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Bankruptcy: What Happens to the Royalty Payments?

By Judith L. Grubner

In a decision interpreting for the first time certain provisions in the Bankruptcy Code, the Third Circuit Court of Appeals concluded that royalty payments belonged to the estate of the bankrupt debtor/licensor rather than to the new owner by assignment of the underlying intellectual property covered by the licenses. In re CellNet Data Systems, Inc., 327 F.3d 242 (3d Cir. 2003). The Third Circuit held that the debtor/licensor was permitted to sever the right to receive the remaining royalty payments due on the license from the transfer of the underlying intellectual property rights.

CellNet Data Systems and Bechtel Enterprises, Inc. formed a joint venture called BCN Data Systems LLC. CellNet granted BCN exclusive licenses to use CellNet's intellectual property outside the United States and promised technological support to BCN.

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