US Supreme Court Declines to Review Fourth Circuit Decision in Jaffé v. Samsung Electronics Co.

The Fourth Circuit reasoned that in a chapter 15 case, bankruptcy courts are required to balance on the one hand – the United States’ interest in recognizing foreign insolvency laws and cooperating with foreign insolvency proceedings against on the other hand – its interest in protecting creditors of foreign debtors with respect to assets located in the United States. US Bankruptcy courts can apply the public policy exception to “comity” under section 1506 of the Bankruptcy Code when termination of licenses that is authorized under foreign insolvency laws would be manifestly contrary to the United States’ public policy that protects intellectual property licenses.

The Fourth Circuit therefore concluded that bankruptcy courts may refuse to grant comity and reject a foreign court’s order when such foreign order authorizes a foreign insolvency administrator to terminate US licensees’ rights to license agreements. Such a termination of licensee rights violate the United States’ public policy of supporting the high tech industry by protecting intellectual property license agreements as embodied under section 365(n) of the Bankruptcy Code.

Qimonda’s German Insolvency Proceeding

On January 23, 2009, Qimonda AG, a German semiconductor manufacturing corporation, filed for insolvency protection in Munich, Germany. Qimonda’s principal assets consisted of approximately 10,000 patents, including about 4,000 US patents. Most of the patents covered products or processes related to dynamic random access memory (“DRAM”). The patents were largely subject to cross-license agreements with other semiconductor manufacturers, including Samsung Electronics Company, International Business Machines Corporation, Intel Corporation, Infineon Technologies AG, Hynix Semiconductor, Inc., Nanya Technology Corporation, and Micron Technology, Inc.

Dr. Michael Jaffé (“Jaffé”) was appointed as the administrator of Qimonda’s insolvency proceeding in Germany, a position akin to a bankruptcy trustee under the US law. Jaffé took control over the administration of Qimonda’s insolvency proceeding, and Qimonda ceased all manufacturing operations and liquidated its assets. Subsequently, the German court, among other things, authorized Jaffé to terminate the licensees’ rights to practice Qimonda’s patents under intellectual property license agreements under section 103 of the German Insolvency Code.

Qimonda’s Chapter 15 Case

On June 15, 2009, Jaffé, as the authorized foreign representative, commenced a chapter 15 proceeding in the United States Bankruptcy Court for the Eastern District of Virginia (the “Bankruptcy Court”). In July, the Bankruptcy Court entered an order recognizing the German insolvency proceeding as the foreign main proceeding under section 1517 of the Bankruptcy Code, authorizing Jaffé to administer Qimonda’s assets located in the United States, consisting primarily of the 4,000 US patents.

Contemporaneously with the chapter 15 filing, Jaffé sent letters to the various licensees of Qimonda’s patents declaring that the licenses granted under Qimonda’s patents, including the 4,000 US patents covering DRAM products, are no longer enforceable under section 103 of the German Insolvency Code. Several licensees protested and filed formal objections with the Bankruptcy Court, asserting that the foreign representative could not unilaterally terminate the licenses under section 365(n) of the Bankruptcy Code, which provides licensees the option to retain their rights under the licenses.

The Bankruptcy Court initially issued an order making section 365 of the Bankruptcy Code applicable in the chapter 15 case. Jaffé filed a motion to modify the Bankruptcy Court’s order seeking either removal of the reference to section 365 altogether or clarification that the reference to section 365 would not apply if he sought to reject licenses for Qimonda’s US patents and to compel licensees to negotiate new licensing agreements at more favorable rates.

The Bankruptcy Court granted Jaffé’s motion to modify and entered a revised order. The licensees appealed the Bankruptcy Court’s order to the US district court, which remanded the matter to the Bankruptcy Court “to determine whether restricting the applicability of section 365(n) was ‘manifestly contrary to the public policy of the United States’ and whether the licensees would be ‘sufficiently protected’ if section 365(n) did not apply.

On remand, in March 2011, the Bankruptcy Court held a four-day evidentiary hearing, receiving testimony regarding the likely effects of applying section 365(n) of the Bankruptcy Code to the licenses under Qimonda’s US patents. At the hearing, Jaffé’s expert testified that application of section 365(n) would result in a $47 million loss to the Qimonda estates. Jaffé argued that applying the German Insolvency Code would not significantly affect the licensees’ research and development because Jaffé is committed to re-license the patents on reasonable and non-discriminatory terms. Further, according to Jaffé, applying section 365(n) to protect the licensees with interest in the US patents would violate the principle of equal treatment of creditors under German law because such licensees would receive preferential treatment over Qimonda’s other creditors whose licenses were terminated under the German Insolvency Code.

By contrast, the licensees’ witnesses testified regarding the harm that would befall the licensees with interest in the US patents and the semiconductor industry as a whole, including, for example, destabilizing the system, harming US productivity growth and US consumers, and reducing investment, innovation and competition, if the protections under section 365(n) of the Bankruptcy Code were eliminated. The licensees’ witnesses also testified that the threat of market uncertainty would slow the pace of innovation to the detriment of the US economy and severely impinge an important statutory protections accorded licensees with interest in the US patents.

At the end of the hearing, the Bankruptcy Court concluded that the outcome of its balancing analysis was a close call but denied Jaffé’s motion. The Bankruptcy Court held that under section 1506 of the Bankruptcy Code, granting comity to German insolvency law, to the extent it allows termination of the US patents, would be manifestly contrary to the United States’ public policy that promotes the high tech industry by protecting intellectual property license agreements embodied under section 365(n) of the Bankruptcy Code.

Fourth Circuit’s Decision

On December 3, 2013, Judge Niemeyer of the United States Court of Appeals for the Fourth Circuit, writing for the court of appeals, affirmed the Bankruptcy Court’s decision and held that chapter 15 does not permit a foreign representative to circumvent section 365(n) of the Bankruptcy Code.

The Fourth Circuit concluded that the Bankruptcy Court properly recognized that Jaffé’s request for discretionary relief under section 1521(a) of the Bankruptcy Code required it to consider the interest of the creditors and other interested entities under section 1522(a) and that it properly required the application of a balancing test under section 1522(a). Moreover, relying on the extensive record developed during the four-day evidentiary hearing, the Fourth Circuit concluded that the Bankruptcy Court reasonably exercised its discretion in balancing the interests of the licensees against the interests of the foreign debtor and finding that the application of section 365(n) of the Bankruptcy Code was necessary to protect the licensees’ rights under Qimonda’s US patents.

The Fourth Circuit recognized both the importance of the chapter 15 of the Bankruptcy Code to the global economy and the United States’ commitment to cooperate with foreign insolvency proceedings. Such commitment, however, was not unlimited, according to the Fourth Circuit. The Fourth Circuit held that a bankruptcy court is required to ensure sufficient protection of creditors under section 1522(a) of the Bankruptcy Code, and at a more general level, a bankruptcy court may refuse to grant comity or take an action that would be manifestly contrary to the United States’ public policy under section 1506 of the Bankruptcy Code.

Conclusion

The Supreme Court of the United States’ denial of a petition for a writ of certiorari regarding the Fourth Circuit’s Jaffé v. Samsung Electronics Co. leaves undisturbed the Fourth Circuit’s decision that preserved the rights of licensees of intellectual property owned by foreign debtors in a chapter 15 case.

Under section 1506 of the Bankruptcy Code, US bankruptcy courts have the ability to refuse to recognize foreign judgments and orders that conflict with the US public policy (for example, to protect the rights of licensees with interest in the US patents). This is an important consideration that must be evaluated by foreign representatives seeking to commence a chapter 15 case.

As stated in the Final Report and Recommendations of American Bankruptcy Institute’s Commission to Study the Reform of Chapter 11^[3], the Jaffé case is “one example of the tension that can arise when courts consider the competing interests of parties in the respective countries.” Indeed, what the decision underscores is that conflicts often arise with respect to the rights, interests and protections afforded to parties under different legal, social and political systems. In the Jaffé case, it was the rights of parties to intellectual property licenses that were brought into conflict under the US and German legal systems.

Public policy has a critical place in chapter 15 cases, and US bankruptcy courts will continue to be called upon to weigh and assess underlying public policy interests when deciding whether to recognize actions of foreign courts.