purchased by a company
for one workstation routinely
was copied onto new computers
and servers purchased by the
company without purchasing
new licenses or additional
“seats” for such software; (2) the
person or department responsi-
ble for software purchases
and/or installation did not retain
the license agreements, purchase
orders, invoices, or receipts
proving that the company pur-
chased such software; and/or (3)
software or computer purchase
receipts do not specify the type
of software purchased or the
number of permitted users of
such software. Any one of the
foregoing scenarios results in a
company being unable to prove
that it has purchased--and has
the legal right to use--the soft-
ware that it currently has
installed. Software piracy is
especially prone to occur dur-
ing rapid business expansion,
management changes or
employee turnover--primarily
due to poor record-keeping and
the absence of a standard soft-
ware use and control policy.
Even though unauthorized
installations and copying may
occur without company man-
agement’s knowledge, no intent
is required, vicarious liability
applies, and ignorance of the
law is no excuse.
Who’s Looking? The
Business Software Alliance
(BSA) and the Software and
Information Industry
Association (SIIA) are the two
major enforcement groups that
have been created primarily to
eliminate (or at least minimize)
software piracy on behalf of a
software industry that lost
approximately $11.75 billion to
software piracy in 2000 alone.
These associations represent the
interests of software developers
such as Adobe Systems
Incorporated, Apple Computer,
Inc., Autodesk, Inc., Bentley
Systems, Inc., Lotus
Development Corporation,
Macromedia, Inc., Microsoft
Corporation, and Symantec
Corporation, and view the unau-
thorized copying or use of soft-
ware products as if the software
had been shoplifted directly
from the shelves of the local
computer store. There is little
sympathy for infractions, as
minor as they may be.
How Do They Know? Each
of the BSA and SIIA have set up
toll-free anti-piracy reporting
hotlines as well as Internet web-
sites with e-mail reporting links
(see www.bsa.org and
www.spa.org). These hotlines
and e-mail links enable any per-
son with knowledge of a compa-
ny’s computer systems or soft-
ware use to report violations.
By guaranteeing that all
Software Piracy?...
Continued from page 1
Intellectual Property Law Committee Newsletter Spring 2002
5
reported violations will be held
in the strictest confidence, will
not be disclosed without the
prior authorization of the
reporter, and that no telephone
calls are recorded or traced, the
BSA and SIIA encourage a
company’s former employees,
current unhappy employees, and
competition to report such com-
pany’s unauthorized use of soft-
ware. These confidentiality
assurances make it simple for
even the non-confrontational
“whistle-blower” to reveal a
company’s violations.
What Are The Penalties?
Section 504 of the federal
Copyright Act provides for two
measures of damages for copy-
right infringement in civil
actions: (1) actual damages
based on the number of copies
misappropriated or (2) statutory
damages, which range from
$750 to $30,000 per work
infringed. The court may
increase statutory damages up to
$150,000 per work infringed
where it determines that the
infringement was willful. The
court also may award costs and
reasonable attorneys’ fees to the
prevailing party. For felony vio-
lations, federal law carries a
maximum five-year prison term
for first-time offenders and up to
10 years for repeat offenders,
with fines of up to $250,000 for
individuals and $500,000 for
organizations. For misde-
meanor violations, there is a
maximum fine of $5,000 for
individuals and $10,000 for
organizations. The BSA reports
that it has collected more than
$68 million over the past nine
years from United States com-
panies using unlicensed soft-
ware.
How Your Company Might
Find Out. The BSA and SIIA
will send a letter to any compa-
ny for which they have received
information regarding the possi-
ble illegal duplication of com-
mercial software products.
Generally, the letter will state
that unauthorized duplication of
software constitutes copyright
infringement and that the soft-
ware companies representatives
are fully prepared to pursue all
available legal remedies, but
will offer the company an
opportunity to conduct an inter-
nal, company-wide software
audit and investigation to deter-
mine the circumstances that led
to such copyright infringement.
The letter also will prohibit the
deletion or de-installation of any
software currently installed that
is published by the software
companies represented by the
association (for evidentiary pur-
poses) and will prohibit the
company from negotiating with
any sales representatives or ven-
dors to purchase additional soft-
ware licenses in order to remedy
existing shortfalls. If your com-
pany chooses not to respond to
the letter, and the reported viola-
tion appears to be factually
based and reasonably reliable,
then there is a risk of a lawsuit
being filed and your company
becoming subject to an unan-
nounced audit (with the assis-
tance of the United States
Marshal’s Office).
What To Do If Your
Company Gets “The Letter.” If
your company receives a letter
from the BSA or the SIIA, you
should consider contacting an
attorney. If your company
decides to cooperate with the
BSA or SIIA to settle an
infringement claim, then your
company will be required to (1)
delete all unauthorized copies of
software currently installed, (2)
pay a penalty with respect to
such deleted software (usually
calculated by multiplying the
MSRP of the software by a mul-
tiplier (as high as 1.5)), (3) buy
appropriate licenses for any
newly installed software, and (4)
pay all attorneys’ fees and other
costs relating to the investiga-
tion and resolution of the copy-
right infringement claim. Any
party entering into a settlement
should consider obtaining a con-
fidentiality and non-disclosure
agreement so that the terms of
such settlement do not end up as
first-page news (on a published
website or otherwise).
An Ounce of Prevention.
The best way to ensure that your
company does not commit soft-
ware copyright infringement is
to (1) adopt, employ and enforce
a comprehensive internal soft-
ware management policy, (2)
perform periodic audits of com-
pany computers and networks,
(3) maintain current, accurate
and complete records with
respect to all software purchases
(e.g., keep copies of all software
invoices and license agreements
for proof of purchase), (4) un-
derstand the company’s license
agreements, and (5) educate
management and employees
Continued on page 6
Intellectual Property Law Committee Newsletter Spring 2002
6
regarding compliance with
copyright laws (e.g., have each
employee execute a standard
form of Employee Software Use
Policy). The BSA and SIIA also
provide auditing software,
guidebooks, workplace courses,
videos, posters and other
employee awareness materials.
A Pound of Cure. Once soft-
ware has been illegally installed
or used, copyright infringement
has occurred, and the destruction,
deletion or removal of such soft-
ware will not remedy the
infringement. Upon discovery
that unauthorized software pro-
grams have been installed or are
being used at your company,
management immediately needs
to take appropriate remedial
action. Such remedial action
may include contacting the appli-
cable software vendor and pur-
chasing the requisite number of
additional licenses. Generally,
the vendor appreciates the com-
pany’s honesty and is willing to
sell the additional licenses with-
out further action.
Software Piracy?...
Continued from page 5
considered executory for bank-
ruptcy purposes. Although the
Bankruptcy Code itself contains
no definition of the term “execu-
tory contract,” bankruptcy
courts apply the Countryman
definition to analyze the unper-
formed duties of each party and
thus determine “executoriness.”
Once a contract is deemed to
be “executory,” Section 365(a)
governs its assumption and
rejection. In general, a debtor
may exercise “business judg-
ment” to decide whether to
assume or reject an executory
contract, assessing the benefits
and burdens to its business
which flow from the contract. If
a debtor decides that the benefits
of a particular contract outweigh
its burdens, it will file a motion
with the bankruptcy court
requesting that assumption be
allowed. In order to assume an
executory contract, however, a
debtor must cure all defaults
under the contract, or provide
“adequate assurance” that it will
promptly cure, and provide ade-
quate assurance of future
performance. If a debtor rejects
an executory contract, the con-
tract is deemed breached as of
the date of the debtor’s bank-
ruptcy petition, and the non-
debtor party may file a general
unsecured claim for damages.
If the debtor is a licensee of
patents or copyrights, the filing
of a bankruptcy petition may
trigger a number of unexpected
hurdles to continuing essential
license rights. An executory
contract may not be assigned if
“applicable nonbankruptcy law”
excuses the nondebtor party
from accepting performance
from or rendering performance
to an entity other than the
debtor. Because the courts have
concluded that patent and copy-
right law constitutes applicable
nonbankruptcy law that excuses
performance from another, the
Bankruptcy Code prohibits
assignment of intellectual prop-
erty licenses without the consent
of the nondebtor party, even if
the license in question is silent
on any consent requirement.
Trademark law, however, is dis-
tinguishable and permits unau-
thorized assignment unless the
use of the trademark by the
assignee is likely to confuse,
cause mistakes by, or deceive
customers.
In addition, many courts have
held that a literal reading of
Bankruptcy Code 365(c)(1)
(dealing with assumption and
assignment of executory con-
tracts) prohibits even the
assumption of an intellectual
property license under a so-
called “hypothetical test.” At
the Circuit Court level, a major-
ity of courts have endorsed the
“hypothetical test.” These
courts reason that a debtor-in-
possession may not assume an
executory contract over the non-
debtor’s objection if applicable
nonbankruptcy law would bar
assignment to a hypothetical
third party, even where the
debtor-in-possession has no
intention of assigning the con-
tract in question to any such
third party.
Obviously, a bankruptcy
decision preventing a debtor
with critical IP license agree-
ments from assuming those
agreements would not only crip-
ple the debtor and its business,
HURDLES...
Continued from page 1
Continued on page 8
7
COMMITTEE UPDATES
by Kari Wangensteen, Committee Chair
Intellectual Property Law Committee Newsletter Spring 2002
The Committee is always
looking for ways to increase the
value of your membership.
Here are some of the things we
have been doing:
The Annual CLE Program
In addition to our Committee
News, the Committee is co-
sponsoring at this year’s ABA
Annual Meeting an exciting pro-
gram entitled, “Applied E-Risk
Management: Real Problems.
Real Solutions.” This practical
“how-to” program will be held
on Saturday, August 10, 2002,
from 9 a.m. to noon. Topics will
include discussion about an E-
Activity Matrix, Basic E-Risk
Profiles, An Ounce of E-
Prevention and An Ounce of E-
Cure. See Chuck Morton’s arti-
cle in this Newsletter for infor-
mation on how to sign up for
this program.
Committee Meetings
Monthly. On the fourth
Thursday of each month, the
Committee holds a business
meeting by telephone. The
hourly conference call, which
starts at 2:00 pm Central Time,
is an opportunity for us to dis-
cuss Committee business as well
as participate in round-table dis-
cussions.
Annual. The Committee will
hold its Annual Business meet-
ing on Saturday, August 10,
2002, from 7:30 am to 9:00 am,
Eastern Time, at the ABA
Annual Meeting in Washington,
D.C.
Committee Resources
Newsletters. The Committee
publishes written materials that
are useful to the intellectual
property lawyer. Currently, we
publish a periodic newsletter. If
you wish to contribute an article
to future editions, please contact
the Newsletter Editor, Kris
Miller, at kmiller@holland-
hart.com. A goal for this com-
ing year is to publish E-Alerts to
provide our members with up-
to-date information on hot new
topics.
Web site. Visit our Web site
to access daily intellectual prop-
erty updated news; intellectual
property cases; Committee
program materials and presenta-
tions. Also check out our new
Intellectual Property Informa-
tion eXchange (IPIX) service
where you can access intellectu-
al property practitioners who
have volunteered to share their
expertise with you. You can also
participate in a bulletin board
service to exchange ideas.
Membership
The Committee is always
interested in new ideas and new
members. If you are interested
in intellectual property law, then
this is the place for you. Please
feel free to contact me
or the Committee’s Chair-Elect
or any of the Vice-Chairs for
more information.
VISIT OUR WEBSITE AT:
WWW.ABANET.ORG/TIPS
Intellectual Property Law Committee Newsletter Spring 2002
8
but stymie any potential reor-
ganization. Moreover, if the
debtor intends to rely on the
assignment of valuable license
agreements to reorganize its
business, a prohibition on
assignment would defeat that
intent.
There are several means by
which a licensee/debtor can
maintain licenses in bankruptcy.
Once in bankruptcy, involve
the licensor parties as early as
possible, and lobby for their sup-
port. There are benefits to the
licensor in permitting a debtor to
assume and assign its license.
For example, the prospect of
additional license fees or the
retention of cross-licenses may
be incentives for consent. If the
licensor consents to assignment,
the debtor should be permitted to
both assume and/or assign the
license.
Also, a licensee debtor can
allow the license to “pass
through” the bankruptcy without
assumption or rejection. At the
conclusion of the case, all proper-
ty of the estate revests in the
debtor. Although a licensor may
seek to compel the debtor’s
assumption or rejection, or
request relief from the automatic
stay in order to terminate the
license, the bankruptcy court
should permit the debtor to con-
tinue to use the license throughout
the case as long as the debtor is
current on its royalty obligations.
It is better, however, to con-
sider these issues up front, when
negotiating the license agree-
ment in the first place. Consider
adding a bankruptcy clause
which affirmatively states that in
the event the licensee files for
bankruptcy, the debtor/licensee
or trustee has the explicit right to
assume the license and to contin-
ue to use the technology. To bol-
ster the enforceability of such
language, the agreement should
state that patent, copyright or
other applicable intellectual
property law does not control
assignment for purposes of the
assumption by the debtor of the
license agreement. This lan-
guage may only be appropriate
in certain situations, for instance,
in the case of a cross-license
between parties with relatively
equal bargaining leverage.
Additionally, consider mak-
ing the license an exclusive
license. The characterization of
a license as “exclusive” or
“nonexclusive” may affect the
determination of whether a con-
tractual arrangement is an
executory contract in the first
place. Under a nonexclusive
license, the licensee has a mere
right to use the intellectual prop-
erty, but the licensor retains the
rights of ownership. Under an
exclusive license, the licensor
may be deemed to have trans-
ferred title to the licensee in a
“nonexecutory sale.” A nonex-
ecutory sale would not be sub-
ject to assumption or rejection.
Note, however, that the label
given to a contractual arrange-
ment is not dispositive, and the
courts will look to the true
nature and economic reality of
the contractual relationship.
Finally, if a joint venture
between unrelated parties is
contemplated, consider con-
tributing the technology to the
venture so that the venture can
continue to operate in the event
of the bankruptcy of either joint
venturer.
Until the enactment of
Section 365(n) of the
Bankruptcy Code in 1988,
licensees were also at risk when
their licensors declared bank-
ruptcy. If the debtor/licensor
rejected the license agreement in
question for its own business
reasons, the licensee would be
left with a terminated license and
forced to forfeit its license rights.
This statute now provides special
protections for licensees to avoid
these harsh results.
Under this provision, the non-
debtor licensee may elect to
either (a) treat the license as ter-
minated, breached and retain a
general unsecured claim, or (b)
continue to use the intellectual
property (trademarks and trade-
names are omitted from the defi-
nition of intellectual property).
If the nondebtor licensee elects
to retain its rights, the debtor
licensor is only required to: (a)
provide access to the intellectual
property; (b) not interfere with
the exercise of the licensee’s
rights under the license; and (c)
comply with any exclusivity pro-
vision in the license agreement.
The licensee must continue to
pay royalties and must waive any
rights it may have to setoff or
administrative claims for unper-
formed affirmative obligations of
the licensor. In addition to retain-
ing the rights under the license
HURDLES...
Continued from page 6
Intellectual Property Law Committee Newsletter Spring 2002
9
agreement, the licensee may also
retain rights under “any agree-
ment supplementary to such con-
tract.” A source code escrow
agreement would likely be con-
sidered an agreement supplemen-
tary to a license agreement.
A source code escrow agree-
ment is a contract among the
technology licensor, the licensee
and a third party who serves as an
escrow agent. The escrow agent
provides a repository for the
human readable program state-
ments, called the source code. A
source code escrow agreement
establishes the conditions under
which the escrow agent may
release the source code to the
licensee, such as the filing of
bankruptcy by the licensor.
Source code escrow agree-
ments have traditionally been
used by licensees attempting to
avoid the negative impact of a
bankruptcy filing by their licen-
sors. In such circumstances, the
existence of a source code
escrow agreement may protect
the licensee’s use of technology
despite rejection of a license
agreement by the licensor in its
bankruptcy. An agreement “sup-
plementary” to the license
agreement, such as a source
code escrow agreement, should
be protected and enforceable
when a licensee elects to retain
its rights under Section 365(n).
No cases have been pub-
lished that test the enforceability
of a source code escrow agree-
ment in bankruptcy. One court
has suggested that source code
escrow agreements should be
enforceable, and several bank-
ruptcy cases consider the
enforceability of other types of
escrow agreements. Those cases
hold that escrow agreements are
enforceable so long as certain
formalities are followed. Below
is a list of items which should be
included in any source code
escrow agreement.
The escrow agent should be a
neutral third party and ideally, a
party that specializes in admin-
istering technology escrow
accounts. Because a source
code escrow agreement is a form
of express trust, the escrow
agent must serve as a trustee for
the benefit of the escrow benefi-
ciary, the licensee. The escrow
agent should not be affiliated
with either the licensor or
licensee other than in its capaci-
ty as agent for the escrow.
The source code escrow
agreement should be a written
contract that covers the following
subject matter. The source code
escrow agreement must clearly
identify the property that is to be
placed in escrow. The source
code escrow agreement must also
clearly establish the conditions
under which the source code is to
be released. In the event that the
source code is released, the
source code agreement should
define the permissible uses for
the released source code.
The source code should be
delivered to the escrow agent and
be fully documented and com-
mented. The Bankruptcy Court
must be able to identify the
escrowed property and distin-
guish it from other assets of the
debtor. Often licensees and licen-
sors develop new technologies
based on existing technology. A
fully commented and document-
ed copy of the source code will
aid the court in distinguishing the
property that is in escrow from
the property of the estate.
An experienced technology
escrow agent can help with the
administration of the escrow
account and can recommend
procedures for ensuring that the
source code is maintained by the
licensor and that documentation
and comments are up to date.
The source code escrow agree-
ment should address issues such
as updates to and maintenance
of the source code, an audit
process and termination proce-
dure. An experienced technolo-
gy escrow agent will likely have
a form of escrow agreement that
will cover these issues.
In summary, under the
Bankruptcy Code, license agree-
ments used by technology com-
panies are generally held to be
“executory contracts.” As such,
whether you or your clients are a
licensee in bankruptcy or a vic-
tim of a licensor’s bankruptcy, a
bankruptcy filing may strip the
value of a license agreement and
cripple a company’s efforts to
reorganize. There are, however,
practical devices that can be used
to maintain the value of technol-
ogy licenses in bankruptcy. As a
licensee, take steps to ensure that
you will be in a position to
assume and assign the license in
the event you become bankrupt.
In the event that the licensor
becomes bankrupt, Section
365(n) offers some protection for
licensees. This protection can be
bolstered by the use of a source
code escrow agreement.
10
ABA TORT & INSURANCE PRACTICE SECTION
COMMITTEE ENROLLMENT FORM
(Please Type)
Name________________________________________ABA ID#________________________________________
Firm/Organization _____________________________________________________________________________
Address______________________________________________________________________________________
City ___________________________________State ____________ Zip Code___ __________________________
Telephone Number (_________)________________ Fax Number (_____)_________________________________
E-Mail Address________________________________________________________________________________
Please add my name to the Committee(s) indicated. I understand Section membership is a prerequisite to joining any of its
Committees. (Please limit your selection to three).
Admirality and Maritime Law 20000_____
Alternative Dispute Resolution 20100_____
Appellate Advocacy 20200_____
Automobile Law 20300_____
Aviation and Space Law 20400_____
Business Torts 20500_____
Civil Procedure & Evidence 20520_____
Commercial Transportation Litigation 20540_____
Corporate Counsel 20560_____
Economics of Tort and 20700_____
Insurance Law Practice
Employee Benefits 20800_____
Employer-Employee Relations 20900_____
Energy Resources Law 21000_____
Excess, Surplus Lines and Reinsurance 21100_____
Fidelity and Surety Law 21200_____
Financial Services Integration 21250_____
Governmental Liability 21300_____
Health and Disability Insurance Law 21400_____
Insurance Coverage Litigation 21450____
Intellectual Property Law 21500_____
International Tort and 21600_____
Insurance Law Practice
Life Insurance Law 21700_____
Media Law and Defamation Torts 21750_____
Medicine and Law 21800_____
Non-Profit Organizations 21850_____
Products, General Liability 21900_____
and Consumer Law
Professionals’, Officers’ and 22000_____
Directors’ Liability
Property Insurance Law 22100_____
Public Regulation of Insurance Law 22200_____
Self-Insurers and Risk Managers 22500_____
Seniors Issues Law 22530_____
Solo & Small Firm Practitioners 22550_____
Staff Counsel 22605_____
Title Insurance Litigation 22660_____
Toxic Torts and Environmental Law 22700_____
Trial Techniques 22800_____
Workers’ Compensation and 22900_____
Employers’ Liability Law
Return to: American Bar Association / TIPS
750 North Lake Shore Drive
Chicago, Illinois 60611-4497
Fax: 312/988-6230
Form may be copied.
Intellectual Property Law Committee Newsletter Spring 2002
11
TIPS LAW IN PUBLIC SERVICE COMMITTEE UPDATE
DOMESTIC VIOLENCE PROJECT
TIPS joined forces with the ABA Commission on Domestic Violence to develop and distribute a
brochure that provides safety tips for victims of domestic violence. The focus of the program is to make
this potentially life-saving information available in work places around the country.
In addition to the physical and psychological damage suffered by victims of domestic violence and
their families, there is a direct impact in the work place. Generally, 70% of domestic violence victims are
employed and over 70% of them report that the abusers harassed them at work, either over the telephone
or in person. Perpetrators cause over 60% of the victims to be either late to and/or absent from work.
Domestic violence in the work place costs an estimated 4 billion dollars a year in absenteeism, employee
turnover and lower productivity. The answer is not to fire the employee/victim, although sadly that often
has been the corporate response. The safety brochure is a simple, but effective tool that provides critical
information for victims of domestic violence in a short, direct and easy-to-use form. By distributing the
brochure, the employer not only assists the victim in keeping safe, but also preserves the corporate invest-
ment in the employee’s training and work.
To date, we have received an excess of requests for brochures from employers and other service
providers around the country. Major corporations, such as Liz Claiborne and AFC Enterprises, Inc., the
parent company of Church’s Chicken, are participating in this program. The State of Florida has dis-
tributed the brochures to all state employees. Numerous law firms are distributing the brochures to their
clients and employees.
You can help this cause by introducing this program to your law firms and clients, and urging
them to participate. Preprinted brochures are available and the brochures can also be customized to pro-
vide individual company and local information. The brochures are currently available in English and
Spanish (hard copies or a 3.5 diskette) and is available in several other languages.
You may also order the Domestic Violence Safety Plan Implementation Kit for Employers.
If you or your clients need additional information on how to order materials, please contact the
ABA Service Center at 1/800-285-2221.
ALERT: APPLIED E-RISK MANAGEMENT PROGRAM
by Chuck Morton, Chair-Elect
The IP Committee, along with the E-Commerce, Insurance Coverage and the Self-Insured and Risk
Managers Committees of TIPS, and the Cyberlaw Committee of the Business Law Section, is pleased to
sponsor “Applied E-Risk Management: Real Problems, Real Solutions” at this year’s Annual Meeting.
The program will take place in Washington, D.C. on August 10, from 9:00am-12:00pm. National speak-
ers will address insurance and non-insurance ways to limit the inherent risk of conducting business in the
new economy.
The Program Chair is our own Kari Wangensteen, Chair of our Committee. Chair-Elect Chuck
Morton, and Chair-Elect Designee Chris Schulte, have also played an active role in developing the cur-
riculum. This program marks the continuation in a long series of such programs sponsored by our
Committee. Past programs have been well received. We look forward to seeing you in August.
Immediately following the program, an informal lunch for Committee members will be held at an, as
of yet, undetermined location. If you are interested in attending the lunch, please contact Chair-Elect
and luncheon coordinator, Chuck Morton, at [email protected].
Intellectual Property Law Committee Newsletter Spring 2002
12
2002 TIPS CALENDAR
June
5-7 JCEB ERISA Basics New York, NY
August
9-13 ABA Annual Meeting Washington, DC
10 JCEB Executive Compensation Washington, DC
11 JCEB Breaking Up is Hard to Do: Washington, DC
Benefit Implications of Business Failures
& Restructuring
October
(TBD) JCEB Health & Welfare Benefit Plans Washington, DC
17-18 Aviation Litigation Washington, DC
November
(TBD) JCEB ERISA Litigation Chicago, IL
(TBD) Back to the Fundamentals: Insurance Washington, DC
Regulation, Broker-Dealer Regulation,
Investment Advisor Regulation
7-8 JCEB Compensation for Executive & Directors New York, NY
December
14-16 U.S. Supreme Court Ceremony Washington, DC
